The household employee tax — which you may know as the “nanny tax” — hasn’t made the headlines lately. But the filing requirements still exist, and they may apply to you, if you hired people to help around the house in jobs such as caregiving, housekeeping, or gardening during 2013.
Here’s an overview.
- Are you an employer? If you pay someone to work in your home and you have the right to tell them what work to do and how the work must be done, the answer is most likely yes. That’s true even if the employment is temporary or part-time.
- What taxes do you have to pay? If your household employee earned $1,800 or more during 2013, you’re responsible for social security and Medicare taxes. This threshold amount increases to $1,900 for 2014. You can choose to pay these taxes yourself, or withhold them from your employee’s wages. You don’t need to withhold federal income tax unless your employee asks you to.
You may also owe federal unemployment and state payroll taxes.
Note. Special rules apply to amounts paid to your parents, your under-age-21 children, and students who are younger than 18.
- How do you pay the taxes? File Schedule H, Household Employment Taxes, and include the form and the tax due with your federal income tax return.
- What other forms are required? You’ll need to complete Forms W-2, Wage Statement, and W-3, Transmittal of Wage Statement, and you may need to file forms for state payroll taxes.
Keep Form I-9, Employment Eligibility Verification, in your file. You’ll also need Form W-4, Withholding Allowance Certificate, if your employee asks you to withhold federal income tax.
Please contact us about household employee tax reporting requirements. We’ll help you file for an employer identification number and determine if tax breaks are available, such as the child and dependent care tax credit.
Did you take a distribution from a Roth IRA during 2013? If so, you may not have been thinking about income tax consequences, as one often-touted benefit of Roth IRAs is tax-free distributions.
However, like most tax rules, there are exceptions. In some cases, when you distribute earnings from your Roth IRA you may have to pay income tax and/or a 10% penalty-tax. That can happen when you’re under age 59½ and you distribute the earnings within five years of making your first Roth contribution. Note that the earnings portion is what’s taxable in this situation, not the contributions you made.
This rule can also apply if you’re the beneficiary of a Roth and receive distributions from the account.
The five-year waiting period that applies to conversions may also make your Roth distributions taxable. When you’re under age 59½ and convert traditional IRA funds to a Roth, you generally have to wait five years (or until you reach age 59½, whichever comes first) before taking a distribution of the converted balance. Otherwise, the distribution may be subject to the 10% penalty tax. Note that when you make more than one conversion, this five-year rule applies separately to each.
Please give us a call to review distributions you intend to make or receive from IRAs or other retirement accounts. Don’t let unintended taxes surprise you.
As temporary tax breaks expire and are re-extended, it is sometimes confusing to remember which ones are effective for a particular tax year. Here are several deductions that are still available for your 2013 federal income tax return.
- Teacher expenses. If you’re an eligible educator, you can deduct up to $250 of out-of-pocket expenses for classroom supplies and materials. The deduction is above-the-line — meaning you don’t have to itemize to claim it.
- Tuition. Another above-the-line tax-saver available for 2013 is the tuition and fees deduction for higher-education expenses you pay for yourself, your spouse, or your dependents. The maximum deduction for 2013 when you’re married filing a joint return is $4,000. Income limits apply.
- State and local sales tax. You can benefit from this itemized deduction by choosing to claim state and local sales taxes that you paid during 2013 instead of state and local income taxes. You have the option of claiming the actual amount based on receipts, or using an amount from IRS-created tables. If you use the IRS tables, you can add the sales tax you paid for certain large purchases such as vehicles.
- Asset expensing. Under a tax provision called the Section 179 deduction, you can choose to expense the full cost of new or used assets you placed in service during the year. For 2013, the maximum Section 179 deduction is $500,000 when total asset purchases for the year are $2 million or less.
- Bonus depreciation. New equipment with a depreciable life of 20 years or less, certain leasehold improvements, and computer software are eligible for an additional, or “bonus,” first-year depreciation deduction. For 2013, you can write off up to 50% of the cost of a qualified asset used in your business.
Do you need information about other tax deductions not mentioned here? Please give us a call for the latest details.
Wondering what capital gain rates will apply to your 2013 federal income tax return? The rate you pay on gain from the sale of stocks or other assets depends on the length of time you owned the asset, the type of asset, and your taxable income.
- Length of time. The “holding period” determines whether an asset is classified as short-term or long-term. As you probably know, short-term is presently defined as a year or less, and short-term assets are typically taxed at your ordinary federal income tax rate. In contrast, the capital gain rate for assets held more than a year is generally lower than your ordinary rate.
Measuring the holding period can be straightforward. For example, when you purchase publicly traded stocks, the holding period is measured by trade date. You start counting the day after you purchase the stock and stop on the date of sale.
