Author: Leon Clinton

Renting out a vacation property to others can be profitable. If you do this, you must normally report the rental income on your tax return. You may not have to report the rent, however, if the rental period is short and you also use the property as your home. If you’re thinking about renting out your home, here are seven things to keep in mind:

1. Vacation Home. A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.

2. Schedule E. You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.

3. Used as a Home. If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more information about these rules, please call.

4. Divide Expenses. If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between rental use and personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.

5. Personal Use. Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also considered personal use.

6. Schedule A. Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes, and casualty losses.

7. Rented Less than 15 Days. If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income. In this case, you deduct your qualified expenses on Schedule A.

Please call the office if you have any questions about renting out a vacation home.

• By Leon Clinton
• September 18, 2016

If you filed for an extension of time to file your 2015 federal tax return and you also chose to have advance payments of the premium tax credit made to your coverage provider, it’s important you file your return sooner rather than later. Here are four things you should know:

1. If you received a six-month extension of time to file, you do not need to wait until the October 17, 2016, due date to file your return and reconcile your advance payments. You can–and should–file as soon as you have all the necessary documentation.

2. You must file to ensure you can continue having advance credit payments paid on your behalf in future years. If you do not file and reconcile your 2015 advance payments of the premium tax credit by the Marketplace’s fall re-enrollment period–even if you filed for an extension–you may not have your eligibility for advance payments of the PTC in 2017 determined for a period of time after you have filed your tax return with Form 8962.

3. Advance payments of the premium tax credit are reviewed in the fall by the Health Insurance Marketplace for the next calendar year as part of their annual re-enrollment and income verification process.

4. Use Form 8962, Premium Tax Credit, to reconcile any advance credit payments made on your behalf and to maintain your eligibility for future premium assistance.

Questions?

If you have any questions about filing an extended return, help is just a phone call away.

• By Leon Clinton
• September 16, 2016

Now is a great time to clean out that growing mountain of financial papers and tax documents that clutter your home and office. Here’s what you need to keep and what you can throw out.

Let’s start with your “safety zone,” the IRS statute of limitations. This limits the number of years during which the IRS can audit your tax returns. Once that period has expired, the IRS is legally prohibited from even asking you questions about those returns.

The concept behind it is that after a period of years, records are lost or misplaced, and memory isn’t as accurate as we would hope. There’s a need for finality. Once the statute of limitations has expired, the IRS can’t go after you for additional taxes, but you can’t go after the IRS for additional refunds, either.

The Three-Year Rule

For assessment of additional taxes, the statute of limitation runs generally three years from the date you file your return. If you’re looking for an additional refund, the limitations period is generally the later of three years from the date you filed the original return or two years from the date you paid the tax. There are some exceptions:

• If you don’t report all your income, and the unreported amount is more than 25 percent of the gross income actually shown on your return, the limitation period is six years.
• If you’ve claimed a loss from a worthless security, the limitation period is extended to seven years.
• If you file a “fraudulent” return or don’t file at all, the limitations period doesn’t apply. In fact, the IRS can go after you at any time.
• If you’re deciding what records you need or want to keep, you have to ask what your chances are of an audit. A tax audit is an IRS verification of items of income and deductions on your return. So you should keep records to support those items until the statute of limitations runs out.

Assuming that you’ve filed on time and paid what you should, you only have to keep your tax records for three years, but some records have to be kept longer than that.

Remember, the three-year rule relates to the information on your tax return. But, some of that information may relate to transactions more than three years old.

Here’s a checklist of the documents you should hold on to:

1. Capital gains and losses. Your gain is reduced by your basis – your cost (including all commissions) plus, with mutual funds, any reinvested dividends, and capital gains. But you may have bought that stock five years ago, and you’ve been reinvesting those dividends and capital gains over the last decade. And don’t forget those stock splits.

   You don’t ever want to throw these records away until after you sell the securities. And then if you’re audited, you’ll have to prove those numbers. Therefore, you’ll need to keep those records for at least three years after you file the return reporting their sales.

2. Expenses on your home. Cost records for your house and any improvements should be kept until the home is sold. It’s just good practice, even though most homeowners won’t face any tax problems. That’s because profit of less than $250,000 on your home ($500,000 on a joint return) isn’t subject to capital gains tax.

   If the profit is more than $250,000 ($500,000 joint filers) or if you don’t qualify for the full gain exclusion, then you’re going to need those records for another three years after that return is filed. Most homeowners probably won’t face that issue, but of course, it’s better to be safe than sorry.

3. Business records. Business records can become a nightmare. Non-residential real property is depreciated over a period of 39 years. You could be audited on the depreciation up to three years after you file the return for the 39th year. That’s a long time to hold onto receipts, but you may need to validate those numbers.
4. Employment, bank, and brokerage statements. Keep all your W-2s, 1099s, brokerage, and bank statements to prove income until three years after you file. And don’t even think about dumping checks, receipts, mileage logs, tax diaries, and other documentation that substantiate your expenses.
5. Tax returns. Keep copies of your tax returns as well. You can’t rely on the IRS to actually have a copy of your old returns. As a general rule, you should keep tax records for six years. The bottom line is that you’ve got to keep those records until they can no longer affect your tax return, plus the three-year statute of limitations.
6. Social Security records. You will need to keep some records for Social Security purposes, so check with the Social Security Administration each year to confirm that your payments have been appropriately credited. If they’re wrong, you’ll need your W-2 or copies of your Schedule C (if self-employed) to prove the right amount. Don’t dispose of those records until after you’ve validated those contributions.

   Contact the office by phone or email if you have any questions about which tax and financial records you need to keep this year.

• By Leon Clinton
• September 14, 2016