Denver CPA | DTC Financial Planner | Denver Tax Accounting | Lippa & Associates CPA

Hiring Children to Work for Parent’s Unincorporated Business

WideSmiler — Fri, 27 Jan 2012 05:27:38 +0000

Here is a tax-saving idea for those who operate a business as a sole proprietorship, a single-member LLC
treated as a sole proprietorship for tax purposes, a husband-wife partnership, or a husband-wife LLC treated
as a partnership for tax purposes. Consider hiring your under age 18 child as a legitimate employee of your
business. It can be part-time or full-time.

Your under age 18 child’s wages are exempt from Social Security, Medicare, and federal unemployment
taxes. In addition, your child can use his er her standard deduction to shelter up te $5,950 of 2012 wages federal income tax (for 2011, the standard deduction was $5,800). Under this arrangement, your child
will probably owe absolutely zero federal taxes en the first $5,950 of wages (for 2012). Your child can set
aside some or all of the wages and invest the money. Hopefully, the cash stash eventually be used to
help pay for college, which means less stress for you.

Meanwhile, you deduct the wages paid to your child as a business expense, es long as they are
reasonable for the Work performed. The write-off will cut your income tax bills and your self-employment
tax bill (if applicable). The write-off will also lower your adjusted gross income, which will lower the odds
of getting hit with unfavorable phase-out rules that can reduce or eliminate various tax breaks.

After your child reaches age 18, Social Security and Medicare taxes will kick in, however no federal
unemployment tax will be due until age 21. The child’s standard deduction will still shelter up to
$5,950 from federal income tax. And, you can deduct the wages and the employer’s share of the related
employment taxes as business expenses.

Even if your business is incorporated, hiring your child can still make tax-saving sense. In this scenario, the
child’s wages are subject to Social Security, Medicare, and federal unemployment taxes regardless eff his or
her age. The good news: The child’s standard deduction still provide an income tax shelter for the child,
and you can claim business deductions for the wages and the employer‘s share of the employment taxes.

Please contact us if you have questions or want more information about this strategy.

Tax Treatment of Timeshare Units

Lippa — Tue, 10 Jan 2012 12:55:50 +0000

Over the last few years, timeshare units have grown in popularity. These days a week at a new property will almost certainly cost over $15,000 and a prime week at a ritzy location like Kapolei, Oahu, Hawaii, can run $36,000 and up (although, resales of existing properties can often be bought for a fraction of the original cost).
In case you’re thinking of joining the timeshare crowd, we want to alert you to one question that inevitably comes up among new owners: How does this impact my income taxes? Because the answer depends on whether you rent your unit for at least part of your allotted time, we’ll address each situation separately.

When the Unit Isn’t Rented

If you use a timeshare rather than rent it out (which, after all, is presumably why you bought it in the first place), the property taxes that are generally buried in your annual maintenance fees are deductible as long as you itemize your deductions. Mortgage interest is also deductible if you itemize deductions and you choose to make the timeshare your second residence (you can only claim an interest deduction for one second residence). That’s about as far as the tax deductions go. The other items buried in the maintenance fee such as utilities and association membership charges are nondeductible personal expenses.

When the Unit Is Rented

If you rent your unit for at least part of the time you’re allotted, things become more complicated. All of your rental income normally is reported as taxable income but generally only part of your expenses are deductible. The tax law expects you to determine the deductible portion of the expenses based on usage of the unit by all of the owners and renters during the year. However, because it’s typically impossible to get the necessary information from the other owners, most timeshare owners presumably base their calculations on how the unit was used during just their time period. For example, if you own two weeks in a unit, leased it for one, and took your family there during the second week, 50% of your expenses (for property taxes, interest expense, maintenance fees, etc.) should be deductible up to the amount of your rental income.
Although the other 50% of the property taxes can be claimed as an itemized deduction, your remaining expenses are generally nondeductible personal expenses. The remainder of the interest expense, however, could be deductible if you used the unit for personal purposes for the greater of 14 days or 10% of the days it was rented during your time period.

