Posted by: Easy Affordable Accounting | December 8, 2017

Home Office Deduction Benefits

The home office deduction allows the business owner to write off the expense of doing business from home. The benefit of this deduction if you qualify (which was covered in an earlier post), is that it decreases the taxable amount of the business income. The home office deduction is actually the last deduction on the schedule c, and is subtracted out before determining your net income (the amount you are taxed on).

Image result for home office deduction

Here is a list of information you will need to take this deduction:

  1. Square footage of the room which functions as the office
  2. Square footage of the entire residence
  3. Expenses of maintenance for the entire home (HVAC repairs, roof repairs, whole home maintenance,  whole home improvements, etc…)
  4. Specific expenses for your office (like paint, flooring, anything that adds to the specific office)
  5. Total utilities for the year
  6. Total insurance on the residence for the year
  7. If renting total rent payments for the year
  8. If buying total interest on the property or the year
  9. Casualty or loss from the year
  10. Property tax amount if buying the residence

Because the home office is based on the percentage of the residence used for business, the expenses, other than for the specific office, will be prorated based on how much of the house square footage is occupied by the office.

Image result for home office deduction

An example would be if I have a 1000 sqft apartment and my office is 250 sqft then 25% of my household expenses will form my deduction in addition to the office specific expenses. These are the annual totals.

  • My rent is $10,000
  • My utilities are $5,000
  • My rental insurance is $600
  • I painted my office for $100

With these figures my deduction would be $4,000 (2,500 + 1,250 + 150 + 100).

If you own your home then you will actually depreciate a percentage of your home based on the square footage of the office in relation to the overall size of the home.

 

 

 

Posted by: Easy Affordable Accounting | December 1, 2017

Home office deduction – Qualifications

I have had a few questions about the home office deduction, so I am going to give a quick run down of what qualifies, what information you will need to claim it and some of the benefits.

Image result for home office

What qualifies as a home office?

According to the IRS, for a home office to qualify the room must be 1) dedicated exclusively to the business and used regularly; AND 2) be the principal location for the business.

  1. Any room in the home can be the office, even the garage if that is where you locate your office. Location in the home is irrelevant.
  2. The office can only be used for the business. If you use your kitchen as an office and also to prepare meals you do not have an office and can not take the deduction, if your guest room doubles as a guest room, it does not qualify for exclusive use. If you have a spare bedroom set aside for your business and only your business you have a home office, If you run your business from your garage even if you store your inventory there, you have a home office.
  3. The office must be used regularly for business. This is an arbitrary distinction, ultimately up to the taxpayer, but discretion is advised.

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Sharing a room disqualifies the office from the deduction.

The IRS also requires the home to be the principal location for the business.

“You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.” -IRS

The good news that the home office does not have to be the only location. For example if you are a realtor and you have a home office where you conduct most of your business but also a storefront for meeting clients then you qualify for a home office and on your schedule c for rent for the store front.

Please feel free to leave your questions below and I will address them.

 

Posted by: Easy Affordable Accounting | June 27, 2016

Simple break down of ObamaCare for 2016

Many people are going to the health insurance marketplaces and exchanges to acquire their health insurance. There are some facts people need to be aware of.group-health-cooperative-sernetinsurance.com-29

There are three important thresholds to know about: if you make under 400% of the Federal Poverty Level (FPL) you should qualify for a tax credit. If make under 250% of FPL you should be eligible for a cost share reduction subsidy – BUT only if you go with a silver plan. For people who make less than 138% of the FPL in most states they are eligible for Medicaid. If you are not in a state that expanded Medicaid and you made under a certain level for your state you can file for an exemption.

Exemptions can come from the marketplace or you can file for your own based on your income, this is done on a form 8965.  If premiums are over 8% of your income, you can file for an exemption. Please note that if you did not have health insurance for the entire year you will need to file form 8965.

People who qualify for a tax credit (under 400% FPL) you can make an election to either take an advance payment to lower your premium or wait for the adjustment on your taxes.healthinsurance

If you receive a form 1095C you need to file a form 8962 to determine how much of the premium tax credit you need to repay to the IRS. This amount will be placed on your 1040 as a tax. Many people were surprised this year to find out they had to repay their entire credit. An easy way to avoid repaying your credit is to alert your carrier if you have an income change, the carrier can recalculate your premium.

If you are not covered by health insurance for even one month for any member of your household there is a fee, called the individual shared responsibility payment which is due with the annual tax return. There are two methods to calculate the fee: 2.5% of the household income, or per person.

