Top 10 Investment Tax Blunders to Avoid

Oakland Tax Attorneys 

If you can avoid the top ten investment blunders, you will save money on your taxes and perhaps even increase the returns on your investments. We realize that a mid-year review of your tax situation may not be at the top of your “to-do” list, but think of it this way: devoting a few minutes now could save you big bucks at tax time.

By following these tips, you can reduce your taxes for the year and even increase the after-tax return on some of your investments:

1. Anticipate distributions from declining funds – Since mutual funds are required to distribute capital gains to shareholders, you might receive a taxable distribution even though there was a decline in the share price of your fund this year. By preparing yourself and setting aside cash, you can avoid scrambling to pay taxes in April.

2. Purchase shares after the next scheduled distribution – Don’t buy a mutual fund shortly before a capital gains distribution since a portion of your investment will almost immediately be handed back to you. This will have you owing tax on the distribution with less money to reinvest.

3. Be prudent with “tax-exempt” investments – Although the income from “tax-exempt” investments is generally nontaxable, funds will sometimes throw off capital gains distributions. This happens when the fund managers sell bonds, which can produce a taxable capital gain, and then buy other bonds. This can aggravate fund investors who don’t expect to pay taxes on these types of investments.

In addition, if you want the income to be tax-exempt for state income tax purposes, you need to make sure the fund is invested in your resident state muni-bonds since most states treat as taxable muni-bond interest derived from other states. Another common mistake is failing to change funds when you move from one state to another.

If you are subject to the alternative minimum tax (AMT), be aware that interest from “private activity” muni-bonds is tax-exempt for regular tax purposes but not for AMT purposes.

As part of the Affordable Health Care Act, starting in 2013 the net investment income of higher income taxpayers will be subject to the unearned income Medicare contribution tax, which is a 3.8% surtax on their investment income less investment expenses. For surtax purposes, gross income doesn’t include excluded items, such as interest on tax-exempt bonds, which weighs in favor of owning tax-exempt bonds.

4. Time your fund transfers wisely – Frequently, people sell one bond fund to buy another as a way of rebalancing their portfolio. However, for tax purposes, that represents a sale of a security and the purchase of another. Thus, you will need to account for the gain or loss from the fund sold on your tax return. This is generally an unpleasant surprise to those unaware of this rule, especially if there is significant gain to report on the sale. If there is a loss, selling it during the current year will allow you to utilize the loss now. However, if there is a gain, consider waiting until just after the first of the year so that you can defer the gain—but this strategy may not be appropriate for someone who can take advantage of the 0% long-term capital gain tax rate.

5. Contribute the maximum – If you maximize your retirement plan contributions, it will help maintain your current lifestyle years from now. In addition, it may also reduce this year’s taxable income.

6. Say “no” to tax-free investments in tax-sheltered plans – Instead of concentrating on annuities or municipal bonds, you’ll do better with high-yielding income and growth-oriented investments.

7. Sell a loser – There probably isn’t a stock market investor who isn’t holding a stock that is worth less now than when it was bought. Selling a loser in a taxable account can save you money and free up cash for investments with more potential. This is because the IRS allows investors to offset realized gains with realized losses. In addition, $3,000 in additional losses can be used to reduce your taxable income. Don’t sell for tax reasons alone, especially if you are confident that your dogs will turn into dream stocks. Just keep in mind that if a stock has dropped in price by 50%, it will need to gain 100% in order to break even.

8. Be aware of the limit on losses – If you are thinking of cashing in all your dogs, consider that losses are limited to offsetting realized gains and up to $3,000 in ordinary income. Although losses higher than this amount can be carried over for use in the future, they would be of no benefit to you this year.

9. Stay away from wash sales – If you would like to offset gains with losses, try and avoid “wash sales” since the IRS doesn’t allow you to recognize the loss on such sales. A wash sale occurs when a security is sold at a loss and then repurchased within 30 days before or after the date it was sold.

Don’t fret. One way you can realize losses and keep your portfolio balanced is to sell and buy back a security 31 days after the sale. Individuals who cannot wait for that period of time should purchase a similar security (not identical) to the one that was sold.

10. Check your cost basis when you sell – Although most people remember to include commissions on trades or mutual fund transaction fees when calculating cost basis, many fail to consider the dividend money that has automatically been reinvested, which results in taxpayers overpaying on taxes. Most commonly dividend reinvestment occurs with mutual funds but some companies also have dividend reinvestment plans for individual stockholders. Reinvested capital gains and dividends can add quite a bit to cost basis and make gains much smaller.