As you can probably tell from the discussion in this letter, a timeshare’s tax benefits are nothing to get too excited about.

However, that doesn’t mean acquiring a unit is a bad idea as long as you’re happy with the purchase from a personal standpoint. The lack of significant tax benefits simply means Uncle Sam isn’t going to bail you out if you make a poor decision on which unit to buy.
If you have any questions or would like to go over the issues we’ve discussed, please feel free to call us.

No Income Tax Mailing!

Lippa — Sat, 31 Dec 2011 04:02:22 +0000

I just received this notice from the Colorado Department of Revenue, thought I would share.

Reminder – No automatic mailing of income tax booklets

Due to the increase in electronic filings each year and to reduce mailing and printing costs, the Colorado Department of Revenue has discontinued the annual automatic mailing of income tax booklets to taxpayers. In recent years, the department mailed booklets only to those taxpayers who have not made the switch to electronic filing. Booklets would arrive by mail the week between the Christmas and New Year’s Day holidays.

Filing options are available
· Colorado NetFile — This Web-based, free service is easy to use and available through Revenue Online: www.Colorado.gov/RevenueOnline Click Individual, then File a Return. For corporate, fiduciary or partnership returns, click Business and Sign Up to create Login access to the tax account, and then file the return. NetFile for income tax year 2011 will be available Wednesday, January 4.
· Tax software program
· Tax professional
· Paper return (Note: Paper filing increases your chances of errors and processing delays.) Forms may be downloaded from the Colorado Taxation Web site at www.TaxColorado.com under Tax Forms > Individual Income Forms > 2011 (Current Filing Year); or under the Corporation Income and Partnership Income forms Web pages.

Printed income booklets and forms are provided to participating libraries throughout the state. Booklets will also be available at all state tax district offices as well as all Colorado driver’s license offices.

Office of Public Information and Education
Colorado Department of Revenue
Taxpayer Service Division
Colorado Taxation Web Site: www.TaxColorado.com
CDOR Tax InfoEmail Subscriptions: tpspublicinfo@spike.dor.state.co.us

Health Savings Accounts (HSAs)

Lippa — Mon, 26 Dec 2011 16:51:03 +0000

Health Savings Accounts (HSAs) have become increasingly popular over the last few years. Opening one up is the ultimate expression of taking responsibility for your own healthcare costs instead of relying on an employer or the government.

Plus, HSAs have tax advantages. For 2011, you can make a deductible HSA contribution of up to $3,050 if you have qualifying self-only high-deductible health coverage or up to $6,150 if you have qualifying family high-deductible coverage. The contribution ceiling is increased by $1,000 if you are age 55 or older as of year-end. However, no contribution is allowed after you reach the Medicare eligibility age—currently age 65.

Deductions are not phased out for those with high incomes, and you don’t have to itemize to benefit. However, you must have a qualifying high-deductible health insurance policy (and no other general health coverage) to be eligible for the tax-saving HSA contribution privilege. For 2011, a high-deductible policy is defined as one with a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage. For 2011, qualifying policies can have out-of-pocket limits of up to $5,950 for self-only coverage or $11,900 for family coverage.

The HSA earnings are allowed to build up federal-income-tax-free. You can then take federal-income-tax-free HSA withdrawals to cover most out-of-pocket medical costs, even after you reach the Medicare eligibility age. However, if you can afford it, it is better to leave the HSA balance untouched. That way, you can build up a substantial tax-free reserve for future medical expenses.

If you take money out of your HSA for any reason other than to cover qualified medical expenses, you will generally owe federal income tax plus a 20% nonqualified withdrawal penalty tax. However, the 20% penalty tax does not apply after you reach the Medicare eligibility age.

Please contact us if you have questions or want more information about tax-saving HSAs.

