Q: Can I lower my tax bill by buying some residential rental property?
A: Depending on your gross income you may be able to benefit from losses you experience on rental real estate property. You can deduct up to $25,000 of annual rental losses against other income if your "modified adjusted gross income" (MAGI) is less than $100,000. In this case MAGI is your gross income before deducting any student loan interest, IRA contribution and any deduction for ½ self-employment tax, if any. If your MAGI is between $100,000 and $150,000 the amount of loss you can deduct is reduced. If your MAGI is greater than $150,000 and you have no passive income you cannot deduct any of the rental property losses in that tax year. However, your loss carries over to future tax years. You will eventually be able deduct your carry-over losses when you either sell the property or generate some passive income.
Q: I am considering donating a car to a charity. Will I get any tax deduction for the donation, and if so how much?
A: New rules regarding donations of cars, boats and airplanes are in effect which begin with the tax year 2005. If the value of the vehicle is $500 of less, the normal donation rules apply, which require a receipt from the donee organization if the value is $250 or more (showing description of the vehicle, date and location of the contribution, and whether any goods or services were provided to you by the organization). If the vehicle is valued at less than $250, any written record describing the vehicle, the date and location, and donee name is sufficient.
As in 2005, if the value of the vehicle is over $500, the organization will provide you with Form 1098C and if they sold the vehicle, the proceeds from the sale will be reported on this form and will determine the amount of your charitable contribution deduction. If the organization keeps the vehicle or sells it below FMV to needy individuals, Form 1098C will state this and your deduction will generally be equal to the vehicle's FMV. Note - Form 1098C must be attached to your return! .
In cases where FMV is used, the taxpayer should document the condition of the car (pictures are useful) and consult a source such as Kelly Blue Book.
If the value of the vehicle is over $5000, a qualified appraisal must be obtained and the appraiser and donee organization must complete Form 8283 section B, which is attached to your tax return.
Q: Which is better, a Roth or a regular IRA?
A: Which is better is based on your current tax situation. First, here is some background on retirement savings accounts. There are currently 3 types of retirement IRA's: tax-deductible, nondeductible and Roth. If you are eligible to contribute to a 401k plan, especially a plan where the company matches some or all of your contributions, this is generally your best retirement savings vehicle and we recommend you maximize your 401k contributions (the maximum for 2007 is $15,500). If you turn 50 years old during 2007, you are eligible to contribute up to $20,500. If you are eligible for a company sponsored plan any investment in a tax-deductible IRA will be limited or disallowed based on your Adjusted Gross Income.
Because the Roth IRA utilizes after-tax dollar contributions, the withdrawal rules are much more flexible than for traditional IRA's. Also participation in an employer sponsored retirement plan has no effect on Roth IRA contributions. A taxpayer can make contributions to a Roth IRA on behalf of his/her spouse if the spouse has little or no compensation for the year. If the Roth account is open for at least 5 years, the gains grow tax-free until they are withdrawn. The eligibility rules for a Roth are limited for joint filers with more than $156,000 of income and for single filers with more than $99,000 of income.
So, you can probably tell that I like Roth accounts better because of the flexibility and the optimistic approach that you may not necessarily be in a lower income tax bracket when you retire than you are now.
Q: My company offers a Flexible Spending Account for Medical Expenses? Is it worth my time and money to get into this program? And how does it work?
A: Short answer is YES! Here are the detail reasons why:
Flexible Spending Accounts are for health care or dependent care expenses can be very beneficial to your tax situation. The employer deducts the money from your paycheck on a pre-tax basis so you do not pay federal or state income taxes, Social Security or Medicare on this income. These withholdings are then held by the company or an administrator in an account for you to use for out of pocket medical or dependent care expenses.
For health care, you decide how much money to set aside in the flexible account on a monthly basis. All money in your account must be used by the end of the plan year or it is forfeited, therefore, you need to be conservative in your estimates of the amount of money to set aside.
The federal tax savings on a contribution of $100 per month would be $271 per year for a person in the 15% tax bracket. As reimbursable medical, vision or dental expenses are incurred, a claim is submitted and the money is reimbursed to the employee. Reimbursable expenses include deductibles, co-pays, co-insurance and out-of- pocket expenses not covered by insurance that are medically necessary.
