Tax Info Blog

The End of Tax Info Blog

As you can tell from the date posts on this blog, I haven't updated in awhile.  After months of telling myself I would, I just don't think I'm going to be able to consistently deliver content.  Between the day job, the tax business, and my growing family, I no longer have the time.

Feel free to contact me at taxplaya@gmail.com with any questions.

Any clients reading this, I'm of course still going to do the tax business.

Glut of Posts Will Be Up Later This Week

Sorry I've been slow to post--lots going on moving-wise.

Moving Expense or Medical Expense?

Q: I have to move from my second floor condo to a ground floor because the steps are too much for me as I have a medical issue.  Are my moving expenses tax deductible ?   What if I were to install an elevator?
Mary Kate

A: As a moving expense, no way.  For one thing, it doesn't even pass the distance test.  However, not all is lost.  It sounds to me like the elevator might be a deductible medical expense.  Here's what IRS Publication 502, "Medical Expenses" has to say...

Excluding Tax on US Pensions If You Live Overseas?

Q: Am I entitled to any type of "foreign earned income exclusion" on my U.S. retiree pension while residing in Spain?  Could I take a tax credit for foreign taxes paid on my U.S. Income?
RD

A: Afraid not.  Chances are, Spain won't try to tax your U.S.-source pension.  Since you're (presumably) a U.S. citizen or national, you will be responsible for paying U.S. income tax on the pension.  In the unlikely event you must pay Spanish income tax on the U.S. pension, your only resource would be the foreign tax credit.

S-Corporations and Unemployment Tax

Q: I know that an S-corporation shareholder-employee must be paid a "reasonable salary."  Does a single-shareholder S-corporation have to pay unemployment tax on this salary?
Mike

A: Yes.  An shareholder-employee of an S-corporation is considered a common law employee for federal employment tax purposes.  This means that FICA and FUTA (unemployment) taxes must be paid.  It also means that you must pay state unemployment taxes.

In reality, that means that any S-corporation paying a reasonable salary must probably hire a payroll service.

The Nuts and Bolts of Leasehold Improvement Depreciation

Q: I leased a building for five years and I have modified the inside of the building to make multiple rooms (9 rooms total plus bathroom) for my spa and hair salon business.   I believe these changes fall in the leasehold improvements category but I am confused about how I should depreciate the capital improvements to the building.  Do I depreciate the capital improvements over the five year lease contract or over a period of 15 years?  Also, I started the modifications in late 2007 so I had expenses in 2007 but the modifications were not completed until April 2008 and I opened for business in May 2008.  Do I combine my 2007 expenses with my 2008 expenses and start the depreciation process for the total amount effective in May 2008?  Or, do I have to address my 2007 expenses on my 2007 return?

A: It's important to note that right now, leasehold improvements face a 39 year depreciation life.  Assuming Congress renews the 15 year rule for 2008, you would be allowed to begin depreciation in May 2008, when the improvements were available for business use.  All costs of the improvements form the depreciable basis.  If you have any non-depreciated basis remaining when you vacate the property, it becomes a capitalized asset of your business.

"New" Rules for Charitable Contributions

I'm not normally wont to cut and paste from an IRS update, but I get so many confused clients on the rules for deducting cash or cash-equivalent charitable contributions.  So, I thought I would both link to and paste this very handy update the IRS just published:

***

Charitable Contributions

Did you make a cash contribution to your favorite charity? Have you recently spent a weekend cleaning stuff out of your garage or basement that you then donated to a local charity?

Charitable contributions can be tax deductible, but you must have the proper records to support your deduction.  Due to the Pension Protection Act of 2006 the rules on recordkeeping for charitable contributions became a little more strict beginning in January 2007. 

To deduct a charitable cash donation, regardless of the amount, you must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Acceptable bank records would include canceled checks or bank or credit union statements containing the name of the charity, the date and the amount of the contribution. 

Under the previous rules, records such as personal bank registers, diaries or notes made around the time of the donation could often be used as evidence of cash donations. Personal records like this are no longer sufficient.

Here are some additional tips to help you deduct your charitable contributions on your 2008 federal tax return. 

