Categories

Thursday, November 28, 2013

Mutual fund

I bought a mutual fund on 5/8/2013 for $100,000. The mutual fund paid dividend/capital gain since then so my account value is $110,000 now.

If I sell $100,000 (The original amount that I put in) on 1/1/2014, will I have to pay capital gain tax in 2014?

My guess is no since I withdrew only the principal amount that I put in.

Am I correct?

Answer :

You need to start with Form 1099-B. Anytime you sell a mutual fund, you will receive a 1099-B at year's end(in this case at year of 2014’s end) outlining the sales proceeds for each transaction. Your first step is to match the proceeds from any sales with the respective purchase price.As you sell it for $100K, then, there is no gain/loss on the sale of the mutual fund.However, because a mutual fund actually holds the underlying securities in its name, the mutual fund pays several types of dividends and distributions that the mutual fund has received on the underlying securities. You must report all mutual fund dividends and distributions, including dividends reinvested in the mutual fund, on your tax return. Your mutual fund will send you Form 1099-DIV. Your mutual fund will also send you instructions on where to enter the tax information from the Form 1099-DIV onto your tax return. The ordinary dividends from a mutual fund are entered on Form 1040, Schedule B, Line 5. This figure is then carried to Form 1040, Line 9.

Visit Asktaxguru for Online tax help


RMD when filing Jointly

My wife and I file our income tax jointly. She reaches 70 and 1/2 this year, and I won't for another year. She has an IRA account with about $50K in it, and I have two totalling about $250K. When she reaches 70 and 1/2 this year, can she just pay her RMD on her $50K account, or does filing "jointly" somehow mean we need to pay the RMD on our entire IRA totals?? (Obviously next year when I hit 70 and 1/2, we would both pay on the entire amounts.)

Answer :

They are separate. Each person has to take her RMD from her own IRA. Filing a joint return does not change that. A distribution from the spouse's IRA cannot be used to satisfy the husband's RMD. So, each spouse is responsible for making a RMD withdrawal based on his or her own individual tax-deferred retirement savings account (i..e., IRA and 401(k) plan) balances. Just as these accounts have been funded separately over a couple's working years, the individual balances of a husband and wife must be handled separately for the purposes of an RMD withdrawal calculation.

Visit Asktaxguru for Online tax help

Allocating S Corp shares to a new member

1 : My s corp is 5 yr old small business with 2M revenue. Me and my wife are currently holding 50/50 shares. We would like to invite one of our employees into the managing board of directors by offering 30% share. What is the best way to do this? Do we have to sell our 15% portion at a price ? 

2 : How the share value is calculated ? Can we offer these shares as a bonus or a pay ? 

3 : Will the new person need to pay tax when she receives the shares of S corp on paper ?

Answer :

1 : I guess the first thing you need to do is contact your attorney & your CPA/ an IRS EA;the sale of the shares in your S corp will require the corp sec to issue a new stock certificate to the new owner & cancel the old one.When preparing the S corp tax return, the transfer of interest will consist of the income being allocated on the k-1. The corporation files an 1120S with the appropriate K-1 forms to report the net profit and/or loss to the shareholders during the year. If you sell your shares in mid-year you and the other shareholder will EACH receive a K-1 reporting your respective shares of net profits (or losses) for the year. There are two different ways to do this, so consult a CPA or IRSEA familiar with "S" taxes, ~~~before~~~ you go to the attorney to draw up the sales agreement, as it should be stipulated in the documents how this get handled.

NOTE : an owner of an S-corp might wear two hats. One is as the owner of the business, entitled to receive a share of the net profits of the business. Oftentimes, the owner will also work for the business, and thus be an employee of the firm. Thus an owner-employee of an S-corp can receive two different types of income: net profits (or losses) and salary income. Assume that , In 2012, the corp shows net income of $300K as wages, paid to you as salary and bonus. Instead, you could pay yourself $210K salary($300K-$90K(30% of the net profit was sold to the employee), then you need to pay your Soc Sec taxes on $210K as employees/owners as long as you can demonstrate that's comparable to other top executives' earnings at similar companies. The remaining $90K balance ($300K minus $210K)sold to the EE is taxable to the EE as corporate earnings on his tax return. By shifting the $90K from earned to unearned income, you would save $9,360 for FICA tax and $2670 in Medicare tax, assessed at 2.9 percent for employer and employee.However, profit distributions are not subject to FICA payroll taxes; they are subject only to the shareholder's income tax rate. So all things considered, you, as the shareholders-employees, will have a strong preference to pay yourselves a minimal salary and thereby increase the profit distribution on your Sch K-1 of 1120S..

