Are you making summer plans for visiting your vacation home? When you use your vacation home personally and also rent it during the year, knowing the rules can maximize tax breaks on your federal income tax return.
Here are two general guidelines to keep in mind.
- When you rent your home for 14 days or less during the year, all of the rental income is tax-free. That’s true no matter how much you charge — and you’re not even required to report the rent. Expenses related to the rental under this exception are generally not deductible. However, your mortgage interest and property taxes are still deductible if you itemize.
- If you rent your vacation home for more than 14 days, all of your rental income is reportable. You’ll have to divide your expenses between your personal use and those of the rental. The portion of your expenses related to your personal use, such as mortgage interest and property taxes, are deductible as long as you itemize. You deduct the rental expenses against the rental income. Just remember, you generally can’t claim a loss on your current-year tax return when the expenses exceed the income. Instead, you may be able to carry the excess to future years.
If you rent your vacation home when you’re not using it, please Carl Heinemann, your Chattanooga CPA, a call. We’ll help you set up a system to track your time and expenses so you get the best possible benefit.
Keep your tax credits and carry on. That was the outcome of the Supreme Court decision in June regarding the health insurance premium tax credit. This federal income tax credit was created by the health insurance laws passed in 2010. The rules for claiming the credit have not changed, and the credit is still available in every state.
How it works. The premium tax credit is an advanceable, refundable federal income tax credit that you can use to offset some of the cost of a health insurance policy. To claim it, you must buy a policy through the health insurance marketplace and have income that falls within certain limits. Other rules include filing a joint return if you’re married and not being a dependent on someone else’s return.
You can receive the credit in advance as a reduction in your health insurance premium. If you choose this option, the money will be sent to your insurer as you pay your monthly premiums. Next April, when you file your federal income tax return for 2015, you’ll reconcile the amount of the advance credit with the amount you’re actually eligible to receive. The difference will affect the tax on your return.
As before, the credit you’re eligible to receive is based on your income and family size. If your financial situation changes after you begin receiving the credit, updating the calculation can prevent surprises at tax time. Please give Carl Heinemann, your Chattanooga CPA, a call for help in making sure you’re claiming the right amount.
Are you prepared for the worst? In addition to the personal toll, natural disasters have tax implications. Planning ahead can ease the stress. Here are some tips.
- What happens on your tax return after the disaster? You can claim casualty losses as an itemized deduction on your personal federal income tax return for costs that are not reimbursed by insurance or otherwise. Your deduction is allowable only for the amount of the loss that exceeds $100 per casualty and 10% of your adjusted gross income for the year.
Generally, you can deduct the loss in the year the disaster happens. There is an exception that lets you file an amended return and deduct the loss in the year before the disaster. You can make that election when the president pronounces your location a “federally declared disaster area.”
Different rules apply when the disaster affects your business or investment property. For example, you’ll typically have to account for depreciation you claimed on the property in prior years when calculating your loss.
For help in coping with casualty losses before and after the event, please contact Carl Heinemann, your Chattanooga CPA. We’re here to help.
Section 529 plans are old enough now to go to college, yet a recent survey by a financial services firm indicates these education savings plans are still not well known. Here’s an overview.
- What they are. In tax language, 529 plans are “qualified tuition programs.” Practically speaking, they’re education savings accounts with tax benefits. They were created in 1996, when Internal Revenue Code section 529 was added to tax law, authorizing two new ways to save for college: prepaid tuition plans and college savings plans.
With a 529 prepaid tuition plan, you buy credits at participating colleges, allowing you to lock in tuition prices. With a 529 college savings plan, you establish an account, choose the plan beneficiary and how you want to invest, and begin making contributions.
- How you can benefit. While there’s no federal income tax deduction or credit for making 529 plan contributions, your state may offer a tax break. The money you contribute to your account grows tax-deferred — and the earnings are potentially free from federal income tax if you use withdrawals to pay for qualified education expenses.
The plans provide estate and gift tax benefits as well. For example, your contributions qualify for the annual federal gift tax exclusion ($14,000 per donee for 2015). You can make a gift-tax-free lump sum deposit of up to $70,000 in 2015.
