Monday, July 30, 2012

Tax rules apply to family loans


There are many worthwhile reasons to lend money to a relative. For example, you may want to help a child or sibling continue their education or start their own business.

But lending money to relatives can have tax consequences. The IRS requires that a minimum rate of interest be charged on loans. If you do not charge at least the minimum rate, the IRS will still require you to pay tax on the difference between the interest you should have charged and what you actually charged. If these excess amounts become large, or if the loan is forgiven, there may also be gift tax implications.

There are some exceptions, though. Loans of up to $10,000 generally can be made at a lower (or zero) rate of interest, as long as the proceeds aren’t invested. Loans between $10,001 and $100,000 are exempt from the minimum interest requirement as well, as long as the borrower’s investment income is $1,000 or less. If the investment income exceeds $1,000, you’ll be taxed on the lesser of this income or the minimum IRS interest.

For the IRS to treat the transaction as a loan and not a gift subject to the gift tax rules, the transaction must look like a loan. The borrower should have the ability to repay the principal and interest. A contract should be prepared which specifies the loan amount, interest rate, the payment dates and amounts, any security or collateral, as well as late fees and steps to be taken if the borrower doesn’t pay. Have the document signed and dated by all the parties.

Thursday, July 19, 2012

Can you qualify for the home office deduction?


The home office deduction is available when you use part of your home regularly and exclusively as your primary place of business, or for meeting clients.

If you're an employee who works from home, there's an additional rule: The exclusive use must be for the convenience of your employer.

In either case, "exclusive" is defined as "all or nothing." Conduct any personal activities in the space you've designated as your office and the deduction is lost.

But satisfy the requirements and you can write off part of the expenses of running your home, including utilities, interest, and property taxes, as a business deduction. That means those costs can directly reduce business income, saving you income tax. If you're a sole proprietor, the deduction may also reduce self-employment tax. Though the amount you can claim is generally limited to business income, disallowed expenses can be carried forward to future years.

What are the drawbacks? One drawback to taking a home office deduction is the potential for depreciation "recapture" that may apply when you sell your home, potentially reducing the amount of gain you can exclude from income.

Monday, July 16, 2012

Supreme Court rules on health care law


On June 28, the Supreme Court ruled that the "Patient Protection and Affordable Care Act of 2010" was constitutional, including the provision in the law requiring individuals to have health insurance coverage starting in 2014.

Several provisions in the health care law had already gone into effect, and many new tax provisions are scheduled to take effect in 2013. These are the provisions you should factor into your tax planning for the rest of this year. A quick review of these tax provisions:

* Annual contributions to health flexible spending accounts (FSAs) will be limited to $2,500.

* The 7.5% income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65. Those 65 and older may continue to take an itemized deduction for medical expenses exceeding 7.5% of adjusted gross income through the year 2016.

* The payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns.

* A new 3.8% Medicare tax will be imposed on unearned income for single taxpayers with income over $200,000 and married couples with income over $250,000.

Tuesday, July 10, 2012

Wedding bells ringing? Take care of taxes


Will wedding bells be ringing for you or a family
member this summer? If so, add tax updating to the long
list of things to do.

Here are some of the tax concerns newlyweds need to
take care of.

* Check the effect marriage will have on your tax bill.
  If both spouses work and earn about the same income,
  you may pay higher taxes due to the "marriage penalty."
  You may need to adjust your tax withholding to avoid
  a big tax bill next April, and perhaps even penalty
  and interest charges for underpayment of taxes.

* Notify the Social Security Administration if you
  change your name.

* Notify the IRS of your address change if you move to
  a new home.

* File new Forms W-4 at work to reflect your married
  status.

* If either of you has an IRA, check the effect marriage
  will have on the deductibility of contributions.

* Update your estate plan, making appropriate changes
  to wills, powers-of-attorney, health care directives,
  etc.

* Review the beneficiary designations on your retirement
  plans and insurance policies.