Tax Info Blog

Cancellation of Debt Income: Principal Residences Only

Q: I moved out of my home and began living with my boyfriend in his apartment in the hopes that if my house was move-in ready, it would sell faster. Well, it didn't sell and now it is foreclosing. The new law says cancellation of debt income exclusion applies to "principal residence." Can I still get the tax relief?
Janet

A: Those who haven't done so should first read my post on this new exclusion from cancellation of indebtedness income.

Let's take a closer look at the "principal residence" requirement.  The law doesn't define it--rather, it references the definition of "principal residence" from Section 121 of the I.R.C.  This is the section that allows for an exclusion of capital gains on a sold home.

Section 121 talks about the holding period of a principal residence, but not the definition thereof.  The regulations are a little more clear.  The principal residence depends on all the facts and circumstances.  It's normally the place where the taxpayer spends a majority of the days in the year.  Other factors that affect whether or not a property is a principal residence include: place of employment, family's place of abode, address listed on tax return/voter ID/driver's license/bills and correspondence, location of banks, and location of religious organizations and recreational clubs to which the taxpayer belongs.

Household Employers Can Pay For Expenses

Q: Are there any tax advantages to buying/leasing a car for my nanny? I currently pay her a mileage rate for her trips around town with my kids.
James

A: Household employers, like any other employer, can reimburse employees for expenses, assuming all the rules are followed.  Employers should also feel free to compensate household employees in fringe benefits, which can be found here.  The big advantage is that this compensation is not cash wages.  This may allow you to avoid or postpone the "nanny tax" thresholds for FICA ($1500 in wages per year) and FUTA ($1000 in any quarter).  In any event, you will have to issue a W-2.

For your particular question, you have to be careful.  See IRS Publication 463 for more details, but here are some general rules:

1. Make sure your plan is accountable (i.e. your employee documents the business use of the vehicle)
2. If you use standard mileage, you cannot use most other actual expenses like lease payments, gasoline, etc.  Exceptions are made for parking and tolls
3. If you use actual expenses the first year the vehicle is placed in service, you can never use standard mileage
4. Actual expenses on a leased vehicle includes the lease payments.  However, these must often be reduced by the "inclusion amount" described in Pub 463.  Also, the lease down payment must be amortized over the life of the lease
5. If the car is used 50% or less for business, the "listed property" rules apply

IRS Releases New Stats on Earnings Thresholds and Tax Paid

Kudos to the American Shareholders Association for summarizing the latest IRS stats on income earned and taxes paid.

Did you know that if you're a married couple earning $100,000 or more that you are probably in the top 10% of income earners, and that you are in a group that pays 70% of all income taxes?  Lots of fascinating stuff there.