Ann G. Chiang, CPA
Thank you for the opportunity to service you. Thank you for following my retirement plan to save you taxes.
Showing posts with label Income Taxes. Show all posts
Showing posts with label Income Taxes. Show all posts
Monday, April 18, 2011
Thursday, January 27, 2011
Cutting the "Kiddie Tax" Down to Size
Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
The "kiddie tax" is a bit of a misnomer. This tax provision may actually apply to children well into their twenties. Nevertheless, with some advance planning, you can minimize or even eliminate the tax damage.
Basic rules: Income is generally taxed at the tax rate of the individual who receives it. For example, if you are in the 35% tax bracket, your top dollars are taxed at the 35% rate. On the other hand, if your child is in the 10% bracket, the child pays tax at a maximum rate of only 10%.
However, a special rule applies to younger children who receive unearned income above an annual threshold. In this case, the excess is taxed at the top tax rate of the child's parents. Thus, instead of being taxed at the 10% rate, your child may be taxed at the 35% rate on the excess.
The annual threshold is adjusted for inflation, but increases have been small or nonexistent. For 2011, the threshold is $1,900, the same as it was in 2010 and 2009.
Another problem: Initially, the kiddie tax only applied to children under age 14, but the limit has been raised several times. Currently, the age limit is 19, or age 24 for a full-time student if the child doesn't have earned income in excess of half of his or her annual support. In other words, if your dependent child is in college, the kiddie tax most likely still applies.
How can you lessen the impact? Although every situation is different, here are four ideas to consider:
1. Keep your child's unearned income below or near the $1,900 threshold. For instance, you might wait until next year to give your child some income-producing property. This technique works especially well if you do not expect your child to pay the kiddie tax in 2012.
2. Utilize tax-deferred investments that don't produce current income. This may include investments in growth stock and U.S. Savings Bonds. Similarly, if the child buys certificates of deposit (CDs) or Treasuries that will not mature until next year, you can avoid or minimize the kiddie tax for 2011.
3. Allocate a portion of your child's investment portfolio to municipal bonds ("munis") or muni bond funds. Generally, the income received from these investments is completely free from federal income tax, so your child can pocket any amount without kiddie tax worries.
4. Hire your child to work for your company. Because the wages constitute earned income, this will not trigger any kiddie tax complications. As long as the child is paid a reasonable salary for the services performed, your company can deduct the wages. This is a good way to help a child save money for college without adverse tax consequences.
Final advice: Keep one eye on your child's portfolio and the other on the kiddie tax. But take all the relevant factors--not just taxes--into account when you make investment decisions.
The "kiddie tax" is a bit of a misnomer. This tax provision may actually apply to children well into their twenties. Nevertheless, with some advance planning, you can minimize or even eliminate the tax damage.
Basic rules: Income is generally taxed at the tax rate of the individual who receives it. For example, if you are in the 35% tax bracket, your top dollars are taxed at the 35% rate. On the other hand, if your child is in the 10% bracket, the child pays tax at a maximum rate of only 10%.
However, a special rule applies to younger children who receive unearned income above an annual threshold. In this case, the excess is taxed at the top tax rate of the child's parents. Thus, instead of being taxed at the 10% rate, your child may be taxed at the 35% rate on the excess.
The annual threshold is adjusted for inflation, but increases have been small or nonexistent. For 2011, the threshold is $1,900, the same as it was in 2010 and 2009.
Another problem: Initially, the kiddie tax only applied to children under age 14, but the limit has been raised several times. Currently, the age limit is 19, or age 24 for a full-time student if the child doesn't have earned income in excess of half of his or her annual support. In other words, if your dependent child is in college, the kiddie tax most likely still applies.
How can you lessen the impact? Although every situation is different, here are four ideas to consider:
1. Keep your child's unearned income below or near the $1,900 threshold. For instance, you might wait until next year to give your child some income-producing property. This technique works especially well if you do not expect your child to pay the kiddie tax in 2012.
2. Utilize tax-deferred investments that don't produce current income. This may include investments in growth stock and U.S. Savings Bonds. Similarly, if the child buys certificates of deposit (CDs) or Treasuries that will not mature until next year, you can avoid or minimize the kiddie tax for 2011.
3. Allocate a portion of your child's investment portfolio to municipal bonds ("munis") or muni bond funds. Generally, the income received from these investments is completely free from federal income tax, so your child can pocket any amount without kiddie tax worries.