Review all your purchases when it comes time to sell. You will have a smaller taxable gain and a much better idea of your actual return on a fund.

As an investor, you want what’s best for your money. Be prepared and avoid the unnecessary headache at tax time.

Tax Deductions for Small Businesses

Oakland Tax Lawyers

Business owners – especially those operating small businesses – may be helped by the tax law that allows them to deduct up to $5,000 of their start-up expenses in the first year of the business’ operation.

Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

As with most tax benefits, there is always a catch. Congress put a cap on the amount of the start-up expenses that can be claimed as a deduction under this special election. Here’s how:  If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar that start-up expenses exceed $50,000.

The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.

On Schedule C, the deduction is taken as part of the “Other Expenses” in Part V. If the entire amount of start-up costs isn’t deductible in the business’ first year, use Form 4562 to amortize the excess amount over 180 months.

Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest or research and experimental costs. Examples of qualified start-up costs include:

  • Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
  • Wages paid to employees and their instructors while they are being trained;
  • Advertisements related to opening the business;
  • Fees and salaries paid to consultants or others for professional services; and
  • Travel and other related costs to secure prospective customers, distributors, and suppliers.

For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

Planning on Selling Your Home?

San Jose Tax Lawyers

Each individual taxpayer, regardless of age, is allowed to exclude up to $250,000 of gain from the sale of their main home if certain requirements are met. A married couple that meets the requirements can exclude up to $500,000. To qualify for the exclusion, a taxpayer must own and live in the home as their main home for two of the prior five years immediately before the sale (under certain circumstances the five-year period is extended for military personnel and intelligence community employees). Short temporary absences, such as for vacation or other seasonal absence (even though accompanied with rental of the residence), are counted as periods of use.

If the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the two-year use test. Any gain in excess of the excludable amount is taxable.

If the home was previously used as a rental, second home, used by a relative, unoccupied, etc., and converted to the taxpayer’s primary residence, the gain must be allocated between gain attributable to non-qualified use after December 31, 2008 and home sale gain.  Non-qualified use is any use other than as a home between January 1, 2009 and the time it was converted to the taxpayer’s home.  Only home sale portion of the gain qualifies for $250,000/$500,000 gain exclusion.

The exclusion can be used over and over again, as long as two years have elapsed between sales and the taxpayer otherwise meets the ownership and use tests. If there is a loss from the sale of your home, that loss is not deductible. Even if the taxpayer doesn’t qualify for the full exclusion, he or she may still qualify for a partial exclusion if the home is sold due to a job-related move, health reasons, involuntary conversions, death, loss of employment, divorce, or other unforeseen circumstances. Also, in divorce situations where one spouse remains in the home for an extended period after the divorce, the spouse who no longer lives in the home may still qualify for the exclusion based on the other spouse’s use period. If claiming, or have previously claimed, a home office deduction for an office that is an integral part of your home, the IRS has taken a liberal approach and allows the gain from the office portion to also be excluded, except for home office depreciation claimed after May 6, 1997. That depreciation, to the extent of any home sale gain, is taxable at 25%. However, this liberal treatment is not extended to gain derived from a portion of the property that is separate from the dwelling and that was used for business. The exchange of a home can qualify for both the §121 home sale exclusion and §1031 like-kind exchange deferral treatment. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office).

A beneficiary who inherits the residence of a decedent generally (except for decedents dying in 2010 where the executor opts to use a carryover basis regime) receives a step-up or step-down in basis based upon the value of the property at the date of death, and since it is inherited property, it is treated as held for long-term.  Generally, a beneficiary will sell the residence through a broker and will have substantial sales costs. These sales costs quite often translate into a loss on the sale (sales price – sales costs – inherited basis) if the beneficiary does not use the property for personal uses.

Want to Keep More of What You Make?

Oakland Tax Attorneys

The Johnson’s are college graduates with two healthy children, good jobs, a home worth about $160,000 and two relatively new cars. To the casual observer, they’re doing well. Yet anyone taking a close-up view would find a few flaws in their situation, especially when it comes to their finances . . .

You see, the Johnson’s have:

  • Virtually no savings;
  • Retirement plans available through employers but with contributions at a bare minimum;
  • A portfolio of several hundred shares of stock bought as a result of a tip from a friend – the investment has gone sour; and
  • Large debts on their home, cars and credit cards.

