Tax Credit on Car Expenses: Standard Mileage Rate vs. Actual Expenses

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Tax Credit on Car Expenses: Standard Mileage Rate vs. Actual Expenses

Apr 8, 2015 Posted by Sanjiv No Comments

Many people are still confused on what amount to deduct from their tax for expenses incurred on a personal vehicle’s repairs. They are given two options: deducting the actual expenses incurred, or deducting the amount computed by using the standard mileage rate. Which one is better? Which will benefit the taxpayer more?

In order to answer these questions, it would be best to get a clearer understanding of the two methods.

Using Actual Expenses

This is straightforward enough: deduct the amount actually spent or incurred on the operation, repairs and maintenance of a car or vehicle.

There must be a clear indication on which part of the amount was used for personal purposes and which part was for business use.

To come up with the final amount, the following are included in the computation:

  • Expenses on gas, oil and lubricants
  • Toll fees paid
  • Lease payments made
  • License fees
  • Insurance premiums paid
  • Rental and other fees directly related to the car, such as garage rental and parking fees
  • Cost of repairs (includes cost of spare parts and labor)
  • Cost of tires
  • Depreciation

Using the Standard Mileage Rate

Individuals will use a standard mileage rate set by the tax authorities. For tax year 2014, the rate was $0.56 for every mile. Only the miles used for business will be allowed as tax credit. This means that, in this method, the individual must keep track of the miles driven by the car, especially the miles driven for business.

The following are exclusions in this method; meaning, they cannot be claimed as deductions if the individual chooses to use the standard mileage rate, since they are already considered to be part of the rate set forth by the IRS.

  • Fees incurred on registration of vehicle
  • Insurance premiums on the vehicle
  • Fuel and maintenance expenses, including repairs
  • Lease payments on the vehicle, if any

A Comparison

In both cases, there is a need to divide the expenses between personal and business expense. An individual can only claim expenses on cars, including for auto repairs, if they have been used for business purposes.

Compared to the actual expenses method, choosing the standard mileage rate comes with several limitations or restrictions. For example, once it was chosen and clearly stated on the individual’s tax return, it is irrevocable, at least until the following tax year. Any amendments of the return within the year will also have to follow this method, even if the individual wants to switch to using the actual expenses.

Experts recommend that owners of new vehicles go for the standard mileage rate method during the first year that they use their car for business purposes. In the succeeding years, it would be up to the individual whether he wants to switch to using the actual expenses, or stick to the standard mileage rate.

Clearly, the simpler option would be using the actual expenses, provided you have documentation (e.g. receipts, toll tickets) to back it up. It also has the advantage of letting the taxpayer have his expenses for car repairs as a deduction. This method is also more advantageous for those who drive only a few business miles.

When trying to decide which of the two would be better, try performing mock-computations. The one that gives you a greater amount of deduction is surely the better option.


Theft Loss Deduction -Should you claim it ?

Mar 14, 2015 Posted by Sanjiv No Comments

Theft Loss Deduction – Understanding what you can and can not deduct

The very thought of paying Uncle Sam becomes cumbersome. But again thinking of the benefits that you receive from tax deduction gives you relief. Out of the many areas where tax deduction can help, loss of uninsured properties due to theft is a significant one. In case you are a theft victim, there is no need to worry a lot. In order to know more about tax deduction pertaining to losses on account of theft, the following information will surely help.

As a taxpayer, you are provided deduction by the IRS in case you have suffered sudden loss of substantial properties without any negligence from your end. But you need to ensure that you meet all the requirements in order to avoid reporting any wrong deductions on tax returns.

As per the Federal Law, theft refers to confiscation of property by any individual with the intention of depriving another individual of that property. This act is undoubtedly illegal and is certainly punishable. Some of the known instances of theft are blackmailing, burglary, kidnapping for ransom, larceny, extortion and robbery. However, if you lose money and property i.e. if you have misplaced those, then that does not fall under the category of theft. But if you get threatened by a person with physical coercion when you are attempting to get back your wallet, this kind of loss gets elevated to category of theft and becomes deductible.

You need to produce the proof that you have lost your property on account of theft and the monetary amount of deduction should also be substantiated. In order to do this, as per the IRS, you need to show the precise time of loss and also provide ample proof that you own the pilfered properties. In case you fail to provide minute details of the event and your property, IRS would consider certain other types of proof that support the deduction.

The deductible loss for the money that has got stolen is equal to the sum of money you are unable to recover. In case of property thefts, the basis has to be determined by you. The IRS says that it requires you as a taxpayer to not receive any reimbursement from any insurance company if you are taking the deduction. Insured properties that get stoned are not eligible for tax deduction.