2 : As mentioned above.I guess you need to contact yur CPA/ IRS EA for more accurte info in detail.

3 : An S corp operates a pass-through entity, meaning all corporate income and deduction items pass through to shareholders, who then report those amounts on their personal returns. He owes personal income tax on his share of S corp profits. So as long as you run your business as an S corp, you may consider giving away some shares to low-bracket relatives, including your children, who'll owe less income tax. Share giveaways also can reduce your payroll and estate taxes.

Visit Asktaxguru for Online tax help

November 30 Is Small Business Saturday

Small businesses are the engine that drives America's economy. While everyone will be out and about looking for bargains this weekend it is a good idea to support America's Small Businesses. Visit your local small businesses and support the American economy.

Click on NOVEMBER 30 IS SMALL BUSINESS SATURDAY for additional tips and ideas to support your local Small Business.

Visit Asktaxguru for Online tax help

Reporting Home Sale (Qualified Extended Duty and Rental)

My wife and I sold a house in June 2013. The home was purchased in 2000 and we lived in it for 2.5 years until 2003. From 2003 to present we have been on qualified extended duty for the U.S. Government. Likewise, the property has been rented out since we departed. It was depreciated using the 27.5 year straight line method.

At the sale, I was asked if the property had ever been used for income. Answering affirmatively, I subsequently received a 1099-S. My question concerns properly reporting the sale because I received the 1099-S. It should reflect that I do not owe capital gains tax (the gain was less than $500K) and I met the 2 out of 5 year rule due to the qualified extended duty. I do need to pay the depreciation recapture.

I suspect I need to fill out some variation of form 4797 or 8949. How do I do this correctly to reflect no capital gains tax and correct depreciation recapture?

Answer :

Recapture involves taking the prior depreciation deductions back into income, and it occurs at the sale of a property.As you said, as your pty was rented out before you sold it, you need to recapture unrecaptured depre (it is neither Sec 1245 nor sea 1250 depre) as ordinary income taxed at 25%UNLESS your marginal tax rate is lower than 25% when you dispose of the pty; tax rules authorized an exclusion only for the portion of the profit attributable to the residence part, prohibiting any exclusion for profit on the rental part. Recaptured depreciation is taxed at a maximum rate of 25 percent instead of the top rate of 15 percent for long-term capital gains, plus applicable state income taxes. You need to report this recaptured amount on Sch D of 1040/ form 8949, not Form 4797 . On the plus side, you suffer no recapture of other expenses, such as real estate taxes and mortgage interest.

To qualify for relief from recapture, you have to show by “adequate records or other evidence” (usually, past returns should be sufficient) “that the depre deduction allowed was less than the amount allowable.” Then the amount that “you cannot exclude is the amount allowed.To illustrate, assume that your rental home qualified you to claim depreciation, but you can show that you never claimed any. Then there is no reduction of the exclusion amount and no recapture.

Visit Asktaxguru for Online tax help

Claiming Son now out of state

My son Graduated May of 2013 then moved out of state late June for college for school year 13-14. His residence is now the other state he moved to in the attempt to have his second year of college "instate" tuition. If I claim him for tax year of 2013 (since I took care of him for more than half the year) will that hurt his chance for his second year being the in-state tuition. And I know this will be that last year I can claim him.

Answer :

As long as your child is a student and attends school in another state, you still may claim your child as a dependent on your taxes as a full year resident of the home state. Your child must list your residence as his permanent residence with the school, with your child's residence while attending school listed as his temporary residence. Your son can claim full-time residency in two states at the same time, but it should be avoided. If he, as a taxpayer, tries to claim dual residency then he will be overcharged by the states. A taxpayer can be a part-time resident in one state and a full-time resident in another at the same time, according to the IRS. It is recommended that for tax purposes that one state be considered a domicile. As long as you meet conditions/requirements, you still may claim your child as your dependent even if your son is living out of state for schooling.You may claim him as qualifying relative, NOT as a qualifying child.

Visit Asktaxguru for Online tax help

General Scenario - New LLC in VA

Hi All - I'm a new Virginia LLC start up and have a few questions as I work to understand how I'll be taxed.

Scenario : 

Our year end profit is $100,000. 

A : As a single member LLC is the total $100,000 taxed as income for the owner?