Keep in mind the larger fee is what a person who does not have minimum qualified insurance will pay. If 2.5% of the household income is higher that will be the fee assessed, mind you that this amount is after the annual filing threshold is deducted. The filing thresholds are $10,150 for individuals and $20,300 for couples/ families. If per person is used it is $695/ adult, and $347.50 for minors. Both methods have a cap, the percentage cap is not published until 2017, while the per person cap is published at $2,085 for the 2016 tax year. 2015’s cap was $975.

Tax penalties graphic

For people that have coverage part of the year you take 1/12 of the total for each month there was no coverage. There is a short term gap exemption you can file for if coverage is missing for 1-2 months.

For a FPL guidelines go to http://obamacarefacts.com/federal-poverty-level/

For more info on the short term gap in coverage go to https://www.healthcare.gov/exemptions-tool/#/results/2015/details/short-gap

 

Sources:

http://obamacarefacts.com/obamacare-subsidies/

http://obamacarefacts.com/form-8965-health-coverage-exemptions/

https://www.healthcare.gov/health-coverage-exemptions/exemptions-from-the-fee/

https://www.irs.gov/affordable-care-act/individuals-and-families/calculating-an-individual-shared-responsibility-payment

https://www.healthcare.gov/fees/fee-for-not-being-covered/

Posted by: Easy Affordable Accounting | November 22, 2014

Tax Planning Opportunities for Funding IRAs

IRAs are unique in that they are a simple way that the majority of taxpayers can defer tax and shelter income legally. By making some simple sound decisions any taxpayer can benefit from funding an IRA.

Some different approaches to funding an IRA to achieve maximum tax benefit are:

  • Timing the sale of stock or non IRA mutual funds to trigger a long term capital gain or loss then using the proceeds to fund the IRA
  • Creating a zero tax effect on the sale of mutual funds through timing to contribute to the IRA
  • Selling non IRA mutual funds or stocks to generate a $3,000 loss and use the money to fund that years IRA contribution; especially to a traditional IRA where the contribution is non-taxable. This minimizes current tax. Used by taxpayers in a higher tax bracket when they believe their tax bracket will decrease in near future years.
  • For taxpayers currently in low income brackets selling enough long term non-IRA mutual funds and stocks to fund the current year’s contribution amount provides some benefits if the taxpayer intends to be in a higher tax bracket in the future. This is only beneficial for LTCG because of the lower tax rate. It allows the taxpayer to pay taxes in at a current low rate rather than wait and possibly end up paying more in taxes due to a higher tax rate. This is most beneficial for Roth IRAs as the tax is paid at contribution and not at distribution.
  • If a taxpayer lacks disposable funds to contribute to the IRA then timing the sale(s) of non –IRA mutual funds and stock so that the losses cancel out the gains creates a zero tax effect and allows the taxpayer to fund the IRA with the proceeds from the sale(s).

It is important to note that both Long Term Capital Gains (LTCG) and Loses (LTCL) are netted against Short Term Capital Gains (STCG) and Losses (STCL) before determining the Capital Gains tax.

Also of importance to keep in mind is that Capital Gains tax is capped at 15% for high income payers which is substantially lower than the 39.6% for ordinary income these tax payers will pay.

If a net loss exists no matter if it is from LTCL or STCL $3,000 can be used against ordinary income each year until the net loss is exhausted. If a net gain is present in a later year and any net loss remains the gain is offset by the previous net loss. (Only for non-corporate taxpayers)

When timing the buying and selling of stocks it is important not to trigger the wash-sale rules which cause the taxpayer to be denied loss treatment if the purchase and sale are 30 days or closer apart. If the stock was bought less than 30 days before selling for a loss it will trigger the wash sale rule and if the stock is sold at a loss then repurchased within 30 days its will also trigger the wash sale rule. More can be found in Section 1091 of the Internal Revenue Code.

The requirement for property to convert to long term capital gain is for the taxpayer to hold the asset or property for at least one year. STCG are taxed as ordinary income, but LTCG are taxed at preferential lower capital gains rates.

To achieve a zero tax effect a taxpayer can sell both long or short term assets in a ratio create no tax. For example If I sell enough shares to generate $700 in LTCG and get $1250 from the sale, then I sell LTCL to generate ($3700) in capital losses with $4000 generated from the sale of the LTCL then the $1250 + 4000= $5250 to contribute to my IRA and ($3700)-700 = ($3000) loss which can offset $3000 of ordinary income. This nets a zero tax effect and still gets the IRA funded for the year.