Tax deduction can help in losses due to theft if you follow the steps mentioned below in reporting the loss on tax return.

  • You need to download a copy of IRS form 4686.
  • You are required to complete the first item in Section A of the form and then list every piece of property that has got stolen. The detailed description of every property should be provided by you along with the location from where it had got stolen and also the date of originally acquiring the property.
  • Next, you need to move on to the item 2 of the form. This means that now you have to list the price that had to pay for every item that has not got stolen. Every detail should be provided and should be original.
  • The item 3 talks about the reimbursements. The list of reimbursement covers insurance payment that you have received for your property that got stolen.
  • Next you need to check if the totals listed under Item 2 and item 3 vary. If you find that the totals pertaining to item 3 are more than those under item 2, then you are required to list the increase under item 4.
  • In item 5 you need to list the probable market value of the items before the theft took place. Then after you come to item 6, you need to inform about the properties that are of no value to you. Against those stolen properties, you have to list $0 meaning that those are of no value to you.
  • In the line 7 you need to re-enter the figures from line 5. Again in line 8, you need to re-enter figures either from line 7 or line 2, depending on whichever figure is lower. Then you need to deduct or subtract item 3 from item 8. The result that arrives has to be entered on line 9.
  • Next, complete line 10 by adding the total of all the items on line 9. Line 11 is meant for entering the lower line of number 10 or $500. In line 12, you need to subtract line 11 from line 10 following which you need to enter the result.
  • Line 13 is complete when you enter the total of line 12s from all the form 4684 in total that you are filing. You need to enter the sum of line 4s from all the form 4684 in total in line 14 that you are filing with your taxes.
  • You should determine if the amount that you have entered in line 14 is greater than line 13. If it is, then you will get a capital gain from your losses due to theft and again the difference has to get added in line 15 and on Schedule D of your tax return. In case you enter a capital gain, you need not complete the test of the form.
  • Line 14 has to get deducted from line 13 and the result needs to be entered in line 16. You need to list in line 17 entering $0 in case the theft loss is not disastrous. Similarly you need to enter $0 on line 18 as well. The figure from line number 16 has to be entered in line 19.
  • Then you need to calculate 10% of your gross earnings from Form 1040 and also line 38 and then enter that figure in line number 20. The figure that you would get by subtracting line 20 from line 19 has to be entered in line 21.
  • After adding the lines 18 and 21 the result that comes has to be entered in line 22. All these would reveal you capital loss in total from the theft for income tax reasons. This result should be entered on Schedule a, line 20.
car deduction

How to Make Tax Deductions for Cars and Trucks ?

Mar 5, 2015 Posted by Sanjiv No Comments

Cost of operating a truck, car or other kind of automobile is tax-deductible when moving and relocating or driving for medical, business or charity purposes. The deduction made corresponds to the mileage driven for such tax credits. You may opt for standard rate of mileage in place of calculating actual car expenditure for these individual tax credits.

Medical Purpose

Driving in order to obtain medical care for either yourself or your dependents is what Medical Purpose covers. This kind of drive must primarily cater for medical care, as indicated by IRS (Publication 502) and the deduction is reflected on Schedule A and comprises part of medical expenses for an individual.

Business Purpose

Business purpose pertains to driving away from your regular employment location to a different work site in order to meet with client or travelling for a business engagement. Commuting from home to office does not qualify for this category of individual tax credits. This kind of incentive is captured by Schedule C for self-employed individuals, Schedule F for farmers or as itemized deduction that forms part of unreimbursed business expenses provided in Form 2106 for an employee.

Moving and Relocating

You can deduct the driving cost for relocating to a new place of residence as part of moving expense deduction. To qualify for this incentive, it will be necessary to cover a distance of at least 50 miles away from the old home more than what you earlier covered in-between the old home and old job. The deduction is present on Form 3903.

Charitable Purpose

Individual tax credits are available for any vehicle used for providing services to charitable organization. The corresponding deduction is covered by Schedule A as part of charitable donations. It may involve driving for volunteer causes for a charity, church or hospital.

Actual Expenses

Various elements count as truck or car expense including:

  • parking fees and tolls
  • vehicle registration fees
  • interest on loan
  • rental and lease expense
  • vehicle registration fees
  • personal property tax
  • fuel and gasoline
  • insurance
  • depreciation
  • repairs including tires, oil changes and such routine maintenance

However, fines and tickets such as for parking may not be deducted. In addition, expenditure relating to commuting or personal use is not deductible. Various car expenses may also be deducted depending upon why you are driving. One cannot claim interest, insurance and depreciation as well as auto repairs for medical expense and charity deductions.