B : Federal income tax rate schedule tax is $17,891.25 + 28% of the amount over 87850. Does this mean that I'm left with $78707 after deducting 21293 (17871+3406)?

C : 15.3% FICA tax includes SS and Medicare Employee and Employer Contributions. Do I deduct another $15,300 for this leaving me with $63,407 in net income?

D : Do I also pay PUTA and SUTA? 

E : What about state taxes? 

F : Is there anything that can be done to reduce tax liability?

G : What's the difference between start-up expenses and write offs once you're already in business?

Answer :

Our year end profit is $100,000. 

A : Yes; as you can see, as an SMLLC owner, just like a sole proprietor, you need to report your net profit on Shc C/SCh SE and on line 12 of 1040. Your entity is an SMLLC, NOT a MMLLC. If your SMLLC does not elect to be treated as a cop , either an S Corp or a C Corp, then, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return.

B : Federal income tax rate schedule tax is $17,891.25 + 28% of the amount over 87850. Does this mean that I'm left with $78707 after deducting 21293 (17871+3406)?”=No.As a SMLLC , owner, as long as the amount on Sch SE in 2/ 3 is $400 or exceeds $400, then you need to pay SECA tax to the IRS. You usually file your tax as a self employer as long as the amount on Sch S line 29/ 31 is also $400 or exceeds $400. You can deduct 50% of your SECA tax that you pay to the IRS on your 1040.ALSO, as you are filing as a sole proprietor and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1K or more when you file your return; however, you do not have to pay estimated tax for the current year if you had no tax liability for the prior year ; you were a U.S. Citizen or resident for the whole year ; your prior tax year covered a 12 month period.

C : No, NOT $15,300.You, as a self employed, need to pay SECA tax as mentioned previously; Seca tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.. For self-employment income earned in 2013, the self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% of social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). you need to follow instructions on Sch SE for sure.

D : .UNLESS you have an EE, no

E : Yes; you may have to pay quarterly estimated taxes to your state as well as long as you do not have to pay estimated tax for the current year if you had no tax liability for the prior year ; you were a U.S. Citizen or resident for the whole year ; your prior tax year covered a 12 month period.

F : basically, being self employed, you can lower your self-employment, federal and state tax by claiming expenses. Any expenses that you list must have supporting documentation such as cancelled checks, cash receipts, invoices and credit card receipts. The expenses must be for the business that you run, not personal. Such expenses could be office supplies, licenses, taxes and car expenses if they pertain to the business. as mentioned above, you need to take advantage of the self-employment deduction. You can claim 50% of your self-employment tax as a federal income tax deduction. While this does not actually reduce your self-employment taxes, it does reduce your overall tax burden.also you, as a self-employed individual, can also reduce tax liability through the details of a health insurance plan. Obviously you would not be receiving benefits from your employer and so you will be responsible for insuring your health needs. Health insurance premiums are legal deductibles. However, health insurance deductibles must not cost more than the income your business makes. Taking advantage of a retirement plan can also help you prevent high tax dues. This is quite complicated and so professional help must be consulted. You may also apply Sec 179 expensing/ bonus depre to accelerate your dapper exp so that you can reduce tax liability, too.

G: start up costs can be also write-off; There a number of small business tax write-offs offered by the IRS for startups. If you have a start-up business and want to save some money on your taxes, you should be familiar with these small business tax write-offs. Some of the most common small business tax write-offs that you can use when filing tax returns for your business are; Based on the rules and regulations set by the IRS, you are allowed to deduct up to $5k in start-up costs during your first year. If you fail to deduct the aforementioned costs, you may amortize the said amounts over a period of not more than 180 months beginning from the time when you started your business. Under the IRS rules, you can amortize expenses related to market research, business advertisements, legal matters, human resource training and other items directly associated with business development. The IRS is strict when it comes to the kind of expenses that you write off, so make sure that you follow the rules and regulations set for business-related expenses to avoid getting into trouble.