It is important for a taxpayer to not make investment decisions based solely on tax outcomes but to weight tax consequences before making an investment decision to determining the best strategy. These income planning events are not limited to the wealthy but can be effectively used by any income range

Posted by: Easy Affordable Accounting | November 21, 2014

Differences between Roth and Traditional IRAs

It is important to start with the differences between the two types of IRAs to understand the consequences of both types for the investor. Below is a simple table to compare and contrast some of the differences between both types of IRAs.

Basic Differences Roth IRA Traditional IRA
Deductions for contributions X
taxable distributions X
Distributions prior to 59 1/2 years old tax/penalty free taxable w/ penalities
Income limits AGI based None
Active participant reduced/eliminated deduction
Minimum Required Distribution (MRD) None 4/1 after turning 70 1/2 years old
MRD penality None 50% of required distribution
Post mortium distributions 12/31 year after owners death to beneficiary
Contributions year of 70 1/2 age attained Acceptble Not allowed

But because the distributions of the Traditional IRA are taxed; the end amount the owner of the IRA receives is the same for both Traditional and ROTH IRAs. Below is a chart to depict the after tax investment for both the Traditional and ROTH IRAs with taxes being taken out before contribution on the ROTH IRA and after distribution for the Traditional IRA.One of the biggest differences is that the contributions to a Traditional IRA are not taxable but the contributions to a ROTH IRA are taxable, so if you have $5,000 to contribute with a Traditional IRA all $5,000 is added to the pot whereas with the ROTH IRA only about $3,500 of the $5,000 is contributed after taxes.

Investment Return 10 Years 15 Years
Traditional IRA Roth IRA Traditional IRA Roth IRA
2%  $              38,324  $        38,324  $              60,527  $        60,527
4%                   42,021            42,021                   70,083            70,083
6%                   46,133            46,133                   81,466            81,466
8%                   50,703            50,703                   95,032            95,032
10%                   55,781            55,781                111,204          111,204

This demonstrates that both types of IRA are economically equivalent, but your personal investment and tax considerations will play into determining which type of IRA is the best fit for you.

For instance if your working tax rate is higher than your retirement tax rate than a Traditional IRA is a better fit to capture a lower tax. However if your working tax rate is lower than your retirement tax rate then the ROTH IRA is a better choice because you pay taxes in the lower income bracket when making contributions but you pay no taxes upon distributions from the IRA.

There are some situations where one type of IRA clearly has benefit over the other based on personal needs. One such example is if both husband and wife (or a single individual) is an active participant in the retirement plan. At a certain income threshold (which changes annually) the taxpayers can no longer take the deduction for contributions to a Traditional IRA. In this set of circumstances a ROTH IRA is clearly a better choice because the distributions are still nontaxable but no matter what, the contributions will be taxable nullifying the benefit of a Traditional IRA.

Also important to note that the use of both types of IRAs are unavailable once certain income thresholds are achieved, these amounts are set annually.

One important factor not to discount is the ability to make IRA conversions. Once an investor sets up an IRA it does not have to stay as either a ROTH or Traditional IRA. A conversion can be done in stages to avoid pushing the taxpayer into a higher income bracket, but this is an all or none conversion either all assets in the IRA are converted or none are converted. The Taxpayer can choose to set up multiple IRAs however to get around the entire conversion issue. There are specific requirements for converting an IRA.

Overall an IRA can be a great way to invest for your retirement. You may want to seek advise from a professional before determining the best type of IRA for you personally.

Posted by: Easy Affordable Accounting | January 21, 2014

Unemployment = taxable income

I am taking some time to write a PA that Unemployment Insurance (or just unemployment, UI) IS TAXABLE income on your 1040! Please do not make the foolish mistake and conveniently leave this income off your return, it will come back to bite you. The fines and penalties you will receive from neglecting to acknowledge UI will be more than the tax refund you receive from ignoring that income. Please remember that the money comes from the government and is tied to your social security number, just like your 1040. It may take a few years to get caught, but eventually you will be caught, it is not worth it. In addition you can be held liable for signing a fraudulent tax return which comes with additional penalties.

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Please do not make this mistake. Report all of your taxable income. The only thing they could get Al Capon for was tax evasion.

Posted by: Easy Affordable Accounting | January 17, 2014

Concise ACA Changes

Concise ACA Changes

This article gives a nice concise breakdown of the changes ACA is/ has brought and when said changes take effect. Click the above link for more information.

