We know that a few months may be a long time but personal tax return filing and paying taxes are due on April 15th, so it’s important to start gathering documentation and getting yourself organized. After all, you know what you accomplished and this time of year lets you take a view of what you’ve done!
Here are some answers to some Frequently Asked Questions:
Can I file my taxes after April 15th? – Yes, but you need to let the IRS know that you will be late. The penalties and interest don’t go away, but you are given a small grace period to get everything done. If you have all of the information at your fingertips, why pay the penalties in the first place? You still have time to get all your information together and if you need some guidance, we can give you a hand. Give us a call at MiklosCPA and we’ll help file the extension for you.
I’m missing my W-2 forms. What now? – Talk to your HR department or our employer about obtaining a copy. If they are not able to give one to you, the IRS may already have it on their system. It may be just a quick phone call to get it replaced.
Can I still make IRA contributions? – Yes, you can still make Traditional and ROTH IRA contributions up until April 15th.
Is there an age limit on claiming my child as a dependent? – Generally, your child has be to be younger than 19 years old, or if your child attends a school, they should be younger than 24 years old.
I heard about the Flexible Spending Plan rollover, where my company is supposed to rollover $500 of my FSA plan to the next business year if I did not use it up. – Did that happen in 2016? Possibly. The rollover may apply to your 2016 plan. We recommend contacting your human resources department in your company to discuss this in more detail.
I am currently going to school and want to claim my tuition. How do I proceed? – It depends on a few things. The IRS rules around this particular issue can be a bit complex. A lot of what you can and cannot claim relates to whether or not you are currently employed, and if the schooling goes towards it. If it doesn’t, there are one set of tax credits. If it does, you may be entitled to claiming more. We recommend looking at the IRS article Tax Benefits for Education.
At MiklosCPA, our California-based CPA firm can help you e-file your personal taxes earlier so you can get this done and off your list! Plus, if you have a refund, why wait to get your money? Contact us today and we can provide you with a free tax organizer to get you started!
Additionally, give MiklosCPA a call if you wish to discuss your particular circumstances!
In this tax tip article, we look at the sale or transfer of a house due to a court ordered decree of divorce or separation instrument.
The costs of selling real estate are considerable. Real estate commissions, closing costs, and fees can be many thousands of dollars. The selling process can also be extremely time consuming. The advantage is that real property, meaning land and houses, qualify for special rules of property transfers.
If the house is transferred to a former spouse as the result of a divorce, then the nonrecognition property transfer rules can apply. This means that the former spouse will own the house and no taxes are liable to either party.
Selling the house
There are times when selling the house is the best option for both parties. It provides cash and allows both spouses to live in new communities. Section 121 of the tax code allows a person to exclude from income up to $250,000 of gain on the sale of their primary house. If both parties have lived in the house for two of the past five years, both parties may be able to exclude $500,000 of gain, or $250,000 for each spouse in their income tax. Because of that, the sale of a house may be largely tax free. It is important to note, however, that vacation homes don’t qualify for this divorce law exception. The IRS only applies this for the primary home.
For example:
A married couple in Duarte jointly owns a house worth $700,000 with a mortgage of $100,000. As a result of a divorce, one spouse is required to transfer their interest in the house to the former spouse. This means that one spouse surrenders their $300,000 share, or his/her half of the $600,000 of equity in the house to their former spouse, and will have no tax due on this transfer. The former spouse thus receives $600,000 of equity and no taxes are due until the house is sold.
However, if the house in Duarte is sold for $700,000—(we’ll ignore the commissions and closing costs to keep it simple)—each spouse will receive $300,000 after paying off the $100,000 mortgage. Up to $250,000 of that gain per spouse can be excluded from income. Therefore, $50,000 is taxed at the appropriate capital gains rate of 15%, yielding a tax of $7,500 for each spouse. Each spouse will net $292,500 and the total cash payment made to former spouse will be $585,000. Notice that the sale of the house provides $15,000 less to the former spouse due to taxes, and presents a tax bill of $7,500 to the spouse surrendering their interest in the house. The real amount provided to the former spouse will be even less once commission and selling costs are included.