Obviously, Mr. and Mrs. Johnson could benefit from a course in financial fitness. Their greatest need is to take a long, objective look at their financial picture AND make some rather radical adjustments!

Unfortunately, the hypothetical Johnson’s aren’t a lot different from many Americans today. Statistics indicate that a large number are saving less than 5 percent of their disposable household income, far less than citizens in other countries. For example, Canadians and Germans save about 10 and 12 percent respectively.* In addition, American workers (similar to the Smiths) aren’t taking full advantage of their employer’s retirement plans, most making pension contributions of only about $2,700 each year.

Perhaps most ominous, however, is the amount of personal debt Americans have been incurring. Statistics show that there has been a $256 billion increase in consumer spending in recent years. And 44% of it is being paid for using installment plans!

Improve Your Own Financial Future

The Johnson scenario and previously cited statistics paint a gloomy picture, but there are steps you and your family can take to prevent similar results. Achievement of financial security comes from adjusting your current financial picture in light of future goals. Far from being easy, the whole process requires a good amount of self sacrifice and more than a few trade-offs along the way.

Check Your Spending Habits

The only way to objectively view your finances is to set down on paper what you’re currently spending. No one enjoys this job, but it’s necessary if you’re serious about a plan to ensure financial well-being.

Keep a log of what you spend your money on for a while (account for every cent, including all cash, check and credit purchases). Write down everything from house payments to dinners out, grocery purchases, haircuts, parking fees, entertainment expenses, doctor visits, etc. Try to list each item by category – e.g., amounts spent on movies out, video rentals, and cable TV could all be listed under a category called Entertainment Costs.

At the end of the period, total each expense category and get ready for a huge surprise – you’ll probably find that those “ little” extra miscellaneous items have made a sizable dent in your pocketbook. After you examine the totals carefully, you’ll begin to see a trend. It’s then that you need to ask yourself, “Where can I cut down?”

Once you have a feel for the expense side of the ledger, concentrate on your income – salaries, pensions and annuities, interest, dividends,etc.

Total everything you received for a given period (e.g., a month, a quarter, or a year) and subtract from it the grand total of all your expenditures for that same period. If your answer is positive, you’ve done all right – there’s a profit. If your answer is negative, you could be faced with a problem.

Debt Could Be the Culprit

One reason many people can’t seem to get ahead financially is that they have a lot of debt – mortgages, credit cards, etc. And it’s difficult to reduce debt unless spending habits change. Probably the best place to start cutting back is with the credit cards. Most people have a huge pile of them (the average is nine for most Americans).

Credit card spending is expensive. Assume, for example, that the balance on your Megabank card is $1,000 on which you’re charged an annual interest rate of 20 percent. If you pay the minimum $20 per month on your account, your total yearly payments will be $240 ($20 x 12). Yet by the end of one year, you will have only reduced your debt balance by $44, as shown in the following chart:

Month
Interest
Principal
Balance
1
2
3
4
5
6
7
8
9
10
11
12
$16.67
16.61
16.55
16.50
16.44
16.38
16.32
16.26
16.20
16.13
16.07
16.00
$3.33
3.39
3.45
3.50
3.56
3.62
3.68
3.74
3.80
3.87
3.93
4.00
$996.67
993.28
989.83
986.33
982.77
979.15
975.47
971.72
967.92
964.05
960.12
956.12

And what if you have eight other credit cards with balances similar to the Megabank card? You see how easy it is for debt to escalate?

To get and keep the upperhand on all that plastic, you may need to:

1. Quit making purchases by credit card. If the cash isn’t available,don’t make the purchase.

2. Carry only one card for emergencies and get rid of those with the highest balances.

3. Begin the search for a credit card with a low interest rate – there are some available, but it may take a little detective work to find them.

4. See if you can consolidate your credit card debt into the card carrying the lowest interest rate.

5. Start making the largest payment you can each month to pay off the debt. Once you’ve established an amount, keep at it EVERY month. You will be able to get it paid off faster than you think if you work at it consistently!

Home Equity – Savior or Trap?

Your home equity is a tempting source for money. Just keep in mind that you will never own the home if you continuously tap into that equity. Your reasons for using the equity may be legitimate, but were they necessary and paid back in a timely manner?