Please call Carl Heinemann, your Chattanooga CPA, for more information on 529 plans and other ways you can save for college.
When credit cards gained popularity in the 1960s, card issuers and other lenders tried to develop a surefire methodology for assessing risk. They wanted to determine whether a potential borrower was likely to pay his or her monthly bill on time. Unfortunately, those risk assessments tended to be inconsistent and sometimes inaccurate.
By the 1980s, a firm called Fair Isaac and Company (FICO) had developed a scoring methodology that is still widely used today. When you apply for a mortgage, car loan, or credit card, it’s likely that a lender will check your FICO score. That number may not be the only factor considered, but a high FICO score is often the path to loan approval and favorable credit terms. (A potential borrower’s income may also be a key factor in many lending decisions.)
FICO scores, which range from a low of 300 to a high of 850, are calculated based on five key factors. Most heavily weighted (35%) is a borrower’s payment history. Based on years of statistical analysis, lenders know that a person who has a history of late payments tends to be a higher risk. The next factor (30%) is a person’s outstanding debt as a percentage of available credit. If you have ten maxed-out credit cards, expect a negative impact on your FICO score.
The remaining three factors include the length of time you’ve had credit (15%), the amount of new credit for which you’ve applied (10%), and various types of credit (10%). In general, the longer your credit history, the fewer new credit lines recently opened, and the more types of credit you have (car loans, mortgages, credit cards, and installment loans, for example), the greater the positive impact on your FICO score.
About 40% of consumers have credit scores that fall below 700. Although you may be offered a car loan with a FICO score of 500, don’t expect an offer of 0% financing. If your FICO score exceeds 750, on the other hand, lenders are often eager to extend credit with favorable terms. Over time, those lower interest rates translate into substantial savings, especially on big ticket items like a home mortgage. High FICO scores may even positively impact your insurance rates or increase the likelihood that you’ll be hired by a potential employer.
If you’d like suggestions for improving your FICO score, give Carl Heinemann, your Chattanooga CPA, a call.
Reducing the cost of storage — especially the expense of stockpiling operational records, inventory, and raw materials — can be a real challenge for any business. Dilemmas abound: What records should be kept and for how long? When and how should the firm dispose of obsolete inventory? Should on-site or off-site storage be used?
Consider the following suggestions for reducing your company’s storage costs.
- Records management. A well-thought-out records retention schedule, especially when paired with reliable software, can help ensure that a company doesn’t incur unnecessary storage costs. Relatively inexpensive computer applications can be used to organize files and alert staff when it’s time to dispose of specific records in accordance with company policy. By conducting routine file audits you can even ferret out unneeded records before they’re sent to storage. (Just be sure to retain any paper documents that may be needed for legal, tax, or regulatory purposes.)Some businesses choose to reduce storage costs by creating digital scans of their important documents. Though initially time consuming and labor intensive, the process of scanning documents provides the added advantage of improved access to archived records. Searching a well-organized database from the comfort of your office beats walking the aisles of a dusty warehouse in hopes of finding some long-lost document.
- Dealing with obsolescence. Businesses shouldn’t pay year after year to store something that may never be sold. A prudent manager will track outdated inventory and ensure that it’s discounted for quick sale or moved — temporarily — into storage. Paying for warehouses filled with obsolete products and raw materials is a drain on revenue. So it’s important to pay attention to inventory. The time may come when stored inventory needs to be hauled to the nearest recycling station or sold via an online auction.
- On-site or off-site storage? Having reached storage capacity at your current site, offsite solutions may be the only option. But sometimes a little creative management can yield great results and reduce the need for space elsewhere. For example, you may discover open racks that can be used to store supplies or inventory in a smaller (and less expensive) space. If you opt for off-site storage, be sure to negotiate a contract that’s to your advantage. All fees should be itemized, exit fees should be minimized, and terms and conditions should be spelled out.
If you’d like additional suggestions for reducing business costs, give Carl Heinemann, your Chattanooga CPA, a call.