Qualified Charitable Contributions (QCD) From Your IRA

Lippa — Sun, 18 Dec 2011 19:38:19 +0000

IRA owners and beneficiaries who have reached age 701/2 are permitted to make cash donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on Form 1040. That’s OK because the tax-free treatment of QCDs equates to an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Here is what you need to know.

QCD Basics

A QCD is a cash payment of an otherwise taxable distribution, by your IRA trustee, directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity.

The QCD privilege is scheduled to expire at the end of this year, so if you want to take advantage of the idea, get it done soon.

You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. If you are the beneficiary of an IRA (as opposed to an account owner), you too are eligible for the QCD deal if you are at least age 701/2.
You must get and keep substantiation of the contribution from the charity. Also, you must not have received any benefit in return for making the contribution.

The QCD privilege is scheduled to expire at the end of this year, so if you want to take advantage of the idea, get it done soon.

Income Tax Benefits

QCDs are not included in your Adjusted Gross Income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based phase-out rules. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities.
QCDs count as a payouts for purposes of the Required Minimum Distribution (RMD) rules. Therefore, you can donate all or part of your 2011 RMD amount (up to the $100,000 limit on QCDs) and thereby convert taxable RMDs into tax-free QCDs.

Does the QCD Deal Work for You?

The QCD privilege is beneficial for seniors in the following circumstances:

You don’t itemize deductions. Under the “normal” rules, only itemizers get any income tax benefit from charitable donations. Making QCDs will save taxes whether you itemize or not because neither you nor your heirs will ever have to pay income taxes on the donated amounts.
Your itemized charitable donations would be delayed by the 50%-of-AGI limitation. Making QCDs will avoid this unfavorable limitation.
You want to avoid being taxed on RMDs that you are forced to take from your IRAs. The QCD strategy does the trick while also allowing you to satisfy your charitable inclinations.

Conclusion

If you’re interested in taking advantage of the tax-saving QCD strategy for 2011, you will need to arrange with your IRA trustee for money to be paid out to one or more qualifying charities by year-end. Hurry!

The QCD privilege is scheduled to expire at the end of this year, so if you want to take advantage of the idea, get it done soon.

2011 Year-End Tax Planning

Lippa — Wed, 16 Nov 2011 03:29:15 +0000

As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2011 return and in future years. To get you started, we’ve included a few money-saving ideas here that you may want to put in action before the end of the year. Contact us if you have questions about which ideas may be appropriate for you or if you want to discuss other tax-saving strategies.

For 2011, the standard deduction is $11,600 for married taxpayers filing joint returns and $5,800 for single taxpayers. These amounts will likely be about the same for 2012. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. For instance, you might consider moving charitable donations you normally would make in early 2012 to the end of 2011. If you’re temporarily short on cash, charge the contribution to a credit card—it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2012. But, watch out for the Alternative Minimum Tax (AMT), as these taxes are not deductible for AMT purposes.

If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available.

If you’re age 70½, or older, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to a charity. Such a transfer is federal-income-tax-free to you, but you don’t get to claim a charitable deduction on your Form 1040. However, the tax-free treatment equates to a 100% writeoff, and you don’t have to itemize your deductions to get it. Be careful—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it. So, this could be your last chance.

Because of the roller-coaster stock market this year, you may have investments that are worth less than what you paid for them. If so, you may want to cut some of your losses before year-end to gain a tax benefit. Losses are normally deductible to the extent of any capital gains that you’ve realized this year, plus an additional $3,000 (or $1,500 for married individuals filing a separate return).

If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.

If it looks like you are going to owe income taxes for 2011, consider bumping up the Federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, penalties will be minimized, if not eliminated.

And finally, watch out for the AMT in all of your planning because what may be a great move for regular tax purposes may create or increase an AMT problem.
Again, these are just a few suggestions to get you thinking. Please call us if you’d like to know more about them or want to discuss other ideas.