Visit Asktaxguru for Online tax help

IRS Warns of Phone Scam

In a move to continuously keep the consumers updated, the IRS issues various warnings which affect the consumers financially. Once such warning informs about a phone scam where FAKE IRS agents call individuals demanding back taxes and tell the unsuspecting consumer to pay immediately using a debit-card or wire transfers. The IRS never asks for such payments over the phone. 
Please check further details on this scam and steps to take if you receive such calls by visiting the IRS site at 


Visit Asktaxguru for Online tax help

IRS Warns Consumers of Possible Scams Relating to Relief of Typhoon Victims

Natural disasters present an opportunity to do good by helping the many affected by the disaster. Unfortunately, it also presents an opportunity for the cheaters to prey on the unsuspecting. Times like these give rise to fake charitable organizations and individuals whose only goal is to cheat the consumer by capitalizing on their wish to help the needy. The IRS recently warned consumers of such scams (related to Typhoon Haiyan - Yolanda) and have cautioned the consumers from donating their money to such scam organizations / individuals. 
Information regarding this warning and IRS tips to avoid becoming a victim to scams can be found at 


Visit Asktaxguru for Online tax help

Does the NAME of a corporation affect tax or legal liability?

1 : Does anyone know if using your own personal name as a corporation name in this way can have negative consequences?

2 : In a legal sense, in terms of asset separation (piercing the shield)

3 : From a tax standpoint (might look less like a business and more like just a tax shelter, etc.

4 : I have not conducted any business under the corporation yet. I just registered it last week, and the only other thing I have done is get an EIN. So if I need to scrap it and start over with a different name, now is the time.

Answer :

1 : I guess choosing a business name is an important step in the business planning process. Not only should you pick a name that reflects your brand identity, but you also need to ensure it is properly registered and protected for the long term. You should also give a thought to whether it’s web-ready. Many businesses start out as freelancers, solo operations, or partnerships. In these cases, it’s easy to fall back on your own name as your business name. While there’s nothing wrong with this, it does make it tougher to present a professional image and build brand awareness.As you intend to incorporate your business as an S corp, you’ll need to contact your state filing office to check whether your intended business name has already been claimed and is in use. If you find a business operating under your proposed name, you may still be able to use it, provided your business and the existing business offer different goods/services or are located in different regions. As long as you use your full name as an S corp name, you do not need to choose DBA, doing biz as , option.

2 : UNLESS you operate your personal biz as sole proprietorship, yes. A major advantage of operating as a corp, either C corp/ S corp, is that the owners (shareholders) of the corp are shielded from the liabilities and debts of the corporation. Owners of a corp are liable for the company's obligations, debts and liabilities up to their ownership interest in the business. Business creditors and parties that initiate legal process against a corp may not pursue the personal assets of a shareholder as compensation for the debts and obligations of the company.

3 : As an S corp, I think so; an S-Corp is not subject to corporate tax rates. Generally, an S Corp is exempt from federal income tax other than tax on certain capital gains and passive income. S-Corps therefore avoids the so-called "double taxation" of dividends; instead, an S-Corp passes-through profit or net losses to shareholders. The business profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through nature of the income means that the corp's profits are only taxed once at the shareholder level; the S corp's shareholders include their share of the corp's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. UNLIKE sole ownership, S corp is NOT subject to SECA tax.

4 : I guess so.

Visit Asktaxguru for Online tax help


Repair Expenses in Rental Property

1 : My question is the treatment of repair expenses that I will incur. I know they can be deducted in the year they occurred as a rental expense for a rental property.

2 : However, the jobs will be done while the property is vacant.

3 : Do I need to perform all of the jobs before the end of November for the costs to still qualify as rental expenses? 

4 : What would happen if some of the jobs occur in December? 

5 : When would IRS consider it to be a personal residence/second home? The day I move back in or December 1st?

Answer :


1 : In general, if you are a cash-basis taxpayer, you have to pay your repair expenses by the last day of the year to deduct them. If you are an accrual-basis taxpayer, you have to clear the all-events test , that is, all events to determine the exp. Must have taken place by year-end, and the exp. Must be determinable with reasonable accuracy.


2 : You can still deduct the repair exp. Even if the repair is done (while the pty , as rental pty, is vacant. UNLESS you move back in) that is incurred as a accrual basis TP or when it is paid as a cash basis TP as mentioned above. 

3 : As mentioned above.As long as the repair is done after you move back in , then the repair can be treated for personal cost not reported on your Sch E of 1040;as you can see,. you can't deduct repair costs, and usually can't add them to the basis of your home. However, repairs that you do as part of an extensive remodeling or restoration of your home are considered improvements. You add them to the basis of your home. And it increases ad basis of your home.

4 : As mentioned above; I guess the issue for the repair deduction is if the pty is r ental or personal home.

5 : I guess so since you no longer rent it out as you move back in.