MiklosCPA can help you determine the best way to divide assets while minimizing your tax liability while going through a divorce. Divorce law is no simple matter. If you find our free tax resources useful, please share it and connect with us on our social media pages.
Now, just to be clear, this isn’t about the commute going from home to work and back. However, if you have to stop by to drop off some documents for a client, or if you went to a conference, then some of that mileage may apply as a deduction part of unreimbursed travel expense! To able to write off travel expenses, you are required to meet certain conditions:
Your travel should be temporary or your assignment should be temporary, OR
You have to be away from your tax home (for example, Azusa) which may be different from your family home (for example, Temecula). Should the tax home not be the same as your family home, you may be face with a different set of rules when it comes to deducting travel expenses on your tax return.
If you meet one of the conditions, the unreimbursed travel expenses could be deductible. You would have to determine the category and deduction limitations. Some of the expenses you can deduct as travel expenses are: transportation costs, taxi fares, commuter bus charges, car, lodging and meals, tips and other similar ordinary and necessary expenses which are related to your business travel.
Example 1: You live and work in Los Angeles, and you had to travel to San Francisco to meet your client in her place of business. You took a shuttle to and from the Los Angeles airport, flew from LAX to SFO, rented a car and stayed one night at a hotel. If you were not reimbursed for any of these costs, you may able to deduct these travel expenses on your individual tax return.
Example 2: You live and work in the city of Monrovia and your corporate office in San Diego is requesting you to work out of the San Diego office for the next 20 months while completing your project. During these months, you periodically visited your home in Monrovia. Since you were realistically expected to work in San Diego for more than one year, you cannot deduct any of your travel expenses since San Diego became your tax home.
Still a bit confused? That’s okay. MiklosCPA knows that the IRS has some rules which are difficult to figure out. Our firm can help you determine if your expenses meet the requirement, and you may end up saving a bit of money on your taxes. Give us a call to help review your situation and we can help guide you to the right decision!
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Individuals can take advantage of moving expense tax deductions, however here are some of the things you may need to show:
You move within one year of accepting your new job.
Your new job is at least 50 miles away from your previous home than your last job was from your previous home.
Your new job is a full time position
If you are self-employed, you may have to show some additional reasons why you had to move.
If you qualify, then you are able to deduct the money you spent for household goods, moving, traveling to your new home, and hotel costs while setting up your new home.
Just remember that not all costs can be deducted as part of your moving expenses. Some of these are:
losses from sale of your home
real estate taxes
return trips to your former residence
driver’s license
expenses of entering or breaking a lease, just to name a few.
For example, during the year you lived and worked in Glendale, CA. The distance from your home to your office was 5 miles. You have accepted a new full time position in Bakersfield and decided to relocate instead of driving 120 miles one way each and every day. Your start date is next month and you plan to buy a place in Bakersfield to following month. Within the first month of your employment you packed up all your household goods and personal items and paid a moving company to transport your belongings.
Since your new job will be 115 miles (120-5), you meet the distance requirement
Any reasonable expenses to the moving company may be deduced.
As the position is a full time position, you may be able to deduct your moving expenses.
To make your preparation for your tax return as stress free as possible, make sure you keep good records of your moving expenses and readily available for tax preparer. If in doubt, keep the receipt anyway, as it may be helpful later on.
At MiklosCPA, we understand that some of these rules and applicable limitation may be hard to follow and understanding the maze of the tax code may seem overwhelming. Let us help you make things easy and clear! Give us a call to help review your situation and guide you in making the right tax decision for you.
Education Tax Credits Pt. 1 – American Opportunity Credit
Education costs may be daunting, but there are many types of financial aid to help support expenses. For this article series, we will be highlighting two educational tax-benefits the federal government offers to its citizens, the American Opportunity Creditand Lifetime Learning Credit.