Standard Mileage Rates

Rather than tally up all actual car expenditures, you may utilize a standard mileage rate to aid in calculating deductions. There are standard mileage rates to achieve this goal. It is multiplied by the mileage drive to establish the dollar amount deductible for car expenses as obtained from Notice 2014-79 of IRS.

Standard Mileage Rates
Type of use Year 2015
Business 57.5 cents per mile
Medical or moving 23 cents per mile
Charitable service 14 cents per mile


In addition to standard mileage rate, taxpayers may also deduct tolls and parking fees as stipulated by the IRS in chapter 4 of Publication 463.

Comparing between Actual Expenses and Standard Mileage Rate

You may use any method that will lead to a larger amount of your tax deduction. This varies with individuals depending upon the number of miles driven, amount of depreciation claimed and other expense variables. Claiming standard mileage rate provides results with less paperwork. It is suited best for situations where the car is driven at times for charity, work or medical appointments and the owner is avoiding lengthy scrutiny of all car-related expenditure.


You will require selecting the standard mileage rate option within the first year of using your automobile for business purposes in order to claim the corresponding deduction. If you start by claiming actual expenses, it will be necessary to retain the actual expense option for the entire time duration of using your vehicle for business. IRS Publication 463 offers further clarity on this situation.

Where to Make Claims for Car and Truck Expenses

Expenses for vehicles get reported on Schedule C for self-employed individuals and Form 2106 for the Employee Business Expenses. In particular, this deduction is miscellaneous itemized deduction that is subject to 2 percent of the adjusted gross income limit. It implies that unreimbursed employee expenses may be deducted, although the tax payer does not benefit from the full deduction dollar-to-dollar on tax returns.

Vehicle expenses get reported on Schedule A for medical vehicle uses, together with other medical expenses.

For charitable car use, the expense gets reported on Schedule A, together with related charitable donations.

Practicing Good Record-Keeping

Ensure keeping a mileage log as it will demonstrate your eligibility for car and truck individual tax credits. This document should show date of each trip made that is tax-deductible. It will be necessary as well to record the total mileage covered for the entire year, which makes it pivotal indicating the odometer reading as each year begins at the first.

premium tax credit

Premium Tax Credit

Mar 2, 2015 Posted by Sanjiv No Comments

Premium Tax Credit

Recently, the U.S. government has made some adjustments to the way health care coverage plans are administered to the people. One of these adjustments became feasible in 2014, the Premium Tax Credit.

Background Information

There are dozens of tax credits out there, what makes Premium Tax Credit so important? Premium Tax Credit was established in early 2014 as part of the new Affordable Care Act and is designed to make health insurance more affordable. Premium Tax Credit is available through the Health Insurance Marketplace, which provides thousands of health insurance plans to people with low income.

What is Premium Tax Credit?

 Basically, Premium Tax Credit is an amount of money given to your insurance company via the government in order to make paying for health insurance easier and more affordable.

How do I Receive the Premium Tax Credit?

The first step in receiving the Premium Tax Credit is to obtain a health insurance plan, preferably through the Health Insurance Marketplace (average enrollment period runs from November to February). Once you have selected a plan that works within your budget, Marketplace will check to see if you qualify.

Qualifications for Receiving the Premium Tax Credit

 There are several qualifications you must meet in order to be eligible to receive this tax credit. To qualify, you will need the following:

  • You must be within the average income range
  • You should not be filed as a dependent
  • Cannot file a Married Filing Separately form
  • You should have applied for health insurance through Marketplace
  • You should be unable to qualify for health insurance through work or other health insurance company

Upon confirmation that you are eligible for Premium Tax Credit, the Marketplace will display an amount of money that the government is willing to offer you. If you are satisfied with this tax credit, you move on to selecting how/when you want to receive these benefits.

What are the Options for Claiming My Tax Credit?

There are two ways in which you can claim your tax return amount.

Get It Now

The Get It Now option is designed to lower the monthly premiums that are required to pay, instantly. This means that the tax credit you received is transferred directly to your health insurance company – in increments or all at once – upon acceptance of the credit.

Get It Later

 Get It Later option is designed to pay you back a fixed amount of money towards your health insurance expenses upon the completion of the tax return. This means that you pay your premiums and health insurance cost as expected and then receive your tax credit all at once when the tax return form is completed.

What Forms do I Need to Fill Out?

 Once you have chosen what option you want to engage in, you are required to fill out a couple of forms.