Posted by: Easy Affordable Accounting | November 5, 2013

How the Affordable Care Act (obamacare) will affect you personally – part 4

So there are a lot of changes already in place and many more to come but today I will focus on some of the biggest changes to medicare. Medicare is the program that many people pay into with each paycheck, it typically offers health benefits to both seniors and permanently disabled individuals.  Medicare was established in 1966 as a social welfare program (or social insurance) to ensure that individuals over 65 and disabled individuals (including people with certain end stage diseases) can receive medical care. The program works by spreading the cost over society in its entirety rather then by making higher risk patients pay a higher premium. This program has arguably become a backbone of retirement and many baby boomers have based their retirement around this particular benefit.  Counting on it to offset some of their medical expenses and to help ensure medical care and prescriptions are kept at an affordable rate. This is a program that many baby boomers have paid into their entire working life.

The Affordable Care Act is going to change the way benefits are allocated and how much benefits will be available.  It is important for anyone who is affected by medicare to know and understand the upcoming changes.

First there are currently 4 parts to medicare:

1 Part A:  provides hospital care insurance.

2 Part B:  covers doctor’s visits, home health care, and hospice care.

3 Part C:  also known as Medicare Advantage*, this benefit allows seniors to participate in private health plans rather then the government run plans for an additional premium.

4 Part D: is medication coverage, it was added to the program in 2006.**

*Medicare Advantage currently has about 1/4 of the eligible population enrolled. As part of Obamacare the the amount the federal government will subsidize the plans is going to be reduced by 27%. It is predicted that once this cut back occurs benefits will be reduced and some plans are expected to stop offering the plans to seniors all together; resulting in approximately 7.4 million seniors loosing their choice of medicare advantage.

**  Congress chose to close the donut hole in reference to Medicare Part D. Previously part D paid the majority of expenses up to $2,800 per year. After that cap seniors had to pay 100% until the medication expense hit $6,400. Now the government is working to close the gap by providing money to the program via taxes and direct rebates from the pharmaceutical companies. This will lift a great burden off about 5% of the medicare enrollees.

One of the big changes is that as of 2013 there are some new and increased taxes that will affect seniors and the population as a whole. The Medicare Part A Payroll tax is increasing for income earners over $200,000 or $250,000 filing jointly to 2.35% up from 1.45% of gross income, the increase is not earmarked to go to medicare. Another change in 2013 is the medicare tax on “unearned income.” Now if you sell your house or any other investment and make a profit or end up with other forms of “unearned income” like dividends, interest or other sources you will have to pay 3.8% tax on the gain (this is in addition to the capital gains tax you will have to pay for incomes over $200,000 individual/$250,000 married). This is especially important to know and understand because even if you did not earn high earner status amount for the year the profit from any unearned sale contributes to your income for the year and can easily push you into a “high earner” status. As of right now sales of primary residences are exempt up to $500,000 (some publications refer to this as a once in a life time exemption while others just mention the exemption). The other big tax increase is that now the medical tax deduction is raised form 7.5% of your income to 10% of your income, so you can only deduct amounts over 10% of your adjusted gross income resulting in an increase in the amount the government gets to keep.

The Affordable Care Act is going to decrease payment to doctors, hospitals , home-care agencies, hospice and dialysis, to approximately $0.66 for every dollar of care down from $0.91. In addition there are going to be penalties for hospitals which provide care for more then 30 days (includes after the patient is discharged for example physical therapy after a stroke) for medicare recipients and it will cut the support for the medicare advantage plans.  These cuts are going to be simultaneous with a major influx of seniors relying on the plan as the baby boomers have started to hit the magic age of 65.

Click on pie chart for enlarged version to see how the new entitlements are getting paid for.

pie of medicarebig

So what are the effects of the cuts? Fewer doctors and hospitals will be able to accept medicare and cover their expenses, which means the resulting doctor shortage alone may increase the mortality rate.  Right now medicare pays about $0.91 per dollar of care received. Statistically elder patients that receive treatments at hospitals that spend more on their elderly patient care tend to have better outcomes. Researches found that 13,815 CA seniors that were treated at low spending hospitals died needlessly because they would have made a recovery had they received the same extra care provided by higher spending hospitals. The balanced budget act of 1997 has already proven that when hospital payments get cut: nurses loose their jobs, and  patients have a 6-8% less chance of surviving just a heart attack, let alone other medical maladies. With the cuts required of ACA Doctors will only be paid about 1/3 what they receive from private insurance which is even less then they receive from medicaid patients. Finding a doctor will be difficult, but getting a procedure done like a knee replacement or cataract surgery will be may become nearly impossible.

