IRS Summertime Tax Tips
August 2, 2015 11:00 PM
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Vacation Home Rentals
If your clients rent a home to others, they usually must report the rental income on their tax returns. However, they may not have to report the rent they get if the rental period is short and they use the property as their home. If the property is used as a home and they rent it out fewer than 15 days per year, they do not have to report the rental income. In this case they can deduct their qualified expenses on Schedule A. In most cases, they can deduct their rental expenses. If the property is used as a home, the rental expense deduction is limited; that is, it cant be more than the rent they received. Rental income may also be subject to Net Investment Income Tax.
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Summer Weddings
Clients preparing for summer nuptials should make sure to do some tax planning. A few steps taken now can make tax time easier next year. All names and Social Security numbers on the tax return must match their Social Security Administration records. If the wife or husband changes their name, they should report it to the SSA by filing Form SS-5, Application for a Social Security Card. When taxpayers get married, they should consider a change of income tax withholding. To do that, they should give their employer a new Form W-4, Employee's Withholding Allowance Certificate. The withholding rate for married people is lower than for those who are single. Taxpayers should also let the IRS know if they move. To do that, file Form 8822, Change of Address, with the IRS. If they are married as of Dec. 31, that is their marital status for the entire year for tax purposes. Since spouses can choose to file their federal tax return jointly or separately each year, its a good idea to figure the tax both ways so they can choose the status that results in the least amount of tax.
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Gambling Income on Vacation
If any of your clients bet on horses, play cards or pull the slots, their gambling winnings are taxable. They must report them on their tax returns. Income from gambling includes winnings from the lottery, horse racing and casinos. It also includes cash and non-cash prizes. Taxpayers must report the fair market value of non-cash prizes like cars and trips. If they win, the payer may give them a Form W-2G, Certain Gambling Winnings. The payer also sends a copy of the W-2G to the IRS. The payer must issue the form based on the type of gambling, the amount won and other factors. Winners will also get a form W-2G if the payer must withhold income tax from what is won. Taxpayers normally report their winnings for the year on their tax return as Other Income. They must report all gambling winnings as income. This is true even if they dont receive a Form W-2G. They can deduct their gambling losses on Schedule A, Itemized Deductions. The amount they can deduct is limited to the amount of the gambling income reported on their return. They should keep track of wins and losses. This includes keeping items such as a gambling log or diary, receipts, statements or tickets.
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Back-to-School Tax Credits
If a client, their spouse or a dependent is heading off to college, there are several important facts they should know about education tax credits. The American Opportunity Tax Credit can be up to $2,500 annually for an eligible student. This credit applies for the first four years of higher education. Forty percent of the AOTC is refundable. That means the taxpayer may be able to get up to $1,000 of the credit as a refund, even if they dont owe any taxes. With the Lifetime Learning Credit, they may be able to claim a tax credit of up to $2,000 on their federal tax return. There is no limit on the number of years this credit can be claimed for an eligible student. They can claim only one type of education credit per student on their federal tax return each year. If more than one student in a family qualifies for a credit in the same year, taxpayers can claim a different credit for each student. For example, they can claim the AOTC for one student and claim the LLC for the other student. They may include qualified expenses to figure their credit. This may include amounts paid for tuition, fees and other related expenses for an eligible student. In most cases, taxpayers should receive Form 1098-T, Tuition Statement, from the school. This form reports qualified expenses to the IRS and to the taxpayer.
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Day Camps
Day camps are common during the summer months. Many parents pay for them for their children while they work or look for work. If this applies to your clients, their costs may qualify for a federal tax credit that can lower their taxes. To qualify for the Child and Dependent Care Credit, their expenses must be for the care of one or more qualifying persons. A dependent child or children under age 13 usually qualify. The taxpayers expenses for care must be work-related. This means they must pay for the care so they can work or look for work. This rule also applies to a spouse if the taxpayers file a joint return. Spouses meet this rule during any month they are a full-time student. They also meet it if theyre physically or mentally incapable of self-care. The taxpayer must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Their spouse must also have earned income if they file jointly. Spouses are treated as having earned income for any month they are a full-time student or incapable of self-care. This rule also applies to the taxpayer if they file a joint return.
Generally, married couples must file a joint return. An individual can still take the credit, however, if they are legally separated or living apart from their spouse. They may qualify for it whether they pay for care at home, at a daycare facility or at a day camp. The credit is worth between 20 and 35 percent of their allowable expenses. The percentage depends on the amount of their income. The total expense they can use in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
Taxpayers may not include the cost of certain types of care for the tax credit, including overnight camps or summer school tutoring costs; care provided by their spouse or child who is under age 19 at the end of the year; and care given by a person you can claim as your dependent. Taxpayers should keep all their receipts and records for when they file their tax return next year. They will need the name, address and taxpayer identification number of the care provider. They must report this information when they claim the credit on Form 2441, Child and Dependent Care Expenses. Special rules apply if they get dependent care benefits from their employer. This credit is not just a summer tax benefit. They may be able to claim it for qualifying care that they pay for at any time during the year.
Generally, married couples must file a joint return. An individual can still take the credit, however, if they are legally separated or living apart from their spouse. They may qualify for it whether they pay for care at home, at a daycare facility or at a day camp. The credit is worth between 20 and 35 percent of their allowable expenses. The percentage depends on the amount of their income. The total expense they can use in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.
Taxpayers may not include the cost of certain types of care for the tax credit, including overnight camps or summer school tutoring costs; care provided by their spouse or child who is under age 19 at the end of the year; and care given by a person you can claim as your dependent. Taxpayers should keep all their receipts and records for when they file their tax return next year. They will need the name, address and taxpayer identification number of the care provider. They must report this information when they claim the credit on Form 2441, Child and Dependent Care Expenses. Special rules apply if they get dependent care benefits from their employer. This credit is not just a summer tax benefit. They may be able to claim it for qualifying care that they pay for at any time during the year.
