Tax Facts

Information to help individuals and small business navigate our complex Tax Laws. Not to be construed as tax advice. Contact your hired tax advisor for your specific tax situation and advice.

Taxation of Minister/Pastor/Clergy Housing Allowance


Contrary to general belief, clergy do pay income taxes. This can come as a surprise both to clergy and to laypersons; especially with regard to the housing allowance. An ordained minister, priest, pastor, etc. pays no federal income tax on a housing allowance that the congregation has officially designated as part of the minister's compensation package. This means at best the housing allowance should appear on the W-2 separately as such; at worst it should be listed in a contract dated prior to any payments made for the same.

However, this does not mean the housing allowance is not taxed at all. And it is a misnomer to say it is "tax free." The housing allowance must be reported as Self Employment income. Therefore, it is subject to the self-employment taxation. If a pastor does not receive a housing allowance, then what must still be reported is the rental value of a rectory, parsonage, or other housing that is provided, as self-employment income. The rental value is generally equal to what comparable housing in the area goes for on the rental market.

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Tax Reform: Proposed New Tax Brackets


Currently, there are eight regular individual income tax brackets and they are: 0%, 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Such a large set of tax brackets can easily move you into a higher tax rate sooner (as you make more money), especially when considering the bracket thresholds. Note that politicians and journalists often fail to mention the 0% tax bracket - but it does exist. With standard deductions, exemptions and tax credits, many citizens pay zero in tax and actually receive money when they file (called credits on the tax return).

The new Tax Cuts and Jobs Act (TCJA) proposes to cut those eight tax brackets down to only five: 0%, 12%, 25%, 35% and 39.6%. The zero percent bracket in the new proposal is significant because of the proposed enhanced standard deduction (essentially doubles) - the impact of which is that those who might have paid some tax will now pay zero tax with such a high standard deduction against their income - and of course receive credits (money in the form of a refund) as well.

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Electing to Deduct Sales Tax


The election to deduct sales tax on your tax return only applies to taxpayers who itemize their deductions. Normally, if you're itemizing, you should hire a licensed tax professional to prepare your taxes for you. Itemizing can quickly become complex, involve more details in the preparation process, involve strategy for maximizing deductions and minimizing tax and most importantly take up lots of your time.

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Where are State and Local Taxes Deducted?


State and local income taxes are deductible as itemized expenses on your tax return in the year that they are paid. The tax may be paid either through withholding on a paycheck or through estimated tax payments made each quarter of the year or through an over payment from a prior year. Careful how you shift your payments, if you are planning with strategy for maximizing your deduction in a particular year, though.

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Get Your Tax Refund

If you did not file a tax return in the past three years, perhaps because you did not meet the filing threshold or you encountered a life event that put you on hold, maybe it's a good idea to meet with a tax professional and determine if you are due a refund!

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Real Estate Taxes

Real estate taxes are deductible in the year they are paid to the county tax office. If taxes are paid into an escrow account, they are deductible when actually paid to the taxing authority, not when they are paid to the escrow account or agent. If you pay late and incur penalties and interest, those are not deductible; only the tax portion.

What if you paid someone else's real estate tax? For example, you pay your parents' property tax bill or when you sell your

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A List of Medical Expenses


Clients so often call to ask if one or another expense can be deducted as a medical expense. There are the obvious ones, like visits to the doctor, dentist and chiropractor. It is clear these are deductible. But what about maternity clothes? Or acupuncture? Well the former is not allowed and the latter is. So here's a list of some unusual ones that can be deducted:

Acupuncture, alcoholism (treatment, meals and lodging while at the center), ambulance service, artificial limbs and teeth, braille books/magazines, dyslexia language training, a doctor recommended (in writing) exercise program for a specific condition, eye surgery for nearsightedness, fertility treatment (if medical condition required it), legal fees paid to authorize treatment for mental illness, lifetime care advance payments (if part of the advance fee is allocated to medical care and the percentage is specified in the agreement with the retirement home, mattresses and boards bought specifically to alleviate an arthritic condition, wheelchairs, guide dogs (including their food and vet costs), Medicare Parts B, C, and D and A if not covered under Social Security), entire cost for medical care, including meals and lodging if the main reason for residence is to obtain medical care, reclining chair on doctor's written advice, smoking cessation programs (no doctor recommendation necessary), tuition for a mentally disabled person, prescribed therapeutic swimming costs, weight loss program prescribed by doctor for obesity or other specific condition.

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Defining a Long-Term Asset


Our small business clients often ask the difference between a long and short term asset - especially with regard to deduction and depreciation of that asset. We'll define a Long-Term Asset in this post.

The main distinction is to first ask the question: how long will this asset have a useful life in the business you are operating. So, don't get this confused with its actual physical life. The IRS generally sets the rules on what is reasonably expected to be the useful life of a particular long-term asset.

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Property That's Not Eligible for Depreciation


Rules apply (of course!) when you want to deduct long-term assets in a business and on your business tax return. If it's property - real property, personal property, or otherwise - you can only depreciate or expense the cost of purchasing that property if it's used in your business and if it wears out or gets used up over time.

