Renting out a vacation home

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Over the last five years, the number of people offering their vacation properties for rent has boomed in order to offset expenses and generate income. On the basis of the number of days of the year the property is let out, vacation home owners can avail of certain tax benefits and avoid surprises at tax time.

·         If the vacation home is used as a residence and is rented out for 14 or fewer days that year, there is no need to report any of the rental income.

The best example of this exemption would be vacation home owners near major golf clubs, Super Bowl sites or national political conventions who can earn a fortune by renting out their homes for about 2 weeks, and get to pocket the rental income tax-free. For instance, home owners near the Augusta Golf Club earn as much as $20,000 during the annual tournament. Here, the taxpayer cannot deduct maintenance or depreciation costs, but can deduct mortgage interest, casualty losses and property taxes on Schedule A.

·         If the vacation home is rented out for 15 days or more and used by the owner for 14 days or less, it is deemed a let out property and all rental income must then be reported to the IRS.

The owner can deduct certain rental expenses such as fees paid to property management firms, insurance premiums, maintenance expenses, mortgage interest, property taxes, utilities and depreciation. The amount of deductible rental expenses is calculated by dividing the number of days the home was rented out by the number of days the home was used (rental plus personal use). For instance, let us assume a home owner has rented out his beach house from January through April, and his family uses it for two months starting from July through September. Then, the vacation home has been used for 153 days out of which 91 days were rental days. 60% of the expenses (91 rental days/153 days of total use) can then be deducted against the rental income. The remaining 40% of the rental expenses are non-deductible.      

·         If the personal use is less than 10% of the days rented, however, then joint filers with $100,000 or less of adjusted gross income can deduct up to $25,000 of losses against their ordinary income.

·         If the vacation home is exclusively used by the owner, and not rented out at any time of the year, real estate taxes and interest on home mortgage can be deducted. If personal use is greater than 14 days or greater than 10% of the number of days rented out, the property is deemed residential, and the deductible rental expenses would be limited to the amount of rental income. 

As tax laws are complicated, please feel free to consult with our specialists at GKM to gain a comprehensive understanding of tax laws and how best to utilize a vacation home for rental purposes. 

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Tips to determine taxability of gifts

When you  gift  money or property to someone you may owe tax on the value gifted. For tax purposes, a gift is a transfer of property for less than its full value. In other words, if not paid back, at least not fully, it is a gift. The federal gift tax exists for the main reason of preventing citizens from avoiding the federal estate tax by giving away their money before they die. When invoked, the federal gift tax is owed by the giver of the gift, the recipient never owes anything. There is usually no gift tax when given to one's spouse or a charity.

A federal income tax return is usually unaffected by making a gift to someone. The value of gifts other than deductible charitable contributions cannot be deducted.

The following gifts are considered to be taxable when they exceed the annual gift exclusion amount of $13,000 (as of 2012).

·         Checks

·         Adding a joint tenant to real estate

·         Loaning $10,000 or more at less than the market rate of interest. This rule does not apply to loans of $10,000 or less

·         Canceling indebtedness

·         Making a payment owed by someone else

·         Making a gift as an individual to a corporation

·         A gift of foreign real estate from a U.S. citizen 

·         Giving real or tangible property located in the United States

The following gifts are not taxable:

·         Gifts not more than the annual exclusion for the calendar year

·         Tuition or medical expenses paid directly to an educational or medical institution for someone

·         Gifts to one's spouse

·         Gifs to a political organization for its use and

·         Gifts to charities

In addition, there are certain transactions not considered as gifts, and hence, not taxable:

• Adding a joint tenant to a bank or brokerage account or to a U.S. Savings Bond
•  Making a bona fide business transaction

Payments to 529 state tuition plans are gifts, so one can exclude up to the annual $13,000 amount. In fact, it can go up to $65,000 in one year, using up five year's worth of the exclusion, if the individual agrees not to make another gift to the same person in the following four years.

Alongside one's spouse, one can make a gift of up to $26,000 to a third party without it turning taxable. The gift can be considered as made one-half by self and the other half by spouse. If splitting a gift, a gift tax return must be filed to show that the spouse was also in agreement to use gift splitting.

A Form 709 (United States Gift and Generation-Skipping Transfer Tax Return) must be filed in certain cases.  The gift value given should be such that kiddie tax does not kick in.   To learn more please email info@gkmtax.com 

Social Security Statement online

The Social Security Administration has gone high tech.  It has done away with annual paper statements as a cost-cutting measure and added a feature 'My Social Security' to its website that enables viewing online workers' earnings and benefit information. This is convenient, because it makes it possible to access personal social security information anytime anywhere.

This new system asks for personal information and gets one to answer secret security questions. This is similar to the system used while opening a bank account online or request a credit report online. Once the information matches the data on the file maintained with Social Security, a new account is created with a unique user name and password and access to the Social Security statement is provided.

