Moving Expenses Related to a New Job May Be Tax-Deductible

Did you recently move to another city for a new job or because your old job is now at a new location?  A tax break may be coming your way.

How far you moved and the amount of time you spend on the job will have a major impact on whether you qualify for the tax break.  Moves that are only short hops and jobs that are short-term or part-time generally do not qualify.  However, if you can satisfy the distance and time tests, then job-related moving expenses that you incur may be tax-deductible.

You will meet the distance test if your new workplace is at least 50 miles further from your former home than your previous workplace was from that home.  For example, if your old job was 5 miles from your former home, your new job must be at least 55 miles from that home.

The time test requires that you work full-time for at least 39 weeks during the 12 months immediately after your move.  If you are self-employed, the time test requires you to work full-time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after your move.  Even though you have not met the time test by the date that your return is due, you can deduct your moving expenses on your tax return if you expect to meet the 39-week or the 78-week test as required.

If you could have reasonably expected to fulfill the time requirements but was prevented by death, disability, job lay-off, or a transfer by your employer, you may be able to deduct the moving expenses even if you did not meet the time test requirement.

Members of the armed forces do not have to meet these tests if the move was due to a permanent change of station.

Reasonable moving expenses are deductible and include the costs of moving your household goods and personal effects to your new home.  You can also deduct the expenses of traveling to your new home, including lodging costs.

Meals eaten while in transit between your old and new homes are not deductible as moving expenses.  No part of the purchase price of your new home may be deducted as a moving expense.  You cannot claim a moving expense deduction for expenses covered by reimbursements excluded from income.

If you are contemplating a move in the near future, we urge you to call our office for additional details related to your planned move.  Please also remember that wherever you move, with today’s modern means of communications, we can continue to assist you with your tax and financial needs.  

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Selling Your Home

In many instances, individuals who make a profit on the sale of a home may not have to pay a single dime of additional income tax to the IRS if certain criteria are met. 

Generally, a profit is made if the selling price of a home is greater than the price that was paid to purchase the home.  That profit, considered a capital gain, is usually subject to income tax.  However, under certain circumstances, the law allows a taxpayer to exclude all or part of that gain from his or her income – that is, tax may not have to be paid on the profit.

Individuals may be able to exclude up to $250,000 of capital gain on the sale of their home, and married taxpayers filing joint returns may be able to exclude up to $500,000.  The exclusion may be claimed each time that the main home is sold, but generally not more than once every two years.

To qualify, both the ownership and use tests must be met.

• Ownership Test: During the five-year period ending on the date of the sale, the taxpayer must have owned the home for at least two years.

• Use Test: During the five-year period ending on the date of the sale, the taxpayer must have lived in the home as his or her main home for at least two years.

If a taxpayer files a joint return with his or her spouse and both meet the use test, the taxpayer normally will be able to claim the exclusion for married couples even if only one of them meets the ownership test.

If these tests are not met, a reduced amount of the gain realized on the sale of a home may still be excluded.  But the home must have been sold for other specific reasons, such as serious health issues, a change in the place of employment, or certain unforeseen circumstances (such as a divorce or legal separation), natural or man-made disasters resulting in a casualty to the home, or an involuntary conversion of the home.

For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than two years after the date of the other spouse's death.  However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of death, and during the two-year period ending on the date of death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion.

For individuals on qualified official extended duty in the U.S. Armed Services, the Foreign Service, or the intelligence community, the five-year test period may be suspended for up to ten years.  It is considered qualified extended duty when, for more than 90 days or for an indefinite period, that individual is:

• At a duty station that is at least 50 miles from his or her main home, or

• Residing under government orders in government housing.

Intelligence community members must serve on extended duty at a duty station that is located outside the United States.

If you have questions related to your specific circumstances, please give us a call.