Using home equity loans is an often touted means of avoiding higher interest rates on consumer loans for automobiles, major appliances, etc. It also provides a way to convert nondeductible consumer interest to deductible interest, since the interest on home equity debt (up to $100,000) is deductible as home mortgage interest.This is a good strategy if you plan to pay off the equity debt in the same period of time the consumer debt would have been paid off. Trap#1: People tend to roll their equity debt into their long-term home debt and end up paying on that consumer purchase for years, long after the car or appliance has been carried off to the recycle yard. Trap#2: Interest on equity debt is not deductible for Alternative Minimum Tax (AMT) purposes. Thus, if you are being taxed by the AMT, your benefit from the equity debt interest deduction will be reduced or eliminated.

Savior: If used wisely, a home equity loan can provide you with a fresh start. If you are heavily burdened with consumer debt and have sufficient equity in your home, you can consolidate your debts into a new home loan and substantially reduce your monthly outlay. With the extra monthly cash from the reduced debt, begin saving for future cash purchases, children’s education and retirement. Trap: After restructuring your debt, you continue to run up additional consumer debt and could potentially overextend yourself again.The cycle repeats itself and leaves you with no equity in your home and a heavy mortgage debt at retirement.

Saving For the Future

After you’ve taken stock of your inflow and outgo and instituted measures to reduce debts, the next step is to begin developing a savings plan. Here again, consistency is the key. For instance, look at what happens when you put away $25 a week at an annual compounded interest rate of only 5 percent:

Term

10 years
20 years
30 years

Ending Balance$16,768
44,081
88,571

In addition to regular savings, if you participate in a retirement plan, either through an employer or your own self-employed plan, begin using it to the fullest. Contribute as much as you can! After all, most pension plans allow you to build savings and defer paying taxes on income until you begin making withdrawals. It’s hard to find a better deal than this anywhere.

Review Your Strategy and Adjust For Changes

Remember, you need to continually review the savings strategy you establish in light of your overall goals – someday you will retire, in 20 years the children will be going to college, eventually you may want a bigger house, etc. Your strategy shouldn’t simply take into account those KNOWNs; your plan must create a cushion to handle the UNKNOWNs as well.

Change is a certainty, and because of this, no plan for meeting financial objectives can remain static. As you go along, you’ll no doubt have to do a little “adjusting” here and there. Events like marriage, divorce, birth, death, retirement, job relocation, etc., can all complicate and force reevaluation of your original plan. Because of all the technicalities involved, you’ll probably want some outside help. It’s advisable to consult professional tax, legal and financial advisors before embarking on or changing your course of action.

* According to statistics from the Organization for Economic Cooperation and Development

Deductions for Day Care Providers

San Jose Tax Attorneys

Auto Travel:
Your auto expenses are based on the number of qualified business miles you drive. Auto expenses for you as a day care provider could include your transportation:

  • to and from a class taken to enhance your day care skills;
  • on field trips with those for whom you are providing care;
  • for errands related to day care business (e.g. going to the bank to make a deposit of day care receipts);
  • to the store to shop for day care supplies; or
  • when chauffeuring day care attendees.

Capital Purchases:
Certain purchases for day care use may be so-called “capital items.” These items must be deducted on your tax return using different rules than are used for supplies and expenses. Capital items are those that normally last more than one year and cost more than $100 – typical examples would be cribs, playground equipment etc. Be sure to keep receipts for these items separate from receipts for general supplies.

Supplies and Expenses:
Generally, to be deductible, items must be ordinary and necessary to the operation of your day care business. Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $100. Normally, the costs of such assets are reported differently on your tax return than are other recurring, everyday business expenses like small toys or books. Try to get separate store receipts for the items you use for day care. For example, if you buy food for the day care attendees, don’t combine this purchase with the food purchases for personal use.

Business Use of Home:
Normally, the expenses you incur (other than home mortgage interest, taxes or casualty losses) related to your personal home are not deductible. However, when you regularly use your home for licensed day care, a portion of the cost of your home upkeep can be deductible – the deductible amount depends on both the number of square feet you use for day care AND the amount of time you routinely use various rooms of your home in the day care business.

Your day care records don’t need to detail the specific hours a room in your home is used for business. It’s enough to show that you regularly use a room for day care. For instance, say your home has one bedroom that is regularly used for afternoon naps for day care recipients – about two hours each day. Your day care center is open from 7:00 a.m. to 6:00 p.m. Even though nap time uses only two of the 11 hours your center is open, the bedroom is considered used for business for the entire 11-hour business day.