Visit Asktaxguru for Online tax help

Social security back pay

1 : I applied for SSDI about 5 years ago. During the 5 years, I had no income. Actually I was going into debt further and further every year. About six months ago I was 

2 : I am a single mother so I claim head of household and I have one child. I own a home. My income each month is about $3300, the interest on my mortgage is about 14,000. I was awarded almost 100k in back pay. 
Since the pay was for 3 prior years, can I go back and amend previous tax returns to show that money as income for those years? Or can I income average? Please excuse my ignorance, I know enough to be dangerous.

3 : awarded SSDI. I was also awarded three years back pay. It is quite a chunk of money and I am worried about having to pay taxes on this much money. I did read on the social security website that if you made more than $25,000 in Social Security in a year then you were required to pay taxes. 

Also much of this money is going to be used to pay off the large debts incurred during those 3 years that I had no income. Can you help ??

Answer :

1 : As single, as long as your MAGI (AGI+1/2 of your SSDI annual benefits +any tax exempt interest and other exclusions from income.), then 50 % of your annual SSDI can be included in your AGI for tax;however, as a HOH, UNLESS your AGI exceeds a certain level , then you do not need to pay tax on your SSDI. SO it depends on the amount of your taxable income reported on line 43 of 1040

2 : your back pay is pay received in the prior 3 tax years for actual or deemed employment in your earlier tax years. For social security coverage and benefit purposes, all back pay, whether or not under a statute, is wages if it is payment for covered employment. Damages for personal injury, interest, penalties, and legal fees included with back pay awards are not wages. As long as they are wages , then you need to report all back pay. However, the 3 prior tax years for which back pay is credited as wages for social security purposes is different if it is awarded under a statute; the IRS and the SSA consider back pay awards to be wages. However, for income tax purposes, the IRS treats all back pay as wages in the year paid. Your former employer(s) should use Form W-2 to report back pay as wages in the year they actually pay you, the former employee.

3 : UNLESS those large debts are your personal debts, then you can deduct those debts as your business debts, as non-personal debts.

Visit Asktaxguru for Online tax help

Capital gains question

1 : I live in California. I own a home in Orange County that I have been renting for about 2.5 years. I have been living with my parents during this time and just put my home in OC on the market. My intention is to sell It (I have about $100k in equity) and purchase a less expensive home in North County San Diego. I have seen in other posts that there is a one time exclusion, but don't know enough to know if I qualify. I am a single mother and I am currently on permanent SSDI. 
Someone else told me that to avoid capital gains tax I would need to purchase a more expensive home. I don't know what is true. You are the expert. Can you please help and tell me what is what And exactly how I can get around paying a bundle of taxes. 

2 : My intention is to sell It (I have about $100k in equity) and purchase a less expensive home in North County San Diego

Answer :

1 : I assume that your home in OC is your primary home (primary home: your primary residence, or main residence is the dwelling where you usually live, typically a house or an apartment. You can only have one primary residence at any given time, though you may share the residence with other people. A primary residence is considered to be a legal residence for the purpose of income tax and/or acquiring a mortgage.), then, in general, you are required to include the capital gain from the sale of your home in your taxable income. However, if the gain is from your primary home, you may exclude up to $250K as single ($500K for married couples filing jointly) gain from income, if you meet certain requirements. This is referred to as maximum exclusion. So as long as you sell your main home at a gain, and have lived in it for at least two years during the five-year period ending on the date of sale, you can exclude the gain from taxable income up to a maximum exclusion of $500K for married persons filing a joint return, and $250K exclusion for a single person.If the gain exceeds $250K, the excess amount must be reported on Sch D of 1040 or form 8949.In order to be eligible to exclude up to $250K, 1) you must meet the ownership and use test. Under this requirement, as mentioned above, you must have owned the home for at least 5 years, and have lived in it as your primary residence for at least 2 years. This two-year period must be within the five-year period ending on the date you sold your home. And 2) you did not exclude from your income the gain of a sale of another home during the two-year period ending on the date of the sale of the home for which the exclusion is being claimed.
If you shared ownership in the home, but you and the other owner file separate returns, you may each exclude up to $250K from your income, if you both meet the requirements listed above.
If you exclude the entire gain on the sale from income, the transaction is not reported on your tax return. If any part of the gain is taxable, you need to report the sale on such D of form 1040/ form 8949. 



2 : it doesn’t matter even if you are to buy a less expensive home

Visit Asktaxguru for Online tax help

Democrats are seeking ways for eliminating Tax Breaks to Certain Business and Professional Corporations

The Democrats are pushing for new initiatives to shut down some tax loopholes that help some businesses, investors and professionals as a means to increase tax revenue to help ease impact of potential automatic spending cuts.