4. Hire your child to work for your company. Because the wages constitute earned income, this will not trigger any kiddie tax complications. As long as the child is paid a reasonable salary for the services performed, your company can deduct the wages. This is a good way to help a child save money for college without adverse tax consequences.
Final advice: Keep one eye on your child's portfolio and the other on the kiddie tax. But take all the relevant factors--not just taxes--into account when you make investment decisions.
Home-office Deductions: Terms of Tax Endearment
Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
If you operate a business out of your home, you may be able to write off a portion of your everyday living expenses. But tax deductions for home-office expenses are not automatic.
Basic rules: Home-office expenses are deductible on your 2010 tax return if you use part of the home "regularly and exclusively" as either the principal place of your business or a place to meet or deal with patients, clients and customers in the normal course of business. Also, you may deduct expenses attributable to a detached structure--such as a garage or shed--used in connection with your business.
If you are an employee, the home office must be used for the convenience of the employer. Keep your employment contract as proof of the condition.
The basic rules are relatively straightforward, but several key terms require further explanation.
Regular and exclusive use: To meet this requirement, you must use a specific area of your home only for business reasons. The specific area can be a room or even an identifiable space within a room. It does not have to be permanently enclosed, but doing so strengthens your tax position.
If you use the office portion of the home occasionally or sporadically for personal reasons, the personal use "taints" the home office. Thus, no deductions are allowed.
Note that certain exceptions apply for day care centers and facilities for the aged or disabled. Furthermore, if a home is a principal place of business and a specific area is used for inventory or product storage, the area qualifies for depreciation deductions if it is used regularly for business.
Principal place of business: If you are self-employed and work exclusively from home, it is obvious that your home office is your principal place of business. But this determination is not always so clear cut. For instance, you might perform some business functions at home, but spend most of your time visiting clients, customers or patients at other locations.
The law in this area seesawed back and forth for years, but you can currently qualify for home-office deductions if you perform administrative and management functions at home and you have no other fixed business location for these functions. Administrative and managerial activities may include
*billing and invoicing
*keeping books and records
*ordering supplies
*setting up appointments
*researching and writing reports
However, you are not disqualified if you arrange to have administrative or managerial duties performed at other locations. For example, you might outsource payroll duties or handle customer inquiries on your laptop in hotels or airports. Similarly, you will not be penalized if you spend more time on the road than at home.
Convenience of employer: An employee is entitled to deduct home-office expenses only if he or she is specifically required by the employer to maintain a home office. Thus, a dedicated worker who brings work home nights and weekends usually does not qualify. It does not matter if the work at home results in a benefit to the employer--it must be an absolute condition of employment. In addition, keeping a home office must be justified by the nature of the job.
Contact a professional tax adviser for the application of these tax rules to your personal situation.
If you operate a business out of your home, you may be able to write off a portion of your everyday living expenses. But tax deductions for home-office expenses are not automatic.
Basic rules: Home-office expenses are deductible on your 2010 tax return if you use part of the home "regularly and exclusively" as either the principal place of your business or a place to meet or deal with patients, clients and customers in the normal course of business. Also, you may deduct expenses attributable to a detached structure--such as a garage or shed--used in connection with your business.
If you are an employee, the home office must be used for the convenience of the employer. Keep your employment contract as proof of the condition.
The basic rules are relatively straightforward, but several key terms require further explanation.
Regular and exclusive use: To meet this requirement, you must use a specific area of your home only for business reasons. The specific area can be a room or even an identifiable space within a room. It does not have to be permanently enclosed, but doing so strengthens your tax position.
If you use the office portion of the home occasionally or sporadically for personal reasons, the personal use "taints" the home office. Thus, no deductions are allowed.
Note that certain exceptions apply for day care centers and facilities for the aged or disabled. Furthermore, if a home is a principal place of business and a specific area is used for inventory or product storage, the area qualifies for depreciation deductions if it is used regularly for business.
Principal place of business: If you are self-employed and work exclusively from home, it is obvious that your home office is your principal place of business. But this determination is not always so clear cut. For instance, you might perform some business functions at home, but spend most of your time visiting clients, customers or patients at other locations.