One doctor put it this way “When we went to medical school, people used to die at 66. 67 and 68. Medicare paid for two or three years. We’re the bad guys. We’re responsible for keeping people alive to 85. So we’re now going to try to change health care because people are living too long. It just downs’t make very good sense to me.” Dr. Seymore Cohen, oncologist.

The worst part is the intent of the changes. There is no intent to save medicare.  The changes are being made to pay for persons under 65.  As said by the chief Actuary of Medicare, Richard Foster and the Director of the Congressional Budget office Douglas Elmendorf… {Medicare cuts will not prolong the life of the program, to claim otherwise would be cooking the books.}

Resources

http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/downloads/PPACA_2010-04-22.pdf

http://www.cbo.gov/publication/43471

http://www.cbo.gov/topics/health-care/medicare

“National Health Expendature Projections,” Health Affairs, October 2010

“The long term  impact of medicare payment reductions on patient outcomes,” National bureau of Economic Research, 16859 March 2011

Foster, “Estimated Financial Effects” letter to Jeff Sessions, US Senate January 22, 2010

Posted by: Easy Affordable Accounting | October 30, 2013

How the Affordable Care Act will affect you personally- part 3

Has anyone heard anything about “Cadillac policies”? These are some of the currently most available plans on the market. Most people with one of these insurance plans are pretty happy with the plan. They tend to cover most of what any healthy individual could want or need, at an affordable rate with low to no deductible and low co-pays. Many current companies that offer a health plan to their employees tend to offer this type of insurance; unless the workers were in low wage high turn over fields such as the restaurant business and retail. The low wage employers used to offer Mini-med plans which were cheap and covered only the most basic of health needs. The employers were trying to offer something and the consensus used to be something was better than nothing.

As of September 1, 2010 Min-med plans were discontinued, leaving the low income earners with out insurance provided by employers.

As of January 1, 2014 policies that do not meet the “essential benefits” requirement will be cancelled!

As of January 1, 2018 Cadillac policies will be assessed a 40% tax on the premium, this will likely be passed onto the consumer and may cause this type of policy to be withdrawn from the market.

Many people are starting to get insurance cancellation notices due to the individual mandate which goes into effect on January 1, 2014. This mandate requires all persons to have what the government deems “essential benefits.” Most current affordable plans may lack some of these new required benefits and as such they are no longer allowed under the law. There is an estimate that between 50% and 80% of currently insured (not medicaid or medicare) will lose their coverage next year and be forced into a much higher premium plan.

The reason why the premiums are so much higher is due to the “essential benefits.” One such cost increase is that now all preexisting conditions must be accepted, that means that the healthy must pay for the sick (a benefit for about 5% of the population). Another reason  is that all preventative care must be covered without a co-pay in order to cover that, premiums must rise.  There are no longer caps so while that benefits about 5% of the population as well, 100% of the population must pay for it.

The interesting point about the current slew of insurance cancellations is that President Obama has said since 2009 “if you like your health plan, you will be able to keep your health plan,” he was still saying in 2012, “If [you] already have health insurance, you will keep your health insurance.” But his White House spokesman Jay Carney recently said “What the president said and what everybody said all along is that there are going to be changes brought about by the Affordable Care Act to create minimum standards of coverage, minimum services that every insurance plan has to provide,” Carney said. “So it’s true that there are existing healthcare plans on the individual market that don’t meet those minimum standards and therefore do not qualify for the Affordable Care Act.”

There was a “protection” built in for people who have grandfathered plans. As of March 23, 2010 if you have a plan that has not changed (not the deductible, not the premium not the co-pays) and you have maintained that plan without a break it is considered grandfathered. Unfortunately after ACA passed many plans started to change to prepare for the increased expense of ACA implementation. “Buried in Obamacare regulations from July 2010 is an estimate that because of normal turnover in the individual insurance market, “40 to 67 percent” of customers will not be able to keep their policy. And because many policies will have been changed since the key date, “the percentage of individual market policies losing grandfather status in a given year exceeds the 40 to 67 percent range.”

For some extra reading you can visit this site http://investigations.nbcnews.com/_news/2013/10/28/21213547-obama-admin-knew-millions-could-not-keep-their-health-insurance but there are many more resources out there if you want more information.

Section 1251 of the Affordable Care act details grandfathered plans On June 17th 2010 the ammendment which clarified how grandfathered plans would lose their status was published

http://www.hhs.gov/cciio/regulations/grandfather/factsheet.html

http://mediamatters.org/research/2013/10/29/media-surprised-by-obamacares-effect-on-insuran/196652

 

Posted by: Easy Affordable Accounting | October 28, 2013

How the Affordable Care Act (Obamacare) will affect you personally part 2

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