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Use Appreciated Stock to Fund Obligations

A taxpayer may consider gifting stock that has appreciated in value to his or her children (over age 23) to help pay for education expenses or to purchase a home, or to parents to help pay for elderly care. By doing this, the tax liability for the gain from selling the stock is shifted to the child or parent, who with proper planning, may pay a lower tax on the profits than the taxpayer. In 2008, each taxpayer can gift up to $12,000 (amount may be different for future years) to any other individual without gift tax liability. Let’s say that you own stock worth $10,000 that was originally purchased for $2,000 some years ago. If you sell that stock and use the $10,000 for a child’s education or parent’s eldercare, the $8,000 profit would have to be reported. If you are in the 25% or higher tax bracket, your capital gains tax would be $1,200. On the other hand, if you gifted the stock to someone and then that individual sold the stock, the individual would report the $8,000 gain on their return. Assuming that the individual is in the 15% tax bracket, their tax could be as low as zero if the stock is sold before 2011. 

This strategy cannot be used for children under the age of 19 or by children who are full-time students and under the age of 24.

Everyone's situation is different and what works for one may not work for another. Please call this office for information pertaining to your particular circumstances.

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Can You Take a Home Office Deduction?

If you plan to run your small business out of your home, you may be tempted to “write-off” many of your household expenses.  But how do you know what is deductible or not?  Generally, expenses related to the rent, purchase, maintenance and repair of a personal residence are not deductible items.

However, if part of the home is used for business purposes, a taxpayer may be able to take a home office deduction.  Expenses that can be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation.

In order to claim a business deduction, you must use part of your home:

• Exclusively and regularly as your principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of your business, or in connection with your trade or business where there is a separate structure not attached to the home; or

• On a regular basis for certain storage use, such as inventory or product samples, as rental property, or as a home daycare facility.

In addition, if the taxpayer works as an employee, this deduction can be claimed only if the regular and exclusive business use of the home is for the convenience of his or her employer and the portion of the home is not rented by the employer.

“Exclusive use” means a specific area of the home is used only for trade or business. “Regular use” means the area is used regularly for trade or business.  Incidental or occasional business use is not considered regular use.

Non-business, profit-seeking endeavors such as investment activities do not qualify for a home office deduction, nor do not-for-profit activities such as hobbies.

Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns.  The family also uses the den for recreation.  The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.
 
The foregoing is only a brief summary of the home office rules.  If you are currently running a business out of your home or anticipate doing so, please call our office for further details.

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Reminder – Special Business Provisions for 2008

This is a reminder that the Economic Stimulus Package that passed earlier this year includes two major tax benefits for small to medium businesses that provide the opportunity to acquire business assets and write-off all or a substantial portion of the cost in the first year.  As the end of the year approaches, you may wish to consider these two benefits as means of reducing current-year profits while expanding your business capabilities.

The first provision increases the limit up to which a business can expense property purchased and placed in service during its 2008 tax year. The second provision provides an additional 50 percent special depreciation allowance for property acquired and placed in service during calendar year 2008.

Unlike the economic stimulus payments that millions of individuals have already received, the tax benefits for businesses are not automatic; businesses must act to take advantage of the new provisions by purchasing qualifying property.

The Joint Committee on Taxation estimates that businesses stand to lower their 2008 tax bills by roughly $45 billion as a result of the two business provisions in the Economic Stimulus Act of 2008; these provisions accelerate into 2008 the tax benefits that otherwise would not have been available until future years.

The following are some details about these two key tax benefits:

Section 179 Expensing

• In general, Section 179 provides that, instead of depreciating property, a business with a sufficiently small amount of annual property purchases may choose to expense the cost of the property.  For taxable years beginning in 2008, the Economic Stimulus Act increased the Section 179 expensing limit, allowing more property to be currently expensed.

• The Economic Stimulus Act increased the maximum Section 179 expense deduction to $250,000 for qualified Section 179 property that is placed in service in tax years that begin in 2008. This is a 95 percent increase from the previous limitation of $128,000.

• The Economic Stimulus Act also increased the total amount of qualifying property a taxpayer may purchase before the Section 179 expensing limit begins to be reduced.  Under the new law, the $250,000 deduction amount is reduced only when a business acquires more than $800,000 of qualifying property.  Prior to changes made by the Economic Stimulus Act, the reduction began when a business acquired more than $510,000 of qualifying property.

• The new law does not alter the Section 179 expense limit for sport utility vehicles, which remains at $25,000.