The law in this area seesawed back and forth for years, but you can currently qualify for home-office deductions if you perform administrative and management functions at home and you have no other fixed business location for these functions. Administrative and managerial activities may include
*billing and invoicing
*keeping books and records
*ordering supplies
*setting up appointments
*researching and writing reports
However, you are not disqualified if you arrange to have administrative or managerial duties performed at other locations. For example, you might outsource payroll duties or handle customer inquiries on your laptop in hotels or airports. Similarly, you will not be penalized if you spend more time on the road than at home.
Convenience of employer: An employee is entitled to deduct home-office expenses only if he or she is specifically required by the employer to maintain a home office. Thus, a dedicated worker who brings work home nights and weekends usually does not qualify. It does not matter if the work at home results in a benefit to the employer--it must be an absolute condition of employment. In addition, keeping a home office must be justified by the nature of the job.
Contact a professional tax adviser for the application of these tax rules to your personal situation.
Tuesday, November 16, 2010
2010 Year End Tax Planning for Businesses:
Tax planning for year-end 2010 presents new challenges for business taxpayers to reduce or defer federal income tax liability. Although traditional planning techniques remain fundamentally important considerations this year, there are new opportunities with recent legislation and changes in the tax laws. In addition, tax planning is complicated when considering the effective dates for many popular tax incentives, and anticipating those tax laws that may be put to a vote in Congress before year's end.
Wednesday, October 27, 2010
Primary Residence-Capital Gain Exclusion
Generally, the home one lives in most of the time is one’s principal residence; it can be a house, houseboat, mobile home, cooperative apartment, or condominium.
In order to exclude gain on the sale of a home, a taxpayer generally must have owned and lived in the property as his or her main home for at least two years during the
five-year period ending on the date of sale. The maximum gain that can be excluded is $250,000 for individuals and $500,000 for married couples filing jointly.
In order to exclude gain on the sale of a home, a taxpayer generally must have owned and lived in the property as his or her main home for at least two years during the
five-year period ending on the date of sale. The maximum gain that can be excluded is $250,000 for individuals and $500,000 for married couples filing jointly.
IRA to Roth Conversion
The $100,000 modified adjusted gross income limitation and the joint return limitation are repealed for tax years beginning after 2009. Code Sec. 408A(c)(3). Thus, a taxpayer can convert an eligible retirement plan to a Roth IRA as long as the amount contributed to the Roth IRA satisfies the definition of a qualified rollover contribution.
A taxpayer has a traditional IRA with a value of $100, consisting of deductible contributions and earnings. He does not have a Roth IRA. The taxpayer converts the traditional IRA to a Roth IRA in 2010. As a result, $100 is includable in gross income. Unless the taxpayer elects otherwise, $50 of the income is included in income in 2011 and $50 in 2012. Later in 2010, the taxpayer takes a $20 distribution, which is not a qualified distribution and all of which is attributable to amounts includable in gross income as a result of the conversion. Under the accelerated inclusion rule, $20 is included in income in 2010. The amount included in income in 2011 is the lesser of $50 (half the income resulting from the conversion) or (2) $70 (the remaining income from the conversion), or $50. The amount included in income in 2012 is the lesser of $50 (half the income resulting from the conversion) or (2) $30 (the remaining income from the conversion, or $30.
A taxpayer has a traditional IRA with a value of $100, consisting of deductible contributions and earnings. He does not have a Roth IRA. The taxpayer converts the traditional IRA to a Roth IRA in 2010. As a result, $100 is includable in gross income. Unless the taxpayer elects otherwise, $50 of the income is included in income in 2011 and $50 in 2012. Later in 2010, the taxpayer takes a $20 distribution, which is not a qualified distribution and all of which is attributable to amounts includable in gross income as a result of the conversion. Under the accelerated inclusion rule, $20 is included in income in 2010. The amount included in income in 2011 is the lesser of $50 (half the income resulting from the conversion) or (2) $70 (the remaining income from the conversion), or $50. The amount included in income in 2012 is the lesser of $50 (half the income resulting from the conversion) or (2) $30 (the remaining income from the conversion, or $30.
Friday, March 26, 2010
Donation: Clothing & Household Items
Any donations of clothing and household items that are made to a charitable organization are not deductible unless the donated items are in "good " or better condition. IRS may deny a deduction for any item that has minimal monetary value. Donor of such items should be prepared to prove both the condition and the value of the donated items. Only one exception to this rule: If a single donated item is not in at least good condition, but it is worth more than $500, it is deductible, so long as a qualified appraisal is obtained at the time of the donation.
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