Assets you acquire in other ways, such as by gift or inheritance, follow different rules. For gifts, your holding period can include the ownership period of the person who gave you the gift. Inherited assets have a long-term holding period, no matter how quickly you sell them.
- Type. Special capital gain rates apply to specific assets, such as art or coin collections, certain small business stock, and some depreciable real estate.
- Income. When you’re in the 10% or 15% income tax bracket, the maximum rate you’ll pay on long-term capital gains is 0%. For 2013, the 15% bracket ends at $72,500 when you’re married filing jointly ($36,250 when you’re single).
If your income exceeds $450,000 ($400,000 for singles), the maximum capital gain rate is 20%. When you’re in between, you’ll generally pay 15% on gains.
Please call if you sold investments or other assets in 2013 and have questions about the tax issues.
Because many retirees are house-rich and cash-poor, financial gurus have developed a method for tapping into some of that bottled-up wealth: the reverse mortgage. As the name suggests, a reverse mortgage generates payments from a lender to a homeowner — the opposite of a standard mortgage. By providing access to home equity, reverse mortgages enable cash-strapped seniors to retain their property, subsidize their income, make home improvements, even cover unexpected medical expenses. Furthermore, money received from a reverse mortgage isn’t taxable and doesn’t negatively affect a retiree’s social security or Medicare benefits.
For several years the Federal Housing Administration (FHA) has offered a popular reverse mortgage called the Home Equity Conversion Mortgage or HECM. To qualify under that program, you must be at least 62 years of age and hold title to your home free and clear (or be able to pay off the mortgage balance with proceeds from the reverse mortgage). In addition, you must demonstrate the financial wherewithal to cover ongoing utility costs, maintenance, property taxes, and hazard insurance. You’ll be required to live in the home as a primary residence (although some types of reverse mortgages allow you to live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid). As with other types of mortgages, lenders charge origination and closing fees. Ongoing costs such as mortgage insurance premiums and servicing fees may be part of the bargain as well.
Before you sign on the dotted line, consider the following:
- You’re taking out a loan. A reverse mortgage is an obligation that must be repaid when the borrower moves out permanently, the house is sold, or the borrower dies.
- Read loan documents carefully. Payment amounts, interest rates (fixed or variable), loan length, line of credit availability, events that trigger foreclosure proceedings — all of these variables should be clearly delineated in the mortgage documents.
- Expect your total debt to increase. Interest on a reverse mortgage is generally charged against and added to the outstanding loan balance on a monthly basis.
Although a reverse mortgage may provide a welcome source of cash, such a commitment shouldn’t be undertaken lightly. Shop around, and beware of pushy sales people who love to bundle additional products — risky investments, annuities, insurance — along with their reverse mortgage offerings.
Business owners may decide to shut down their operations for a variety of reasons. Some struggle for years before admitting that their particular market is drying up or the company’s products lack sufficient customer appeal. Others manage strong businesses, but no longer feel motivated to continue pouring energy into the enterprise. Still others may find that partnerships have grown sour or personal crises have unavoidably encroached on their time and resources.
Regardless of the reason for shutting down a business, owners should follow a systematic dissolution strategy whenever possible. Such a plan should include the following steps:
- Vote to close the business. Of course, a sole proprietor may only need to consult with a spouse or trusted advisor. With a partnership, corporation, or limited liability company, more than one business associate must agree to the dissolution. Organizational documents or a state’s business statutes often mandate the level of agreement required (a simple majority or two-third’s majority, for example), so you’ll want to consult applicable rules.
- File a final tax return. Even if the business only operated for a portion of the year, you’ll need to notify the IRS that the company’s annual tax return is its last one.
- Fill out dissolution paperwork. Let your state and local governments know that the company is ceasing operations. The forms you need should be posted on your secretary of state’s website. Especially when a partnership or corporation is dissolved, formal filings should prevent future confusion about ownership and liabilities.
- Cancel licenses, permits, and insurance policies. Most businesses are required to obtain city, county, and/or state licenses to operate. Those governments should be notified of the dissolution. Insurance brokers as well should be told to cancel business liability, health care, and other company policies.
- Notify interested parties. At some point you’ll want to inform lenders, suppliers, service providers, and customers. Lenders will be eager to find out how you plan to repay loans. Suppliers will want to know when to make final deliveries. Utility companies will need to know when to turn out the lights and shut off the water. Customers, too, should be given plenty of notice about final orders and ongoing projects.
- Get expert advice. Closing down a business can be a stressful and fragile process. Many things can go awry, so seeking help from competent professionals — attorneys, accountants, bankers, and others — can keep the process moving in the right direction.