The first one is Form 8962, which is the Premium Tax Credit form. You will confirm that you have received a tax credit from said insurance company as well as the amount of that credit. This form is to be completed along with your Tax Return form.

If you received a health coverage plan through the Marketplace, you will fill out Form 8962 with the information listed on Form 1095-A. Form 1095-A is the Health Insurance Marketplace Statement form that confirms all of your information.

* We strongly suggest that you speak with your CPA to ensure proper calculations.

Penalty Relief

 There may be a time or two where you owe a fee to the government for a late payment or unpaid bill. However, if you have received a premium tax credit, those fees are waivered if the reasoning behind your late payment relates to advance payments made by the government.

If you choose to have your Premium Tax Credit split up and given to your insurance company month by month to lower premium costs, and the payments don’t add up to the amount of credit you are entitled to, you receive a refund of the amount that was not credited to you. If you are unable to make a payment due to this unequal payment method, you do not need to pay any late fees.

You are required to let the IRS know about your circumstance by filing out Form 4868 before the required due date.

Record All Changes

 During a tax year, if there are any changes to the information you provided the IRS with, you are required to make those changes as soon as possible through the Marketplace. These changes can affect the amount of Premium Tax Credit you are given so it is crucial that you keep the IRS updated.


Premium Tax Credit, although new to tax payers, has influenced the lives of thousands of people and helped make health insurance much more affordable. By using the Health Insurance Marketplace, you are almost guaranteed a health plan that fits within your budget and the additional tax credit offered to you will make that price even lower.

Take a few minutes to see if you can receive a Premium Tax Credit and keep you and your family healthy for an affordable price.


tax shelter for business

Tax Shelter Ideas

Feb 23, 2015 Posted by Sanjiv No Comments

Tax Shelter Ideas for Small Business Owners

In general, a tax shelter refers to a program which allows business enterprises or individuals to either defer or reduce payment of income taxes. Such programs may not suit everyone and legitimate ones do involve some level of risk, which not all investors are comfortable to undertake. However, with the correct information, the process of taking advantage of these shelters becomes less involving.

The Internal Revenue Service (IRS) applies huge discretion when applying tax shelters as this area has traditionally been prone to abusive practices by both individuals and businesses.

How IRS Views Tax Shelters

Tax shelters are defined by the IRS as investments that normally requires making substantial contributions which oftentimes are associated with commensurate risk levels. For an individual, tax shelter implies an investment which involves liability incurred within the short-term, with hopes of making appreciable gains across the long term.

For instance, if someone invested in property situated within a low-income environment, depreciation benefits of such property would be termed as legitimate tax shelter.

The losses or tax deductions which a person can take on potential tax shelter gets limited to total worth of investment or amount at risk. The amount viewed as being “at risk” for example might get limited to:

  • Adjusted basis of property
  • Cash invested
  • Loans taken for which someone bears personal responsibility to repay

Treatment of Losses

It is vital gaining the understanding that business activity losses or credits are easily considered passive activity losses or credits. These may only be utilized for offsetting income from different passive activities. You cannot utilize them for offsetting income sources like wages, dividends or interest. Passive losses generated in excess from any tax shelter can be carried forward, or till the investor sells off the asset.

Take care of tax shelters which get marketed with promises of write-offs being more significant that the invested amount. IRS considers such as Abusive Tax Shelters. People generally make investments with hopes of generating huge amounts of profits. Legitimate shelters involve a certain level of risk, cut down fairly on taxes and generate income. If IRS takes note of someone operating an abusive scheme, the individual is then required to pay tax owed along with penalties and interest.

Legitimate Tax Shelters

It is vital knowing how to identify a questionable program. You may achieve this goal by adhering to three primary rules in order to distinguish between legal and illegal tax shelters as follows:

  • If the primary purpose of a given transaction is lowering taxes and not offering other economic gains to parties involved, consider such a business deal unethical or questionable.
  • Transactions involving exchange of goods, assets or even services at prices which lie well below the fair market value should be viewed with suspicion.
  • If the interest rate paid to a different party is unusually high or low, with the sole intention being sheltering income from taxes, such an arrangement should be seen as unethical.

Tax Accrual Work-Papers

The IRS maintains a policy of requesting tax accrual along with other financial audit work-papers that relate to tax reserves. This applies to deferred tax liabilities and footnotes which disclose contingent tax liabilities that appear in audited financial statements.

Owning a legitimate auto repair business enables you take advantage of numerous tax deductions, which are unavailable to mere employees. This includes partial deductions to expenses incurred on housing, automobile, entertainment and meals as well as cell-phone expenditure.