• More than 4.5 million small businesses claimed the Section 179 expense deduction for tax year 2005, the most recent year for which this information is available.  These businesses placed almost $44 billion of Section 179 property in service in 2005 and claimed related deductions of approximately $41 billion (data derived from Depreciation and Amortization forms filed with Forms 1040).

Special Depreciation Allowance

• The Economic Stimulus Act also provided a 50 percent special depreciation allowance for property acquired and placed in service during 2008.  Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over several years.  It is an annual allowance for the wear and tear, deterioration or obsolescence of the property.

• Under the new law, a taxpayer is entitled to depreciate 50 percent of the adjusted basis (after subtracting any Section 179 deduction taken on that property) of qualified property during the year the property is placed in service.  For example, if the taxpayer purchased and placed in service in 2008 a single piece of property at a cost of $450,000 that qualified for Section 179 expensing and the 50 percent special depreciation allowance, $250,000 of the cost could be immediately expensed (under Section 179) and the remaining $200,000 of adjusted basis would be available for the 50 percent special depreciation allowance.  The taxpayer would also be permitted to take a regular depreciation on the remaining $100,000 of adjusted basis during that year.  This is similar to the special depreciation allowance that was previously available for certain property placed in service generally before January 1, 2005, often referred to as a “bonus depreciation.”

• The types of property that qualify for the 50 percent special depreciation allowance are Section 168 property with a recovery period of 20 years or less, off-the-shelf computer software, water utility property and qualified leasehold improvement property.

• To qualify for the 50 percent special depreciation allowance, a taxpayer must meet all of the following tests:

o The taxpayer must have acquired the property after December 31, 2007, and before January 1, 2009.  If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify for the special depreciation allowance.

o The property must be placed in service before January 1, 2009 (before January 1, 2010, for certain transportation property and certain property with a long productions period).

o The original use of the property must begin with the taxpayer after December 31, 2007.  In other words, the property must be “new” property.

• Prior to the enactment of the Economic Stimulus Act, the total depreciation amount (including the Section 179 deduction) a business could deduct for a passenger automobile was $2,960.  The Economic Stimulus Act increased this limitation by $8,000.  Therefore, the maximum limit is increased to $10,960 for automobiles for which the special bonus depreciation allowance is claimed.

• Prior to the enactment of the Economic Stimulus Act, the total depreciation amount (including the Section 179 deduction) a business could deduct for a truck or van used in a business and first placed in service in 2008 was $3,160.  The Economic Stimulus Act increased this limitation by $8,000.  The new maximum limit is increased to $11,160 for trucks and vans for which the special bonus depreciation is claimed.

To make the most out of these provisions, we suggest that you take action soon.  It may not be possible or wise to make last minute acquisitions near the end of the year.  If you would like to see how these special 2008 provisions might benefit your business, please call us for an appointment.

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Home Energy Credits Expire At the End of 2008

Unless Congress extends the tax provision, 2008 may be your last opportunity to take advantage of the tax credit for residential solar and fuel cell credits.  Since they are scheduled to expire at the end of 2008, you will need to act soon if you are going green.  

• Residential solar equipment - For property placed in service before the end of 2008, a credit is allowed for 30% of the cost of qualifying solar water heaters, up to $2,000 per year, and a credit subject to the same 30%/$2,000 limit also applies for photovoltaic (electricity-generating) solar panels.  The foregoing applies to the taxpayer’s first or second homes.

• Fuel cell equipment - In addition, a 30% credit is allowed for fuel cell property, up to $500 for each half-kilowatt of capacity installed per year on the taxpayer’s principal residence.

Labor costs for onsite installation and for piping and wiring connections are qualifying costs for these credits.  However, the credits do not apply to equipment used to heat swimming pools or hot tubs.

None of the credits can be taken until the energy credit item’s installation is complete.  Under this rule, if the installation is not completed by December 31, 2007, it will not qualify for the credits.

One cautionary note: the credits do not apply against the Alternative Minimum Tax (AMT), which means a taxpayer could lose all or a portion of the tax benefit from the credits.  

Check with our office first to verify the tax benefits before signing on with a contractor or salesperson.  Be sure to contact us so we can determine the benefits based on your particular tax situation.  And remember, these credits expire at the end of 2008, and the installation must be completed by the end of 2008.  Don’t wait too long!