• Charitable contributions are deductible only if you itemize deductions using Form 1040
• Contributions must be made to a qualified organization
• Used clothing and household items such as furniture, linens and appliances must be in good used condition
• Vehicle donations are subject to special rules
• To deduct charitable contributions of items valued at $250 or more you must have a written acknowledgment from the qualified organization
• To deduct charitable contributions of items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attached the form to your return

More information is available on the IRS Web site at IRS.gov. A good resource is IRS Publication 526, Charitable Contributions, found on the web site or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov.  Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov. 

Deducting Travel Expenses On a Timeshare Property

Q: I purchased a time share a few years back and was told if I travelled to tour a property to determine whether or not I wished to purchase it, my travel expenses would be tax deductible. Any truth to this or was it just a selling point?

A: The answer can be found in IRS Publication 463 (Travel, etc. Expenses), and Publication 529 (Miscellaneous Itemized Deductions), and it's somewhat of a gray area. 

On the one hand, you can deduct business expenses connected with earning income.  Until the property is actually purchased, though, I would put this under the category of an amortizable start-up expense.  Under these rules, you defer the ability to deduct until income is actually earned.  Then, you can deduct up to $5,000 of start-up expenditures (phases out between $50,000 and $55,000), with the remainder amortized over 180 months.  Since the business activity in question would be a rental property, the expenses would go on Schedule E.

A conservative approach, though, would latch onto the disallowance of a deduction for travel expenses to investment seminars, which is found in Pub. 529.

It goes without saying that expenses connected with buying a timeshare for personal purposes only are completely-disallowed.

Tax Provisions of New Housing Law

The President just signed H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act."  While mostly a bill having to do with regulation of housing, there are some tax provisions:

1. Expands and changes rules related to mortgage bonds and the low income housing credit, including how these relate to the AMT
2. Creates a first-time homebuyer credit of 10% of purchase price up to $7500 (half that MFS) which phases out between $75,000-$95,000 MAGI ($150,000-$170,000 MFJ).  "First-time" means not owning a home for three years before the purchase date.  Must be a principal residence.  The credit is recaptured over 15 years, unless the home is sold or no longer is the principal residence (in which case the credit is 100% due that year).  Credit applies for homes purchased between April 8, 2008 and July 1, 2009
3. Creates a new "standard deduction" for real property taxes for those taxpayers who take the standard deduction.  The limit is $500 ($1000 MFJ) and applies to 2008 only

To "pay for" these measures, there are two main tax increases:

1. Requires "payment settlement entities" (think Paypal) to report transactions to the IRS
2. Prohibits taxpayers selling a home in 2009 or later from excluding any gain attributable to the period in which the home was "non-qualifed" (mainly, a rental property or a vacation home).  The non-excluded portion would face capital gains taxation.  The excluded portion would face the same $250,000 ($500,000 MFJ) exclusion rules that exist currently (not used in 2 years, 24 of the prior 60 months as principal residence, etc.)  The non-excluded gain is equal to the gain times the percent of the time that the home was not a principal residence

Home Sales When Two People on Title

Q: I have a home I bought from my mom. It is worth $160,000. I still owe her $65,000. She is on the deed because she refuses to take a risk taking her name off. I want to sell and have been in my home over 2 years. I don't want to pay tax on the income. Because she is on the deed can I still take the tax free income for living here 2 years?
Deborah

A: Since you're each on title, you would each be entitled to a portion (presumably half) of the sale proceeds.  The $250,000 excludable amount applies to each of you.  The 24 out of 60 test for primary residence and ownership apply to each of your halves.  The pro-ration allowance would apply separately to each of your halves. 

If all of that is Greek to you, first read my post on home sales.

How to Figure the Foreign Earned Income Exclusion

Q: Can you walk me through the new formula for figuring the foreign earned income exclusion?
Katherine

A: Everyone first needs to read my post on the Foreign Earned Income Exclusion.

First, add together the current exclusion amount to the housing exclusion amount for the country you are in.  For most people, this should be a little over $100,000, so let's say this is what it is for you.

Then, assuming you have passed either the physical presence test (330 out of any 365 days) or the bona fide residence test, count how many days in the calendar year qualify as "exclusion days."  Let's say this is 150 for you.

Then, divide your exclusion days (150) by the number of days in the calendar year (let's ignore the leap year here and say 365 for this example).  You'd arrive at .41095.  Multiply this by your maximum exclusion amount ($100,000), and you get $41,095.  This is the most you can exclude in foreign income for this year.