While some expenses get deducted within a year, others get spread out over a number of years.

You can write off full cost of new furniture and computers within this year as per IRS Code Section 179. This might not be significant to a relatively new business that may not generate a lot of income within at first. A wiser strategy therefore might be deferring some portion of deductible expenditure to years in future, which accountants call “depreciation”.

You may deduct some portion of “start-up costs” if this year is your first in business. However, beyond a certain level you will require spreading the remainder of associated costs across your tax returns for the next several years. This practice is termed “amortization” in accounting.

Remember not to overlook the expenses below when filing tax returns:

  • Legal and Accounting Fees
  • Website/ Advertising costs
  • Association Dues
  • Truck and Auto Expense
  • Computer Expense
  • Bank Charges
  • Subscriptions and Dues
  • Training and Education
  • Furniture and Equipment
  • Home Office Expense
  • Gifts
  • Insurance
  • Permits and Licenses
  • Postage and Delivery
  • Meals and Entertainment
  • Printing
  • Office Administration Fees and Rent
  • Maintenance and Repairs
  • Start Up Costs
  • Retirement Savings
  • Materials and Supplies
  • Telephone
  • Travel
  • Taxes (Payroll Tax, Property Tax etc)

Knowing the tax code is important for anyone who owns a business and IRS Publication 463 spells out on available business tax credits relating to travel, entertainment, gift as well as car expenses. Think about hiring services of a tax professional to aid in preparing tax returns for your auto repair business.

child care tax credit

Child Care Tax Credit

Feb 19, 2015 Posted by Sanjiv No Comments

Child Care Tax Credit and Its Advantages

Children on their own are miracles. They make life more exciting and put a smile on your face every single day. In addition to these, having a child (or children) can also reduce your tax payments by up to $1,000/child. There are several qualifications needed to receive the child tax credit, but most are easy to meet. If you and your child can meet all 7 qualifications, you can receive a child tax credit in a very short amount of time.

Qualifications for a Child Care Tax Credit

 There are seven qualifications you must meet in order to receive this tax credit.

  • Age test
  • Relationship Test
  • Support Test
  • Dependent Test
  • Citizenship Test
  • Residence Test
  • Family Income Test

The age test requires your child or children to be no more than 17 years old upon your claim of the tax credit.

The relationship test requires that your child or children belong to you. This means that the child or children must be biologically yours, yours by marriage (step child), or lawfully placed in your care by the foster care system. You are also allowed to apply the child tax credit to your brother, stepbrother, sister, or stepsister if they have been lawfully placed under your care.

The support test requires that your child or children be unable to supply more than half of his/her own financial support over the course of the tax year.

The dependent test required that your child or children must be claimed as a dependent under your care. Being claimed as a dependent means that the child is yours, under the age of 19 or permanently disabled, and must have lived under your care for at least 6 months.

The Citizenship test requires that your child or children be born U.S. citizens, a U.S. resident alien, or a U.S. national.

The residence test requires that your child or children must have lived with you for at least 6 months. However, if your child was born during the tax year or fits into one of the exceptions listed below he/she is considered a resident under your care.

  • School
  • Vacation
  • Medical care
  • Business
  • Juvenile facility
  • Military services

The family income test applies only to the parents asking for the child tax credit. The MAGI limit for a married couple (filing individually) is $55,000. The MAGI limit for a single parent is $75,000 and the MAGI limit for married couples (filing together) is $110,000.

Common Child Care Expenses

Parents know that health care, schooling, after school activities, are all expensive and they all add up.

  •  Doctor’s visits can be costly, with or without insurance. Paying for check ups, getting your child the appropriate shots, medications, emergency hospital visits, can cost you anywhere from $20 to $1000 per visit.
  •  Schooling can be equally as expensive, if not more so. Preschool, kindergarten, grade school, high school, college, that’s hundreds of dollars as it is. When you add in school supplies and the type of school you want you child enrolled in, you’re looking at the thousands.
  •  After school activities, if you plan on enrolling your child in some, add up as well. Taking on karate lessons, gymnastics, cheerleading, school clubs or sports teams can cost you around $100 or more.
  •  Food/Clothing, although not as costly individually, can take a toll on your total as well. Buying enough food to support your child or children tends to cost the average person around $50-$100/week per child. Add onto that the cost of clothing and you are again looking at the hundreds.

How Child Tax Credit Can Help

The childcare credit will give you a cut on those expenses and give you a portion of your money back.

  • One child – parent will receive 35% of up to $3,000 back on expenses paid for their child, at the end of each tax year.
  • Two children – parent receives 35% of up to $6,000 back on expenses paid for their child, at the end of each tax year.