Some of the major loophole items that are targeted in their list are as follows;

1) Elimination of the tax deductions for Corporations who pay executives in stock options instead of Salaries.

2) Elimination of reduced tax rates for Hedge Fund Managers and Private Equity Advisors.

3) Elimination of avenues for escaping Corporate Taxes on Foreign Profits.

4) Elimination of Tax Provisions that help Professionals such Doctors, Lawyers, and Other Professionals and Consultants who incorporate (as an S Corporation) themselves to avoid Medicare Taxes on Pass Thru income or profits.

Visit Asktaxguru for Online tax help

What are the elements of California Proposition 30?

"Proposition 30, a Sales and Income Tax Increase Initiative, was on the November 6, 2012 ballot in California as an initiated constitutional amendment, where it was approved."

Gov. Jerry Brown led the charge for Proposition 30, which was a merger of two previously competing initiatives; the "Millionaire's Tax" and Brown's First Tax Increase Proposal.

What are the Elements Proposition 30?
  1. Raises California’s sales tax to 7.5% from 7.25%, a 3.45% percentage increase over current law. (Under the Brown Tax Hike, the sales tax would have increased to 7.75%).
  2. Creates four high-income tax brackets for taxpayers with taxable incomes exceeding $250,000, $300,000, $500,000 and $1,000,000. This increased tax will be in effect for 7 years.
  3. Imposes a 10.3% tax rate on taxable income over $250,000 but less than $300,000--a percentage increase of 10.6% over current policy of 9.3%. The 10.3% income tax rate is currently only paid by taxpayers with over $1,000,000 in taxable income.
  4. Imposes an 11.3% tax rate on taxable income over $300,000 but less than $500,000--a percentage increase of 21.5% over current policy of 9.3%.
  5. Imposes a 12.3% tax rate on taxable income over $500,000 up to $1,000,000--a percentage increase of 32.26% over current policy of 9.3%.
  6. Imposes a 13.3% tax rate on taxable income over $1,000,000--a percentage increase of 29.13% over current "millionaires tax" policy of 10.3%.
  7. If this proposition is passed in November, 2012, the income tax will apply retroactively to all income earned or received since the first of the year (1 January, 2012).
  8. Based on California Franchise Tax Board data for 2009[8], the additional income tax is imposed on the top 3% of California taxpayers.
Visit Asktaxguru for Online tax help

After Passage of Proposition 30, "California Income Tax Rates 2013 Now Highest in America!"


Following the narrow passage of Proposition 30 in November 2012, "California’s income tax rates have reached an astronomical 13.3% rate. California State now has the most progressive income tax rates of all the states, individuals begin paying an 6% rate at $27,898 and an 8% rate at $38,727 in income, but it now effectively surpassed Hawaii (11% top rate) as the state with the highest income tax rate in America."

Proposition 30 effectively "raised income tax rates for all Californians earning more than $250,000 per year. It progressively increased tax rates from 1% to 3% for all individuals and families earning above that level. Higher income households now face a 10.8% to 29.1% increase in overall tax rates."

Visit Asktaxguru for Online tax help

Depreciation Conventions

1 : There are main 3 conventions : 1) Based on months held, 2) Half Year Convention, and 3) Full year convention

2 : Is it ok to pick any convention for depreciation calculation or there are some rules pertaining to each asset? 

For instance : When there is an asset of start up cost, the asset will be amortized over a period of 5 years and amortization should be calculated based on monthly convention.

3 : Real Estate can be based on monthly convention.
How about other assets like equipment, F/F : I have taken half yearly convention many times. 

4 : But I would like to know the rules laid out by IRS? Can someone guide me / send me the link to read the rules?

Answer :

1 : A convention is a method established under MACRS to set the beginning and end of the recovery period. The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. So, a convention simply refers to figuring how much of the item basis you may depreciate the first year, based on when during that year you purchased and put the item to use in your business. Under the half-year convention, your item is treated as though it was purchased and placed in service at the mid-point of the first year, no matter when during that year the purchase was actually made. Therefore, only half of the otherwise allowable depreciation amount is able to be deducted during the first year. Thus, the half-year convention is standard with all depreciation and must be used unless the mid-quarter convention rules apply. (Except in the case of depreciating the business use of your home, in which case the mid-month convention applies the first year). For example, by using the S/L method of depreciation , a TP is able to depreciate her office desk ,7 yr property, used 100% for business, over a seven year recovery period. Her basis in it ,the amount she paid, is $7K She is able to take equal, $1K deductions each of the seven years. Because of the half-year convention, however, she may only deduct half of that in the first year. Year 1; $.5K Years 2-7 - $100 each year; year 8;$.5K.
The mid-month convention applies only to real property. Under the mid-month convention, one-half month of depreciation is allowed for the month the asset is placed in service or disposed of and a full month of depreciation is allowed for each additional month of the year that the asset is in service.