Thanks to the new rules, any income earned above this income is taxed in the income tax bracket it would fall in if none of the income could be excluded.  This makes the exclusion far less lucrative than it used to be.  There's always the foreign tax credit, which has a totally different set of rules.

Bottom line--don't do this without software unless you like numbers...a lot.

How to Deal with Deferred Mortgage Interest

Q: I just sold a home in which interest payments were deferred until the note was paid off.  This just happened with the sale.  How do I account for the mortgage interest?
Josh

A: Since you are a cash-basis taxpayer, it sounds to me like you'd be able to take the full deduction for interest paid this year.  Assuming this was a primary residence, it would be deductible as an itemized deduction subject to the usual limits.  If it's a rental property, it would be deductible that way.

There's also an election you can make to "capitalize" the interest (which would increase your basis in the sale).  This probably doesn't make a lot of sense given the interplay of the home sale exclusion rules, the lower tax rate on long-term capital gains, and the fact that the mortgage interest deduction is against ordinary income.  But, it's an option that's available to you.

IRS Shortens Extension Deadline for Partnerships

The IRS announced this week that they will be shortening the extension deadline for partnerships by one month, from October 15th to September 15th for calendar-year partnerships.  The reason is that partnerships must issue K-1 forms when their 1065 form is filed.  Until now, a partner (who needs the K-1 form to file his own return) might get the vital K-1 form after his own extended deadline.

By having the partnership deadline end a month earlier, that problem is avoided.  Partners will now have at least a month before their extended deadline in which to incorporate their K-1 forms.

This change is effective for partnerships whose years end on or after September 30, 2008.

New HSA Guidance Released

Click here to read.  The biggest piece of news is a new animal: the post-deductible FSA (or HRA).  According to the guidance, you can use an FSA or an HRA to pay for medical expenses that occur over the deductible, but before the out of pocket maximum.

As an example, suppose you have an HSA with a $2000 deductible and a $3500 maximum.  This provision would allow you to contribute the usual $2850 to your HSA.  If you hit your deductible, you would drain your HSA by $2000 that year.  If you continued to face medical expenses while you were inside the gap between the $2000 deductible and the $3500 OOP max, you'd have three sources to meet them:

1. Your own pocket.  This also gives you the right to draw on HSA assets later.
2. Excess funds remaining in your HSA
3. You can now draw on an FSA or HRA until the out of pocket max is reached

This is a big deal.  It makes it more likely that those who have access to multiple health savings vehicles can coordinate them advantageously.  My first impression would be that a plan with a low deductible and a high out of pocket max now makes more sense, assuming that an FSA is available.  What do you think?

IRS Increases Standard Mileage Rate

The IRS announced today that they have increased the standard mileage rates.  For miles driven between July 1, 2008 and December 31, 2008:

• The business mileage rate increases from $0.505 to $0.585 per mile
• The medical/moving mileage rate increases from $0.19 to $0.27 per mile
• The charitable mileage rate is set by statute at $0.14 per mile

Itemized Deductions on Overseas Properties

Q: Can I take a deduction for mortgage interest and property taxes on an overseas home?
Robert

A: Yes, assuming that you meet all the other qualifications.  Since worldwide income is taxable, worldwide expenses are deductible. 

Click here to read my post on the mortgage interest deduction.

Click here to read my post on all itemized deductions.

How to Claim the Foreign Earned Income Exclusion The Year You Move Home

Q: For the past several years, I have been working overseas and claiming the Foreign Earned Income Exclusion.  I move home for good this July 1st.  How do I claim the exclusion this year?
Mark

A: For those that need a refresher, start with my post on the Foreign Earned Income Exclusion.

In order to claim the exclusion, you must be working outside the United States for any 330 of a consecutive 365 day period.  Up until now, you've probably been using Jan 1-Dec 31 as that period.  However, you are free to use any 365 day period you want.

I would suggest you pick the latest possible day in 2008 that still gets you 330 overseas days, looking retrospectively to the preceding 365 days.  You then see what percent of 2008 the days since Jan 1, 2008 represent.  Let's say it's 55% of the year.  You would be eligible to claim 55% of the full year's allowable exclusion amount for 2008.