This percentage will vary depending on your income, but the average is around 35%.

Basically, with each child you have, the amount of money being taxed from increased by $3,000 and the parent will receive 35% of their childcare costs back.

Consider Applying

 Regardless of whether or not you could use the money back, have tax credit on your children ensure that your child is protected and taken care of financially. You are free to purchase health care for your kid(s) knowing that a percentage of it will be given back to you every year.

You can save money for those family vacations and splurge on an extra toy every so often. Save yourself the expenses and apply for a Child Tax Credit as soon as you can.

Am I Going To Have To Work Forever Because I Am Self-Employed?

Apr 28, 2014 Posted by Sanjiv No Comments

When you are self-employed you rely on yourself to pay your paychecks and insurance. Without any employer, retirement funding and saving falls on you entirely. That can be a lot to take on all by yourself. Unfortunately, more than 70% of self-employed people are not saving regularly for their retirement.

Irregular income is one or the largest challenges for self-employed people; therefore, opening up a retirement savings account is not always top priority.

The first step is to set up your retirement foundation. You should open up a retirement account as soon as you know which type of retirement account would be best for you. Just because you have an account open does not mean you have to start putting money in it right away. Having an open account will make it easy for you to be able to contribute money when you find yourself with extra cash flow.

Retirement Tips

Financial advisors offer several retirement tips that will help get self-employed people started with their retirement savings.

Simplified Employee Pension (SEP-IRAs): Simplified Employee Pensions have a higher limit for contributions in comparison to Roth IRAs and Traditional IRAs. The contribution limits are calculated by a percentage of your net profit. It is a good option for small businesses and partnerships that are closely held because every participant will have the exact same benefits. These plans are very easy to maintain, have flexible funding options and a variety of investment choices. You can contribute up to 25% of your compensation up to $52,000.

Individual 401(k)s: Individual 401(k)s are best suited for self-employed people that do not have any other employees. You are able to make the employer and the employee contributions for yourself allowing you to maximize your business tax deductions and your personal contributions to your retirement. If your business experiences irregular patterns of profits, you should consider this retirement plan type. Depending on your business’ net profit, the contribution limit is up to $52,000.

Savings Incentive Match Plan For Employees (SIMPLE IRAs): If your business has a steady flow of income and the employees would like to make contributions to save for their retirement, this plan might work for you. It allows employees to have salary deferral contributions and you can match a percentage of their contribution. Using a SIMPLE IRA, you can offer employees an incentive and avoid tons of administrative work that is required with a traditional 401(k)

Profit Sharing Plans: A profit sharing plan may be a good option for business owners that have variable profit but they want to reward employees by giving employees a percentage of the profits. These plans are extremely flexible. Every year, you can decide how much you want to contribute or skip a year if necessary.

Take Control Of Your Retirement Future: Self-employed people face many decisions every day but they often do not make themselves a top priority. The decisions you make are just as important as the ones you do not make. You can take control of your future by deciding right now to start your retirement foundation so you do not have to work forever. The only person that you hurt by putting it off is yourself.

Strategies To Reduce The Net Investment Income Tax

Dec 28, 2013 Posted by Sanjiv No Comments

The goal of planning  net investment income tax (NIIT) is to manage the adjusted gross income and net investment in order to reduce the total amount subject to federal tax. The net investment income tax is calculated using the lesser of the net investment income or the adjusted gross income over the tax threshold amount for the year.

How Is The Net Investment Income Tax Calculated?

The net investment income tax is a surtax at a 3.8% tax rate of a base income. The base income is the lesser of:

  • Net investment income
  • Modified AGI above the threshold

NIIT Thresholds

Filing Status of Taxpayer                                                        Modified AGI

Single and Head of Household                                              $200,000

Married Filing Jointly, Qualified Widower or Widow           $250,000

Married Filing Separately                                                       $125,000

If you are trying to reduce your net investment income tax, you could reduce the net investment income, AGI or both. If your adjusted gross income is lowered below the threshold, the net investment income wouldn’t apply to you because it created a negative amount that becomes zero. Also, if the adjusted gross income is above the threshold, reducing the net investment income and/or AGI lowers the amount of your income that is subject to net investment income tax.

If you reduce your capital gains amount earned during the year, your income will be reduced and your AGI will be reduced. It is important to remember that the adjusted gross income is your total income less all the first page deductions on the first page of the IRS form 1040. All itemized deductions don’t reduce your adjusted gross income.