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AMT Relief Provisions

The alternative minimum tax (AMT) is affecting more individuals with each passing year, and the comprehensive reform that Congress has promised still remains to be seen.  Instead, they have had a history of “patching” the AMT late in the year, and we expect a patch for 2008 before year-end.

Generally, the AMT is a separately computed tax that must be used if it exceeds the regular tax computation.  The AMT is a danger to taxpayers because many tax breaks (“preferences”) allowed for purposes of calculating regular taxes are disallowed for AMT purposes, and some types of income exempt from regular tax are added back to arrive at the tentative minimum tax.

As part of the Housing Assistance Act of 2008 and in an effort to help stimulate the sagging housing industry, Congress has provided some specialized AMT relief measures for individuals and businesses:

• Current tax rules provide an income tax credit for building low-income housing and another income tax credit for rehabilitating older buildings.  However, without the relief provided under the Housing Assistance Act, these tax credits cannot be used to offset the AMT.  Under this new law, the low-income housing credit claimed for buildings put into service after 2007, and the rehabilitation credit for post-2007 expenses, can both be used to offset the AMT.

• Interest on certain tax-exempt private activity bonds is taxed for AMT purposes even though it is tax-free for regular tax purposes.  The new law exempts from the AMT three special classes of bonds issued after July 30, 2008: (1) certain exempt facility bonds used at least 95% for qualifying residential rental projects; (2) qualifying mortgage bonds; and (3) qualifying veterans' mortgage bonds.

If you have any questions related to the new AMT provisions or the AMT itself, please give our office a call.

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Big Brother Will Begin Monitoring Merchants' Credit Card Transactions

In an effort to track down unreported small business income and increase income-reporting compliance, beginning in 2010, banks will be required to file an information return with the IRS reporting the total dollar amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and taxpayer identification number (TIN). Similar reporting also will be required for third party network transactions (e.g., those facilitating online sales), with exceptions for certain small merchants. 

We will provide you with more information on this new law as soon as the IRS provides further details.

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Tax Implications of Debt Relief

With the down turn in the economy, many taxpayers find themselves in debt over their heads and end up settling their debts for less than what is owed, or have their property repossessed or foreclosed upon.  All of those actions will result in the individual being relieved of debt.  In the eyes of the tax code, debt relief is treated as income, and the banks, lenders, etc., are required to issue a 1099-C reporting the debt relief income attributable to the taxpayer.  That debt relief income is taxable to the taxpayer unless he or she qualifies for relief provided under provisions of the tax code.

Taxpayers can exclude debt relief income from their tax return by using what is called the “insolvent taxpayer exclusion.”  Under this provision of the law, a taxpayer may exclude debt relief income to the extent their liabilities exceed their assets.  In addition, when adding up the assets, those assets protected under his or her state’s bankruptcy law can be excluded.  If a taxpayer’s home is foreclosed upon, he or she may also be able to exclude home acquisition debt relief income under a special provision that applies for tax years 2007 through 2009.

Please call our office if you have questions regarding debt relief and its tax implications on your specific situation.

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It's Not Too Late to Claim Your Economic Stimulus Payment

It is not too late to file a return to claim an economic stimulus payment. The IRS urges people to file by October 15 to ensure that they receive a payment prior to year's end. It can take up to eight weeks for the IRS to process the return and issue the payment.

For people who have no tax liability or no tax filing requirement, there is a minimum payment of $300 ($600 for married couples), plus the $300 for each qualifying child. To be eligible for the minimum payment, individuals must have at least $3,000 in qualifying income.

Qualifying income includes any combination of earned income, nontaxable combat pay and certain benefit payments from Social Security, Veterans Affairs and Railroad Retirement. 

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16 Bank Reconciliation Tips and Tricks

Although it may seem like drudgery, reconciling your bank account is a critical accounting task that you should carry out each month. Doing so helps ensure the integrity of your financial reports, since most of your accounting transactions ultimately affect cash in some fashion. Further, QuickBooks is a much more powerful tool for your business if you use it to its fullest extent.  Most likely you’ve been reconciling your bank account all along, so in this article we’ll discuss the tricks and techniques you need to know to streamline the process.