So, for example, if you have a rental property and it's a single-family house on land, you can only deduct (and in this case it becomes a depreciation deduction) the house portion of what you purchased and not the land. Land does not wear out. (There are exceptions to this when you are purchasing land specifically for oil drilling - then you have a deduction each year for the depletion of that oil in the land. But that's a different and special case.)

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Hiring a Family Member?


Thinking about hiring your child to work for your business? The IRS expects that you will be following some rules if you decide to, so it's a good idea to become familiar with those rules prior to bringing Mini Me on board and taking the payroll deduction for it. Here are a few main ones:

The child must actually be an employee and that means they must actually be doing some productive work for the business and not sitting in a chair playing video games. On the other hand, the services they provide don't have to be along the lines of "resident genius" either. As long as they are doing work that is common and accepted for your type of business and helping things move along in the daily grind, then you're okay.

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Home Office Measurement Methods

In today's economy and with today's technology it is becoming more common that people work as independent contractors, statutory employees or simply have side jobs in the evening that provide extra income. For each of these scenarios, a person might use part of their home as their place of business.

One of the first things you'll have to do when meeting the requirements for and intending to take a home office deduction on your tax return, is to estimate the amount of space in your home you're using for business. There are two ways you can do this:

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Safe Harbor Home Office Deduction

A taxpayer (either a business owner or an employee) may elect a simplified method to compute the home office deduction for tax years beginning on or after January 1, 2013 without having to substantiate, calculate, and allocate deductible home office expenses. This is referred to as a safe harbor method of taking the home office deduction.

Under the safe harbor, the deduction is equal to $5.00 times the number of square feet of the home office. It is limited to a maximum of 300 square feet. So even if your home office is 500 square feet, the maximum deduction you can take is $1,500. Additionally, the deduction cannot exceed the taxpayer's gross income from the business (and this has to be calculated as a percentage if you are conducting your business elsewhere for parts of the day, week or year).

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Are Traveling Expenses Tax Deductible?

In general, a taxpayer may deduct ordinary and necessary traveling expenses incurred while away from home in the conduct of a trade or business. Internal Revenue Code Section 162(a)(2) and Treasury Regulation Section 1.162-2 allow for a deduction when individuals are away from home if it is reasonable for them to need to sleep or rest while their duties require them to be away from the general area of their tax home for a period substantially longer than an ordinary workday.

It doesn't always have to be that you are away for more than 24 hours. In some cases, travel expenses may be deductible even though you are away for part of the day. So, for example, a pilot that flies a charter trip and needs to rest because of duty time limits.

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Startup Business Deductions

If you are starting a business, be careful that you do not spend too much before you technically "start" the business. Of course, you have to do some spending, but you are limited to $5,000 in business startup costs on your first year's tax return. Any overage is amortized over 180 months (yes, that's 15 years!).

What is the startup phase? That depends on a number of factors and it can differ for each individual business, since each one is unique. However, generally, you are in the startup phase during development and planning of the business. Once you become operational - generally when you are available for hire (and not necessarily that anyone has yet hired you) - then your expenses are considered those of a business in operation (and no longer "starting up").

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Home Office Deduction by Employees

Let's say you're an employee of a business and you use your home office exclusively for business work that you do at home. Can you take a home office deduction? The answer is yes, but to qualify, you must not only meet the exclusive use requirement but your use of this office must also be for the convenience of the employer (and not just your own).

Generally speaking, your home office expenses are subject to the 2% floor of your adjusted gross income. And it only applies to those taxpayers who itemize their deductions. There is an exception to this rule, only if your are classified as a statutory employee. This is not a common status for employees; but if it applies to you, the deduction is not subject to these limits.

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Tax Effects of Divorce

Income tax may be the last thing on your mind after or during a divorce. However, this event can significantly affect your taxes. Alimony and a name change are just a few items you may need to consider. Here are some key tax tips to keep in mind if you are recently divorced or separated.

• Child Support — If you are making child support payments, they are not deductible. If you receive child support, the amount you receive is not taxable.

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Tax Benefits for Military Members

There are many tax benefits for members of the military, their families and disabled veterans. Here are tips designed to help service members and their families take advantage of all tax benefits allowed by law.

• Certain combat pay can be excluded from income.

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Keeping Track

MILEBUG APP

If you're like me, you don't relish the idea of keeping a detailed mileage log for your business miles driven.  But it is required for taking deductions on your tax returns, so anything that can make it easier to do, is a plus in my book.  Recently, I downloaded an App for my iPhone and iPad called MileBug and it not only does the job well, but makes it very convenient to use.  You may want to check it out.  MileBug gives you the ability to not only easily enter odometer readings and parking fees or tolls, but it lets you store information about frequent trips so all you have to do is select a trip you stored in the past as a "favorite" and MileBug populates all the necessary fields.  It even has a GPS tracking device you can turn on or off, so that it will calculate the exact mileage driven for each trip you make.  Best of all, it only costs a few dollars and works on iOS or Android phones and tablets.

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Summer Day Camp Expenses

Summer day camp expenses may qualify for a tax credit

Along with the lazy, hazy days of summer come some extra expenses, including summer day camp. But, the IRS has some good news for parents: those added expenses may help you qualify for a tax credit.

Many parents who work, or are looking for work, must arrange for care of their children under 13 years of age during the school vacation.

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