The full month convention will treat the asset as if placed in service on the first day of the month. No depreciation will be calculated for the last month of the asset's life or the month the asset is sold. This convention normally applies under ACRS Tax System.For all other months and years, full month and year of depreciation is deducted.For example,assume that the depreciation amount computed for the first year of the asset is $10K. Some additional details pertaining to this depreciation calculation for this example are: 1)Full tax year is January to December. (2)Asset was placed in service on April 18 . (3)Full month convention applies to this asset. To apply the full month convention,you need to multiply the full year depreciation by a fraction. The numerator of the fraction will be the number of full months the asset has been in service, and the denominator will be 12. Because the asset is placed in service in April, the number of full months will be nine (asset treated as if placed in service on first of April).In this case, $10K * 9 / 12 = $7.5K The depreciation amount for the first tax year will be $7.5K. Similarly, assuming that the asset lives its full life, the amount of depreciation in the sixth tax year will be full year depreciation multiplied by 3/12, $10K*3/12=$2.5K.

Under the actual month convention, if the asset was placed in service on or before the fifteenth day of the month, the asset is treated as if placed in service on the first day of the month. If the asset was placed in service after the fifteenth day of the month, the asset is treated as if placed in service on the first day of the next month. For all other months and years, full month and year of depreciation is deducted.

If the method of depreciation computation has switched from DB to SLM in the later years, the actual month convention will apply to the depreciation amount computed as per SLM in the last year. Thus, the convention applies, irrespective of the method of depreciation. For example, the depreciation amount computed for the first year of the asset is $12K. And the Asset was placed in service on April 18.Then to apply the actual month convention,you need to multiply the full year depreciation by a fraction. The numerator of the fraction will be the number of full months the asset has been in service, and the denominator will be 12. Because the asset is placed in service on April 18, the number of full months will be eight.; An asset placed in service after the fifteenth of a month is considered as placed in service on the first day of the next month.In this case, the depr amount for the first yr ; $12K * 8 / 12 = $8K. Similarly, assuming that the asset lives its full life, the amount of depreciation in the sixth tax year will be full year depreciation multiplied by 4/12. (Numerator will be the number of months the asset was in service in the year of disposal or retirement.) Because the asset will be in service until April 18 of the last year, it will be considered to be in service for the whole of April.In this case, $12K*4/12= $4K , annual depreciation amount for the last tax year.

2 : You must use theMACRS to depreciate most properties. HOWEVER,you cannot use MACRS to depreciate the Property ; you placed in service before 1987; Certain property owned or used in 1986; Intangible property;Property you elected to exclude from MACRS.

3 : As mentioned above it depends on the situation; for example, under MACRS rule, you can choose either HY or Mid-Qtr convention. It applies when more than 40 percent of your depreciable assets (excluding non-residential real property and residential rental property) purchased during the year are purchased within the last three months of the tax year. Under this convention all property placed in service during any quarter is treated as being placed in service at the midpoint of the quarter. So, under the mid-quarter convention your depreciation deduction will be lower than if you were using the half-year convention.

4 : Please visit the IRS web site for more info in detail;



Visit Asktaxguru for Online tax help

Resolve Preparer tax identification number (PTIN) Login Trouble

Preparer tax identification number (PTIN) applications and renewals for 2014 are now being processed.

Anyone who prepares or assists in preparing federal tax returns for compensation must have a valid 2014 PTIN before preparing returns. All enrolled agents must also have a PTIN.

PTIN requirements are not affected by recent legislation.

Do you have trouble with your PTIN login? There is a YouTube video that explains how to solve PTIN login problems.
You can view the video at Resolve PTIN Login Trouble - YouTube. Hope this helps.

Visit Asktaxguru for Online tax help

Can I use cost basis when I sell a fund from one brokerage?

I hold shares of the same mutual fund at two separate brokerage houses. Therefore, I have an Average cost basis from each of the two brokerages. If I sell from Brokerage A, can I use my average cost basis from Brokerage A as is, or do I need to figure my overall average basis from the 2 brokerage firms?