In addition to showing one's earnings record, the statement shows the estimated Social Security payments at full retirement age (66 to 67, depending on one's age), at age 70 and at age 62.   (The estimates are based on the average earnings to date and assume the same annual income will be earned from now until retirement.)

The statement also shows monthly benefits eligible for on disability, and the amount of survivor's benefits one's child and spouse may receive. It is important to check the statement and ensure the annual income which forms the basis for calculating retirement benefits is rightly recorded.

The site allows printing of the social security statement, and there is also an option to deactivate the online account. Workers who are 60 and older and not yet receiving benefits still get paper copies mailed out to them.

The two main items on a Social Security statement are:

•       Benefits. This section is updated regularly to reflect how much money has been contributed over one's lifetime and how much money one can expect to receive. One needs a certain number of "credits" to qualify for retirement benefits, and that is listed in this section.

•       Earnings report. This section displays the earnings for each year, as well as an estimate of how much money has been paid into Social Security and Medicare. The earnings record should be carefully reviewed for inaccuracies. If the number is too low, one could miss out on benefits down the road. If the number is too high, that could be an indication that the identity has been compromised and the Social Security Number is being misused.

The online statement also contains links to other online Social Security services, such as applications for retirement, disability and Medicare.

The link to track and confirm one's annual Social Security earnings ishttp://www.socialsecurity.gov/mystatement/.

Simplify your finances

The task of managing one's finances efficiently is very important.  This can be done by streamlining various aspects of financial management.

Investments:

·         Consolidate old retirement accounts

Rolling up multiple retirement accounts into one or two IRAs is a safe bet as fewer accounts mean fewer statements up for review, saving time. This reduces the paperwork and allows for easier control of one's investments with help from a financial advisor.

·         Automate the investment process- put the savings on autopilot

The most difficult part about saving is actually setting aside the money and transferring it into an investment account. An automated system to take out savings from every month and automatic money transfers from the bank account to the investment account will help keep the investment plan on track and not fritter away the money on something else.

Banking:

·         Automate payroll deposits

Using direct deposits for all income (salary, pension, social security payments etc) eliminates needless trips to the bank. Recipients of federal benefits can switch to direct deposit or a pre-paid debit card in case they are currently receiving paper checks.

·         Sign up for email / mobile alerts

With email / mobile alerts, the individual will receive immediate notification from the bank when the account balance drops below a certain amount or when credits or debits happen.

Spending:

·         Pay bills online/use auto pay options

Opt for automatic bill payments so that the hassle of writing a check and posting it is avoided. Better, if automatic payments are not preferred, one can still manually authorize electronic payments from a bank account or credit card. The online bill payment mode helps streamline bookkeeping activities.

·         Use fewer credit cards

With multiple credit cards, one runs the risk of overlooking payments on time for a few of them, thereby attracting late fees and heavy interest payments, having a negative impact on the credit score. Hold on to the oldest card as it improves the credit score. Fewer credit cards mean a lighter load on the wallet of course.

·         Draw up a durable power of attorney

A durable power of attorney drawn up by a lawyer will permit a trustworthy person to safeguard assets and pay bills in case of sickness and subsequent inability to manage money matters.

Taxes:

·         Keep records organized

Keeping records organized throughout the year can help simplify the preparation of tax returns. Place receipts and other documents in support of income and deductions in a safe box. Using personal finance software is a high-tech way of tracking expenses and income.

·         Direct deposit of refunds

Providing directions on the tax return for refunds to be directly deposited into bank accounts is a good way of receiving the tax refund faster and saving time going to the bank and putting up a check for collection.

·         Hire a Tax Specialist

Unless the return is a straight forward one and easy to do by self, take the help of a specialist such as a CPA or EA to prepare and file it. With a tax specialist on hire, access to year-round tax planning advice is assured, ensuring reduction in taxes and avoidance of costly tax mistakes or penalties.

Bookkeeping tips for small business

Book keeping is an essential part of running a successful business. Successful business owners have adopted a few basic procedures to stay on top of the paperwork.

Have a vision and plan for where you want the business to be in the long run.  Plan for major expenses in advance.  Almost all businesses have a set of supplementary or ancillary costs that often go unnoticed and do not always make it to the budget. For instance, every time a new software or equipment is purchased, although the cost of equipment might figure in the purchase, associated costs such as training, time and maintenance costs involved in the process might have been missed, thus resulting in an underestimation of the actual costs involved.

Some software products import directly into accounting software such as QuickBooks. Utilizing this type of tool will help save time and paper, and help audit-proof bookkeeping records. While transferring data from paper to computer, one can run a dual system for a few months, and when both the systems have the same totals, the paper trail can be dropped.

Create a checklist of all required statutory reports including due dates, type of tax, report, period covered, etc.  Put aside a portion of money throughout the year for taxes, note tax deadlines on the calendar, along with prep time, to make sure payments are actually made when they are due.