Dependent care expenses are treated in much the same manner. The expenses must be necessary for you to continue working. If married, both parents must be working, or one spouse may be a full-time student or disabled. The person receiving care must be eligible to be claimed on your income tax return as a dependent and be either under the age of 13 or your spouse or dependent who is physically or mentally incapable of self-support.
The amount of money that may be set aside for dependent care is the smallest of:
●Your Income
●Your spouse’s income
●$5000 per family ($2500 married filing separate)
You submit claims for expenses paid and, as with health care, any funds remaining at the end of the fund year are forfeited. Be sure to estimate conservatively in planning for the funds
Q: What are the tax ramifications of selling my home?
A: With the 1998 tax law change, the rules changed for the sale of your primary home. For sale of a personal residence a single homeowner may exclude from income $250,000 of gain and a married couple filing joint may exclude up to $500,000 of gain realized on the sale. To qualify, an individual must have owned and used the home as a principal residence for at least 2 out of the 5 years prior to the sale. If your are thinking of selling your home prior to 2 years of ownership, it may be to your advantage to hold off on the sale if you anticipate a gain. There are exceptions to the two-year rule, such as employee transfers, health reasons and unforeseen circumstances, which may qualify for a reduced exclusion. The exceptions have recently been expanded to include sale of your home due to crisis such as 911 or other disasters. Any gain on the sale of a second home which is not the primary residence and was owned for at least one year would be taxes at the lower capital gain tax rate. Also, your closing statement on the sale may reveal real estate taxes you prepaid that came due after the date of the sale. These real estate taxes may be deductible.
Q: What is the most effective strategy for saving for my child’s college education?
A: There are several ways to save for a child’s college education. Unlike the many tax deferred retirement savings options available, there are not as many tax incentives for college savings. Offering limited benefits is the Coverdell Education Savings Account (formerly called an Education IRA). Of the tax advantaged education savings plans, the Coverdell is the only one for which private, elementary and secondary education expenses qualify. However, the income phase out limitations and low maximum contributions rules ($2000 per year per beneficiary) restrict the benefits. A savings strategy that utilizes a section 529 plan should be strongly considered. A section 529 plan is a state sponsored plan that allows parents or grandparents (or anyone over 18 years old) to contribute money to a 529 account with the child as beneficiary. These gifts do not currently qualify as a deduction for federal income taxes. However, the savings grow tax-free. When the funds are withdrawn to pay for qualified college-related expenses, the gains or earnings are not taxed. Qualified expenses include tuition, room, board, books and other related expenses at any accredited college or university regardless of where the school is located. These plans are administered by each state. The provisions for investment options, contribution minimums and maximums, portability rules, fees and resident vs. non-resident availability vary by state. For the best comparative analysis of each state’s 529 plan see www.savingforcollege.com.
Q: Is it true that electronically filing my federal or state return makes it more likely that I will be audited?
A: Electronically filing your federal or state return does not increase the likelihood that your return will be selected for audit. In fact, if anything, it reduces the probability of audit because of the internal checking that occurs by the IRS before the return is accepted. By E-filing a return the taxpayer can be assured the IRS has received the return, as we receive proof of receipt, usually within 24 hours. Also, E-filing a return allows the taxpayer to get their refund quicker; especially if it is direct deposited into a bank account. Although some firms charge for this service, it is a benefit we provide free of charge.
Balance due returns can be filed at any time, but the balance will not be due until the due date of the Federal return, which is April 16, 2007 for the 2006 tax year. The funds can be taken directly out of your checking account or mailed in at a later date.
Q: Have there been any changes this year in the per diem meal deductions for pilots?
A: As you know, the IRS allows airline industry workers a deduction for non-reimbursed meal expenses at per diem rates while on layovers. . In the 2006 tax year this allowable amount increases to 75%. Remember, we calculate the allowable amount from flight schedules or total number of days flown and subtract the per diem paid to you. The difference is the amount used to calculate the 75% deduction.
This rate has continued to increase by 5% each year, until it reaches a total deduction of 80% next year.