If you’re new to QuickBooks, you start the bank reconciliation process by having your bank statement in hand, and then choose Banking, and then Reconcile. The Reconciliation screen shown in Figure 1 appears. In most cases, you enter the ending balance from your bank statement, add any interest or fees, and then click Continue. You mark transactions as cleared, as shown in Figure 2, and then click Reconcile Now. However, it’s not always that simple, so read on to learn how to sail over any hurdles that may appear.

Figure 1: The QuickBooks Begin Reconciliation window.

Figure 2: The QuickBooks Reconcile window.

1. Locate discrepancies
As shown in Figure 1, click the Locate Discrepancies button to display the Locate Discrepancies window shown in Figure 3. From there, click the Discrepancy Report button to display the report, as shown in Figure 4. This identifies any edited or deleted transactions that may affect your reconciliation.

Figure 3: QuickBooks can help you identify edited transactions that may disrupt your reconciliation.

Figure 4: Ideally your discrepancy report should never have any transactions listed.


 
2. Confirm your beginning balance
Your beginning balance should always tie to your bank statement, but if it doesn’t, click the Undo Last Reconciliation button until you reach a point where the beginning balance matches your bank statement. You must then redo the reconciliations to bring your books current and resolve the discrepancy.

3. Don't forget interest and fees
Be sure to record any interest and fees in the window shown in Figure 1. Alternatively you can record deposit and check transactions to record interest and fees, or the very savvy can use journal entries. If you go this route, be sure to debit cash and credit interest income for interest earnings or credit cash and debit bank charges for any fees incurred. 

4. Double-check your ending balance
Always double-check your ending balance input when you start the reconciliation. A simple transposition or other error here can make it appear that you’ve missed a transaction.

5. Look for transpositions
Sometimes you’ll mark all transactions as cleared, but still have a difference. In such cases, divide the difference by 9—if it divides out evenly, then there's a good chance that you transposed a number on a transaction. For instance, a $63 dollar difference divided by 9 returns 7 could mean that a transaction was entered incorrectly. As shown in Figure 5, you can right-click on an amount, and then choose Edit Transaction to fix the error.

Figure 5: Right-click on an amount and choose Edit Transaction to correct a mistake.

6. Pick a side, any side
Don’t mix and match deposits and withdrawals. Reconcile your Deposits and Other Credits first, and then confirm that the total items you marked cleared ties to the amount shown on the Reconcile window. Then reconcile Checks and Payments — doing one side a time limits your search area for missing or misposted transactions.
 
7. Clear the decks
If you get tangled up in a reconciliation, click the Unmark All button shown in Figure 2 to start over.
 
8. Enter missing transactions
You can add missing transactions without closing the reconciliation window. Simply choose a command from the menu across the top or from the Home screen. Saved transactions will instantly appear in the reconciliation window.
 
9. Check undeposited funds
Choose Banking, and then Make Deposits. If the window shown in Figure 6 appears, you must complete the deposit process for these transactions.

Figure 6: Undeposited funds can pose problems with your reconciliation.

10. Hide unnecessary transactions
Click the Hide Transactions after the Statement’s End Date check box shown in Figure 2 to have fewer transactions to sift through.

11. Void old transactions
Old, uncleared transactions can linger on forever—locate such transactions within your register, choose Edit, and then Void. The banking system generally considers checks to be stale after six months. Such lingering transactions are often duplicates of a transaction that cleared.

12. Clear voided transactions
Always clear transactions with a zero balance as these won’t affect your reconciliation, but do clutter up the Reconcile window.

13. Bank online
Some institutions allow you to synchronize your records with your online statement. This involves a matching process that automatically clears transactions that match, and makes it easy to quickly post new transactions.

14. Use your keyboard
Rather than using your mouse to click on each transaction that you wish to clear, use the arrow keys on your keyboard to move up and down. Press the spacebar to toggle a transaction as cleared or uncleared.

15. Walk away and come back later
If you just can't seem to get the unreconciled difference down to zero, the best thing to do is click the Leave button shown in Figure 2, and then resume the reconciliation tomorrow. A fresh eye can do wonders.

16. Reconcile More Frequently
If you can access your bank account online, you can reconcile your bank statement as often as you wish. Consider reconciling accounts with heavy volume weekly or twice a month.

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