Answer :

The two accounts will be independent. As you sell shares of a mutual fund, you are required to declare the gain or loss on your income tax return. First, you must know your basis, or cost, of the mutual fund shares that have been sold. I guess when you sell from Brokerage A, you can use my average cost basis from Brokerage A, NOT composite overall avg cost basis. When shares of a fund are sold, you have a few different options as to which cost basis to use to calculate the capital gain or loss on the sale. The first in, first out method simply state that the first shares purchased are also the ones to be sold first. Subsequently, each investment in the fund has its own cost basis. The average cost single category method calculates the cost basis by taking the total investments made, including dividends and capital gains, and dividing the total by the number of shares held. This single cost basis then is used whenever shares are sold. The average cost double category basis requires the separation of the total pool of investments into two classifications: short term and long term. The average cost is then calculated for each specific time grouping. When the shares are sold, you can decide which category to use. Each method will generate different capital gains values used to calculate the tax liability. Subsequently, you should choose the method that provides you with the best tax benefit.

Visit Asktaxguru for Online tax help

Wednesday, November 27, 2013

Caregiver credits and allowances

As part of my research I found that the Government has created a very useful site which informs about the various benefits available to individuals and families facing various disasters and challenges.


Hope it helps people reading this forum and individuals such as me who are facing life changing situations.

My spouse was just diagnosed with a long term illness which will prevent me from working a full time job. I will have to take up a large portion of the caregiver responsibilities. Are there any tax benefits/credits for someone in my situation? Where can I go for additional tax and finance information for this question. Any help is appreciated. Thank you.

Answer :

To qualify for caregiver tax deductions and credits, the person you are caring for must be a spouse, dependent, or qualifying relative or etc. The caregiver and medical expense tax rules have several important qualifications:the 7.5%(or 10% rule UNLESS you are 65 or older) rule says you can only deduct medical expenses-for both yourself and your loved ones-if these costs exceed 7.5% of your AGI. Senior citizens and caregivers should be aware that premiums paid for qualified long-term care insurance contracts are also deductible medical expenses. According to the IRS, the contract must be guaranteed renewable; not provide a cash surrender value; not pay the costs that are covered by Medicare; provide that refunds, other than refunds upon death, surrender, or cancellation of the contract, and dividends are used only to reduce future premiums or increase medical benefits. For 2011, long-term care premiums are deductible up to the following dollar amounts: for individuals age 61 to 70 the limit is $3,500, for individuals 71 and older the limit is $4,370.Many state governments also offer tax credits and deductions for caregivers on state income tax forms, so it pays to know your individual state's rules.

You may need to contact your local Social Security Administration office to find out if there are Medicaid provisions for home care that will compensate spousal care. Review your own insurance coverage for similar provisions. Both state-based and private insurance compensation options will outline the qualifications you must have to be considered as a home-based caregiver.

Visit Asktaxguru for Online tax help

so confused, filing status?


My ex-husband and I have THREE biological children. we are LEGALLY divorced and have been for OVER a year. however, we now live in the same house. we both work and we both pay the bills. IS IT LEGAL if i claim two children and file as hoh and he claims 1 child and files as hoh? i know it would be if we lived in seperate homes, and from what i understand hoh isnt based on where you live but support of dependants...i make more so i would say i 100% support 2 children and he 100% supports 1 child....but i get different answers every time i ask someone... so if you know the actual truth and are not just guessing PLEASE clue me in.... and if the answer is no we shouldnt file that way, then how should we file? we CANT file joint cause we are not married....

??? so confused!!!


Answer :

I do not think so.Only if there are two separate living units at the address, such as a multi-family house, and each person lives with their qualifying person in a separate unit and pays more than half of the cost of maintaining their respective homes. However, as it is mathematically impossible for two people to both pay more the 50% of the household expenses, there can really be only one Head of Household. As you have children with your former spouse, only one of you can claim the children as dependents. However, if your former spouse doesn't agree to let you take the exemption and vice versa, the IRS allows the parent with the higher AGI to claim the children as dependents. You can't BOTH file HOH if living in same household as only one of you is paying MORE than half the cost of maintaining the household. And to file HOH, each of you need a dependent--not same dependent. What you CANNOT do is both claim HH by using the same child(ren) as your Qualifying person. Ypu can contact the IRS for more info in detail.

Visit Asktaxguru for Online tax help
Related Posts Plugin for WordPress, Blogger...