Two Basic Net Investment Income Tax Planning Strategies

  • Reduce AGI below the threshold
  • Reduce your net investment income

Tax-Sheltered Investments

  •  Life Insurance. Growth in a life insurance policy is sheltered from current income taxes. Additionally, the death benefit is also tax free. Placing assets directly into life insurance removes that investment income from net investment income and AGI. 
  • Roth 401(k) or Roth IRA plans.  Qualified distributions from a Roth retirement plan are not included as income.
  •  Deferred Annuities. Consider using deferred annuities after all 401(k) and contributions to retirement plans have been maxed out. Annuities will shelter your earnings from immediately being taxed. They will help you smooth out your income and help keep your AGI under the NIIT threshold.
  • Possibly convert Pretax Retirement Plans into a Roth plan.  Taxpayers need to determine if this will make sense for them. The amount that is converted into a Roth plan increases adjusted gross income and income which could potentially cause income tax liability and net investment income tax liability. However, future income distributions from the Roth IRA will be exempt from tax.

 Passive Income Strategies

Consider investments where your investment can be depreciated. For example, rental real estate can be depreciated. Depreciation reduces the total rental income that is taxable. Another option is gas and oil investments. These offer a large deduction for depletion that can be taken upfront and a deduction for most of the intangible drilling costs. These deductions give gas and oil investments more tax advantages than many other investments. Both of these strategies help reduce the total investment income that is taxable.

Many taxpayers own real estate and rent their building to directly to their own business (self rentals). These may be subject to a 3.8% net investment income tax.

When taxpayers own multiple passive businesses or rental properties, they should consider how these activities are grouped to calculate passive activity loss limitations. The IRS provides taxpayers an opportunity to regroup these activities which can be a better way to handle passive losses. It can reduce the amount of income that is subject to federal tax.

Strategies for Capital Gains

Installment Sales. Taxpayers that are selling major capital assets or real estate should think about using installment sales. The seller directly finances the purchase using a loan. Taxpayers will then have the choice of whether they want to spread the capital gains over loan’s life or not. This will help smooth income for the amount of years of the loan.

Charitable Remainder Trusts. Property can be placed in a charitable remainder trust and the taxpayer can draw distributions over the rest of the taxpayer’s life. The remainder will go to charity.  The distributions are subject to the net investment income tax but it can be done over many years. Taxpayers, for example, can sell appreciated assets from inside of the charitable remainder trust and income can be distributed over many years.

Charitable Lead Trusts. Taxpayers get an upfront charitable deduction and they are able to keep the gains off of their tax returns. This is a good option for extremely generous taxpayers.

Tax Provisions That Expire In 2013

Dec 25, 2013 Posted by Sanjiv No Comments

There are many tax provisions that are scheduled to expire at the end of 2013. You should consider taking advantage of these provisions while they exist.

Tax Breaks For Individuals

Exclusion for Mortgage Debt Cancellation on Primary Residences

In general, debts that have been cancelled or forgiven are considered to be taxable income. There has been an exception for mortgage debt cancelled between 2007 and 2013 if the debt was canceled because of a short sale, mortgage restructuring or foreclosure.

Distributions From Retirement Plans Are Tax Free If It Is For Charitable Purposes

Individuals that are at least 70.5 years old can distribute funds from a retirement account directly to the charity of their choosing up to $100,000 per year as a qualified charitable distribution. These qualified charitable distributions are tax free and may satisfy the minimum plan distribution rules.

Qualified Small Business Stock Exclusion

Investors are able to sell qualified small business stock. 100% of the gains from the sale of the stock will be excluded from income. After 2013, only 50% of the small business stock gains will be able to be excluded.

 Tax Breaks For Employee Benefits

 Mass Transit Benefit

 During 2013, the tax free exclusion for the mass transit fringe benefits was $245 each month. The amount is reduced to $130 per month beginning in 2014.

 Above The Line Deductions

Deduction For Classroom Expenses

K through 12 educators, principals and teachers are able to deduct job related expenses up to $250 as an above the line deduction. In 2014, they will only be able to deduct these expenses as part of the itemized deduction for employee business expense.

Deduction for Tuition and Fees

This above the line deduction expires in 2013. In 2014, the American Opportunity Credit and Lifetime Learning Credit will be available.

Itemized Deductions

Mortgage Insurance Premium Deduction

Homeowners are able to deduct mortgage insurance premiums, only through 2013, as part of the mortgage interest deduction.

Local and State Sales Tax Deduction

State sales tax can be deducted in place of state income taxes. This is very valuable for taxpayers that live in any state that does not have state income tax.