Deductions for Sales Reps

Oakland Tax Attorneys

Auto Travel:
Your auto expense is based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.

Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.

Out-of-Town Travel:

Expenses accrued when traveling away from “home” overnight on job related and continuing education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include
transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Professional Fees & Dues:
Dues paid to professional societies related to your profession are deductible. However, the costs of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.

Continuing Education:
Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves skills as a sales representative. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.

Equipment Purchases:
Record separately from other supplies the costs of business assets that are expected to last longer than one year and cost more than $100. Normally, the costs of such assets are reported differently on your tax return than are other recurring, everyday business expenses such as business cards or office supplies.

Telephone Expenses:
The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business- related. The costs (basic fee and toll calls) of a second line in your home are also deductible, if the line is used exclusively for business.

Supplies & Expenses:
Generally, to be deductible, items must be ordinary and necessary to your business profession and not reimbursable by your employer.

Miscellaneous Expenses:
Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.

Deductions for Airline Flight Crew Personnel

Oakland Tax Attorneys

Professional Fees & Dues:
Dues paid to professional societies related to your occupation are deductible. However, the costs of initial admission fees paid for membership in certain organizations or social clubs are considered capital expenses.

Deductions are allowed for payments made to a union as a condition of initial or continued membership. Such payments include dues, but not those that go toward defraying expenses of a personal nature. However, the portion of union dues that goes into a strike fund is deductible.

Educational expenses are deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves skills. Costs of courses that are taken to meet the minimum requirements of a job, or that qualify you for a new trade or business, are NOT deductible.

Uniforms & Upkeep Expenses:
Generally, the costs of your uniforms are fully deductible. IRS rules specify that work clothing cost and the cost of maintenance are deductible if: (1) the uniforms are required by your employer (if you’re an employee); and (2) the clothes are not adaptable to ordinary street wear. Normally, the employer’s emblem attached to the clothing indicates it is not for street wear.

Auto Travel:
Your auto expenses are based on the number of qualified business miles you drive. Expenses for travel between business locations or daily transportation expenses between your residence and temporary work locations are deductible; include them as business miles. Expenses for your trips between home and work each day, or between home and one or more regular places of work, are COMMUTING expenses and are NOT deductible.

Document business miles in a record book as follows: (1) give the date and business purpose of each trip; (2) note the place to which you traveled; (3) record the number of business miles; and (4) record your car’s odometer reading at both the beginning and end of the tax year. Keep receipts for all car operating expenses – gas, oil, repairs, insurance etc. – and of any reimbursement you received for your expenses.

Out-of-Town Travel:
Expenses accrued when traveling away from “home” overnight on job-related or continuing-education trips are deductible. Your “home” is generally considered to be the entire city or general area where your principal place of employment is located. Out-of-town expenses include transportation, meals, lodging, tips and miscellaneous items like laundry, valet etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense. However, if any other business expense is less than $75, a receipt is not necessary if you record all of the information in a timely diary. You must keep track of the full amount of meal and entertainment expenses even though only a portion of the amount may be deductible.

Telephone Expenses:
The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business-related. The costs (basic fee and toll calls) of a second line in your home are also deductible if the line is used exclusively for business.

Equipment, Supplies & Repair:
Generally, to be deductible, items must be ordinary and necessary to your job as airline flight crew personnel and not reimbursable by your employer. Record separately from other supplies, the costs of business assets that are expected to last longer than one year and cost more than $100. Normally, the costs of such assets are recovered differently on your tax return than are other recurring, everyday business expenses such as flashlights, batteries and other supplies.

Miscellaneous Expenses:
Expenses of looking for new employment in your present line of work are deductible – you do not have to actually obtain a new job in order to deduct the expenses. Out-of-town job-seeking expenses are deductible only if the primary purpose of the trip is job seeking, not pursuing personal activities.

Paycheck Calculator

San Jose Tax Lawyers

The calculators offer unmatched features for paycheck modeling. These personal finance paycheck calculators are here for employees to better manage their paychecks.

  • Paycheck Calculator

    Here you may calculate your net pay or “take home pay.” Take home pay is what is left from your wages after withholdings for taxes and deductions for benefits have been subtracted. Salaried employees can enter either their annual salary or earnings per pay period.