Request for statements with a month-end cut-off date, and save time when reconciling records with the bank statement every month. Do not file statements and canceled checks without reviewing them and review statements immediately for unauthorized checks. Maintain separate folders every year for paid invoices and bills, and go for numbering of the folders for all clients for ease of use and reference.

 Save storage space and opt to go paperless with the purchase of a good scanner.  A good scanner costs only around $500 to $600 and is a very affordable solution.

Consistency is the essence of successful business bookkeeping. For most small businesses, the most common bookkeeping errors are also the easiest to fix. Getting a better handle on bookkeeping can help make and keep long-term goals, smooth out the seasonal ups and downs of cash flow and improve business profits.

Guide to college savings plans

September – With schools reopening throughout the country there is never a better time than now to start with a college savings plan for your kids. Starting the savings habit early and wisely makes college a very realistic achievable goal.

The value of college education is immense, but the cost incurred in the process is enough to create a permanent hole in a family's savings purse. The numbers presented before us today are scary – with rising rates of inflation, the cost of higher education has spiraled, and today's kids may face college bills upward of $250,000.  To help families save for rising college costs, states offer 529 college savings plans with tax benefits to enhance savings.

What are 529 college savings plans?

These state-sponsored plans are named after Section 529 of the Internal Revenue Code which gave states permission to offer savings plans exempt from federal taxation.

Each state determines what the lifetime contribution limit or account balance cap will be in its 529 plan, but typically such limits range between $100,000 and $270,000. Investment minimums are low (most plans allow saving as little as $25 a month as long as a minimum of $500 is accumulated within two years of the initial purchase date), and there is no restriction on the contributions every year unless the account is nearing the lifetime cap.

529 plans - good estate planning tools:

ü  One may contribute as much as $65,000 tax-free per beneficiary in a single year without the gift being taxable, but that contribution will be treated as if it were being made in $13,000 installments over the next five years.

ü  Married couples can contribute up to $130,000 per beneficiary in a single year

ü  Ideal for parents, grandparents and friends to reduce size of their taxable estates today and help their cherished ones attend college in future

Most 529 savings plans offer a menu of age-based portfolios, and some also offer a small selection of stock and bond funds. Early on, the portfolio is tilted toward stocks, and as the time for college nears, the weighting shifts toward bonds.

Tax Advantages:

If used for qualified higher education expenses such as college tuition, fees, books, room and board, investment earnings in a 529 plan are tax free. While the taxpayer's contribution is not deductible on his / her federal taxes, the investment will grow tax-deferred and withdrawals will not be subject to federal tax. In addition to federal tax breaks, one gets state-tax deductions on contributions or exemptions on qualified withdrawals.

Flexibility on offer:

One can choose any state's 529 plan regardless of the state of residence, where the beneficiary lives, or where the beneficiary will eventually attend college, and still be eligible to claim the associated federal tax benefits. Only a few states restrict participation to state residents. The money accrued in the savings account can be used to fund higher education at any eligible educational institution in the country.

Starting on savings while a child is still young helps take maximum benefit of compound earnings.

Why choose a 529 college savings plan?

ü  Withdrawals for qualified education expenses exempt from federal taxation

ü  Investment earnings grow tax-free

ü  Can be opened by parents, relatives and friends

ü  Beneficiary can be any age

ü  No restrictions on income levels – anyone can contribute

ü  Assets generally protected from creditors

ü  Option to change account beneficiary

Why outsource bookkeeping & accounting?

Here's what a business stands to gain by outsourcing bookkeeping      and / or general accounting functions:        It saves time and money.       The need for hiring an employee to do the work is eliminated, which cuts        expenses for office space, payroll tax, worker's compensation and                  benefits.       The business stays in compliance with laws and regulations. Outsourcing bookkeeping and general accounting means different things to different businesses. A business owner has three basic choices:     Completing the tasks with direct intervention and no outside support,              although it means taking precious time away from actually running the             business.     Hiring a bookkeeper to take care of the tasks in-house. But this will                involve provision of office space, pay wages plus fringe benefits, and              more importantly, time to oversee the bookkeeper's work.     Or choosing a better way. Many business owners rely on professionals to      administer their accounts payable, keep their checking accounts in order      and handle other bookkeeping chores.  Here are some of the tasks we can do:      Ensure that bills are checked for accuracy and paid by or before their            due dates to keep the business in good standing with its vendors.       Keep track of payment terms and make sure payments are made within          the discount period and the lowest prices available are provided for.        Monitor sales tax charged (or not charged) by vendors.           Keep the business' checkbook up-to-date.         Reconcile checking account with the bank on a monthly basis so that the        business owner is always aware of the fund availability. No matter what your bookkeeping and accounting needs are, GKM can assist you. Email info@gkmtax.com to find out more.