Unlike simple deductions (e.g. expenses for school supplies) that only reduce the income that you will be taxed on, the American Opportunity and Lifetime Learning Credits can reduce your tax liability. In simple terms, that means the tax bill that YOU will ultimately have to pay to the IRS after deductions and other things are calculated. The biggest difference between the two credits is that the American Opportunity Tax Credit is a refundable credit, which means if your final tax bill due to the IRS, after all the calculations are done, is a negative amount, you can receive some money back.
Of course there are some rules to take into consideration before deciding on which one to claim. For starters, you can only take the American Opportunity Credit OR the Lifetime Learning Credit. Not both.
American Opportunity Credit
The American Opportunity credit allows you to claim up to $2,500 in qualified educational expenses. The first $2,000 of your expenses is 100% refundable, while the next 25% of $2,000 in expenses is refundable. To illustrate:
Juan spent a total of $2830 in qualified educational expenses (registration fees, books, and lab materials) for his two semesters at Pasadena City College. Assuming he meets the other requirements, the first $2,000 of his expenses will be considered entirely refundable if he claims the American Opportunity credit, while of the remaining $830, only $207.50 ($830 x .25) will be refundable. He can get a total of $2,207.50 back for his qualified education expenses.
Payments made for the tax year, or for the 3 months prior to the next one can also be claimed. For example, expenses paid in December 2018 for the following semester in 2019 can be claimed for 2018.
The American Opportunity credit can only be claimed for 4 years, but those years do not have to be consecutive. You must be pursuing a degree or certificate and be considered a part time student.
If you are a parent of a dependent child in college, you can claim the credit on behalf of the dependent. Additionally, if you have more than one dependent in college, you may claim more than one credit per student.
There is an income limit to claim the credit though. The limit is based on your Modified Adjusted Gross Income (MAGI), which is your adjusted gross income after certain adjustments are calculated. The limit is $90,000 if you file as single and $180,000 for those married filing jointly (the credit cannot be claimed if married, filing
separately).
For the next part in this series, we will look at the Lifetime Learning Credit and go over its uses and rules.
We regularly post “good to know” tax tip articles for businesses and individuals. Follow us on our social media pages for future updates!
MiklosCPA works with US Citizens and permanent residents across the globe when it comes to tax time. This is why our accounting practice is a listed expat advisor on many of the US Embassy websites abroad.
More than ever, many US citizens are taking their lives, and often their businesses overseas. Understanding and navigating the income tax implications is a daunting task. The United States is one of the few countries imposing unique restrictions and reporting requirements to her citizens and their worldwide income; yes, we’re talking taxes living abroad.
If you are a US citizen and you lived in a foreign country during the past year, you may be taxed on your income even if none of it was earned in the USA. But there is some good news! If you lived abroad long enough, you may qualify for the Foreign Earned Income Exclusion and for certain Foreign Housing Exclusions and Deductions as well. The IRS recognizes that being a bona fide resident of another country, you can claim income exclusion of up to $102,100 for 2017.
For example, let’s say you are a US Citizen doing business in China as a self-employed consultant for most of the last year. You earned $90,000 for your consulting services and your business deductions were $20,000. This will result in a net profit of $70,000. If you qualify for the Bona Fide Resident Test and lived in China for most of the year you may qualify for the Foreign Earned Income Exclusion (Form 2555) and have the $70,000 excluded from US taxable income when you file your IRS Form 1040. That’s a great savings! (You may have to check if your income earned as a consultant will be subject to self-employment tax even when it is earned abroad.)
Do not forget about the other reporting requirements such as FATCA and FBAR. Remember, filing an incorrect or incomplete US return will not save you from interest and penalties.
Which forms are you required to file and when are the taxes due? The CPA practice of MiklosCPA is here to answer these questions and address other tax related challenges while you enjoy working in another country and building your business.
Contact MiklosCPA for assistance with determining if you qualify for this, or any other, tax saving exclusion. We provide solutions to your problems and help you plan to save the most of your hard earned money in the present and future years, whether you are doing business at home or filing your taxes living abroad.
If you enjoyed reading our tax tip, please share our article with your expat friends on Facebook or Twitter, and help them with their questions!
MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