Other Paycheck and Benefit Calculators

Thinking of Renting Out Your Vacation Home?

Oakland Tax Attorneys

If you own a home in a vacation locale – whether it is your primary residence or a vacation home – and are considering renting it out to others, there are complicated tax rules, referred to as the “vacation home rental rules,” that you need to be aware of.

Generally, the tax code breaks a “vacation rental” into three categories, each with a different treatment for income and expenses:

  • Rented Less Than 15 Days – If you rent your home for less than 15 days during the tax year, the tax code says that you do not need to report the income and you can still deduct 100% of the property taxes and qualified mortgage interest as an itemized deduction. Yes, you heard me correctly: the government is actually allowing you to ignore the income, regardless of the amount, if you rent the home for less than 15 days during the year. This rule offers some opportunities for substantial tax-free income, especially for more expensive homes. Here are some examples:
    • Rental as a film location – typically, film production companies will pay substantial amounts (thousands per day) for the short-term use of homes as movie sets. Individuals with unique properties can register with a local film location company.
    • Home in a vacation locale – individuals with homes in a popular tourist or vacation locales can rent their homes out to vacationers in their area while they are on vacation themselves.
    • Home in the area of a special event – when a one-time or special event such as a major sports event (think the Super Bowl) or convention comes to town, hotel rooms may be scarce or even fill up. Homeowners in these locations may want to rent their homes short-term during the activity while getting out of town to avoid the crowds.

However, be careful; if the rental goes over 14 days, the income is no longer tax-free. When calculating the number of days, the definition of a day is generally “the 24-hour period” for which a day’s rental would be paid. Thus, a person using a dwelling unit from Saturday afternoon through the following Saturday morning would generally be treated as having used the unit for seven days even though the person was on the premises on eight calendar days.

  • Rented 15 Days or More – When the home is rented 15 days or more, the income must be reported. However the tax treatment depends upon how many days you used the home personally:
    • Personal Use More Than 10% of the Rental Days – If your personal use of the home totals more than 10% of the rental days, the expenses are allocated according to personal versus rental days. In figuring your rental profit, the expenses must be deducted in the following order: allocated taxes and interest first, then maintenance and other cash expenses, and, finally, depreciation. However, the net result is limited to zero; i.e., a loss cannot be claimed.
    • Personal Use 10% or Less of the Rental Days – If your personal use of the home totals 10% or less of the rental days, the expenses are allocated according to personal versus rental days in the same manner as when the personal use exceeds 10% except that a loss is allowed, but the loss cannot include any amount attributed to depreciation.

When figuring the personal use days, include days used by an owner, co-owner, or family member of the owner/co-owner and days used under a reciprocal arrangement. However, you can exclude “fix-up” days, which are days spent repairing and maintaining the property.

Assisting Your Child in Buying a Home

Oakland Tax Attorneys

If you are a parent who wants to assist your child in obtaining his or her first home, there are a number of ways you can help.

  1. Help with the down payment – Real estate lending laws generally will not allow the parents to loan the down payment on the home, since that is considered part of the debt. However, you can make an outright gift of the down payment. Just keep in mind that to avoid reducing your lifetime gift tax exclusion and filing a gift tax return, the gift cannot exceed the annual $13,000 gift tax exemption. If you are married, the limit could double to $26,000 since both you and your spouse are allowed a separate $13,000 exemption. If your child is married, the gift limit could double again to $52,000, since the annual exemption limit applies to each donee, not the donor.
  2. Buy the house in your name – Let your child make payments to you in order to buy the property. Over time, in most cases, the property will have appreciated enough in value to provide the necessary equity required for your child to obtain a favorable bank loan.
  3. Slowly gift the home to the child – If you are financially secure, you could purchase the home and then gift a portion of the property to your child each year. By making these gifts over a period of time, you are able to take advantage of the annual gift tax exemption rules.

Sometimes, an elderly parent will transfer the title to their home to their children. Although this might seem to be a good idea at the time, it generally is not for the following reasons:

  • If the home title is transferred to a child while the parent is still living, it constitutes a gift and a gift tax return will generally need to be filed.
  • The tax basis (point from where gain or loss is measured) will be the parent’s basis. Had the child, instead, inherited the home, the child’s basis would be the fair market value of the home at the parent’s date of death, which means the child would have no taxable gain if the home is immediately sold. On the other hand, if the home had been previously gifted to the child, the gain would be measured from the parent’s basis.