 Real Property Charitable Contributions Made For The Purpose of Conservation

Taxpayers that donate conversation easements to a charity can deduct the value of the easement limited to 50% of AGI minus deductions for all additional charitable contributions. The 50% special limitation expires in 2013.

 Tax Credits

Non Business Energy Property Credit

The tax credit is for 10% of the cost of the qualified energy efficient products that are installed at the main residence of the taxpayer.

2 Or 3 Wheeled Plug In Electric Vehicles

This tax credit is for $2,500 for a vehicle that draws energy from a battery that has a minimum of five kilowatt capacity hours. There is an additional $417 credit for each additional kilowatt capacity hours in excess of the minimum five. The total of this credit has a limit of $7,500.

 Credit For Health Coverage

 The health coverage credit is equal to 72.5% qualified health insurance premiums and the taxpayer’s family.

Credit For Work Opportunity Tax Credit

This tax credit is an incentive for businesses to hire specific employees including public assistance recipients or veterans. For example, employers can receive a tax credit of $4,800 for each disabled veteran that is hired.



 Businesses are able to deduct up to 50% of new equipment costs through a bonus depreciation deduction in 2013. All of the rest of the cost of the equipment will be depreciated over the equipment’s useful life. This bonus will not be available in 2014. The only exception in 2014 will be in the case of noncommercial aircrafts and long production period property.

Section 179

Under section 179, businesses are able to expense the total cost of equipment in the year it is purchased instead of using depreciation and spreading the cost over many years. In 2013, businesses are able to expense up to $500,000. In 2014, they will only be able to expense up to $25,000.




Education Tax Deductions and Credits Can Help Save You Money

Dec 25, 2013 Posted by Sanjiv No Comments

The cost of college is always increasing; however, there is some relief with education tax deductions and credits. Qualified education expenses may be deducted for your dependents, yourself or your spouse. These tax deductions and credits help more parents and students pay for college expenses.

 American Opportunity Tax Credit

 The American Opportunity Tax Credit helps taxpayers save money on the cost of post-secondary education. It is a tax credit for undergraduate college qualified expenses. This credit was extended until Dec. 31, 2017 when the 2012 American Taxpayer Relief Act was passed.

Tax credits are better than tax deductions because credits reduce the total amount of tax owed or it increases the total amount of your refund in the credit amount. This means that your tax liability will be reduced one dollar for each eligible credit. There is a $2,500 maximum per student for the American Opportunity Tax Credit. In order to qualify, you need to have paid a minimum of $4,000 during the year in qualified education expenses. If you do not incur a tax liability during the year, this credit is still partially refundable up to 40%.

What Expenses Qualify For The Education Tax Credits?

The American Opportunity Tax Credit is unlike other education related tax credits because in addition to tuition, it also includes expenses for supplies, equipment and course related books that are not always paid directly to the educational intuition. Computers qualify for the tax credit if the computer is needed as a condition of attendance or enrollment at the educational institution. These expenses for course materials must be needed for the course of study.

This credit is allowed to be claimed for expenses that are incurred for during the first 4 years of the post-secondary education. The expenses must be paid during the taxable year and relate to the academic period that begins during the same year or the academic period that begins during the first 3 months or the following taxable year.

There are several expenses that do not qualify for the education tax credits. These expenses include:

  • Transportation
  • Room and board
  • Medical expenses
  • Insurance
  • Student fees that are not required as a condition of attendance or enrollment
  • Expenses that are paid with tax-free assistance
  • Expenses that are used for another educational benefit, tax credit or tax deduction

Do I Qualify For The American Opportunity Tax Credit?

The education expenses must relate to the first 4 years of college after high school to qualify for this tax credit. Although graduate students do not qualify for the American Opportunity Tax Credit, there may be other tax deductions and credits that may be eligible for including the Tuition and Fees Deduction and the Lifetime Learning Credit. The American Opportunity Tax Credit is not available for single filers with a modified AGI (adjusted gross income) higher than $90,000 or people filing jointly with income higher than $180,000.

What is the Tuition and Fees Deduction?

 If you have paid a minimum of $4,000 in education tuition and fees, the tuition and fees deduction maximizes out at $4,000. This is a tax deduction and is not the same as a tax credit. Additionally, it is different than the American Opportunity Tax Credit because the deduction for upper income is phased out at a slightly lower income range. This deduction is not available for single filers with a modified AGI (adjusted gross income) higher than $80,000 or people filing jointly with income higher than $160,000.

It is important to understand that you cannot use the American Opportunity Tax Credit and the Tuition and Fees Deduction in the same year. You need to choose between taking the Tuition and Fees Deduction or claiming the American Opportunity Tax Credit.