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Job-Hunting Expenses
Many people change their job in the summer. If a client looks for a new job in the same line of work, they may be able to deduct some of their job-hunting costs. Their expenses must be for a job search in their current line of work. They cant deduct expenses for a job search in a new occupation. They can deduct the cost of preparing and mailing a résumé. If they travel to look for a new job, they may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. They may still be able to deduct some costs if looking for a job is not the main purpose of the trip. They can deduct some job placement agency fees they pay to look for a job, but they cant deduct job search expenses if theyre looking for a job for the first time. They also cant deduct job search expenses if there was a long break between the end of their last job and the time they began looking for a new one. Reimbursed expenses are not deductible. They usually deduct their job search expenses on Schedule A, Itemized Deductions. They will claim them as a miscellaneous deduction. They can deduct the total miscellaneous deductions that are more than 2 percent of their adjusted gross income.
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Traveling for Charity Work
Do any of your clients plan to travel while doing charity work this summer? Some travel expenses may help lower their taxes if they itemize deductions when they file next year. They need to volunteer to work for a qualified organization, however. They should ask the charity about its tax-exempt status. They can also visit IRS.gov and use the Select Check tool to see if the group is qualified. They may be able to deduct unreimbursed travel expenses they pay while serving as a volunteer. They cant deduct the value of their time or services, however. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if they enjoy the trip. They can deduct their travel expenses if the work is real and substantial throughout the trip. They cant deduct expenses if they only have nominal duties or do not have any duties for significant parts of the trip. Deductible travel expenses may include air, rail and bus transportation; car expenses; lodging costs; the cost of meals; taxi fares or other transportation costs between the airport or station and your hotel.
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Students with Summer Jobs
Students often get a job in the summer. If its a first job it gives them a chance to learn about work and paying tax. Money earned doing work for others is taxable. Some work may count as self-employment. These can be jobs like baby-sitting or lawn care. Students should keep good records of their income and expenses related to their work. They may be able to deduct (subtract) those costs from their income on their tax return. A deduction can cut taxes. All tip income is taxable. They should keep a daily log to report them. They must report $20 or more in cash tips in any one month to your employer. And they must report all of their yearly tips on their tax return. They may earn too little from the summer job to owe income tax, but their employer usually must withhold Social Security and Medicare taxes from their pay. If theyre self-employed, they may have to pay Social Security and Medicare taxes themselves. Special rules apply to newspaper carriers or distributors. If they meet certain conditions, they are self-employed. If they do not meet those conditions, and are under age 18, they may be exempt from social security and Medicare taxes. If theyre in ROTC, active duty pay, such as pay they get for summer camp, is taxable. A subsistence allowance they get while in advanced training is not taxable.
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Deducting Moving Expenses
Summertime is a popular season for moving to a new home. If any of your clients move because of a job, they may be able to deduct the cost of the move on your tax return. They may also be able to deduct their costs if they move to start a new job or to work at the same job in a new location. In order to deduct moving expenses, the move must meet three requirements:
1. The move must closely relate to the start of work. Generally, moving expenses can be deducted within one year of the date a taxpayer starts work at a new job location. Additional rules apply to this requirement.
2. The move must meet the distance test. The new main job location must be at least 50 miles farther from the taxpayers old home than their previous job location. For example, if the old job was three miles from a clients former home, their new job must be at least 53 miles from their old home.
3. The move must meet the time test. After the move, a taxpayer must work full-time at their new job for at least 39 weeks the first year. If theyre self-employed, they must meet this test and work full-time for a total of at least 78 weeks during the first two years at the new job site. If their income tax return is due before theyve met this test, they can still deduct moving expenses if they expect to meet it.
If taxpayers can legitimately claim this deduction, they can deduct transportation and lodging expenses for themselves and household members while moving from their old home to their new home. But they cannot deduct travel meal costs. They can also deduct the cost of packing, crating and shipping their things. They may be able to include the cost of storing and insuring these items while in transit. They can deduct the cost of connecting or disconnecting utilities. However, they cannot deduct as moving expenses any part of the purchase price of your new home, the cost of selling a home or the cost of entering into or breaking a lease. If their employer later pays them for the cost of a move that they already deducted on their tax return, they may need to include the payment as income. They report any taxable amount on their tax return in the year they get the payment. When moving, taxpayers should be sure to update their address with the IRS on Form 8822 and the U.S. Post Office. If they purchased health insurance coverage from the Health Insurance Marketplace, they may receive advance payment of the premium tax credit in 2014. It is important that they report changes in circumstances, such as a move to a new address, to their marketplace.
1. The move must closely relate to the start of work. Generally, moving expenses can be deducted within one year of the date a taxpayer starts work at a new job location. Additional rules apply to this requirement.
2. The move must meet the distance test. The new main job location must be at least 50 miles farther from the taxpayers old home than their previous job location. For example, if the old job was three miles from a clients former home, their new job must be at least 53 miles from their old home.
3. The move must meet the time test. After the move, a taxpayer must work full-time at their new job for at least 39 weeks the first year. If theyre self-employed, they must meet this test and work full-time for a total of at least 78 weeks during the first two years at the new job site. If their income tax return is due before theyve met this test, they can still deduct moving expenses if they expect to meet it.
If taxpayers can legitimately claim this deduction, they can deduct transportation and lodging expenses for themselves and household members while moving from their old home to their new home. But they cannot deduct travel meal costs. They can also deduct the cost of packing, crating and shipping their things. They may be able to include the cost of storing and insuring these items while in transit. They can deduct the cost of connecting or disconnecting utilities. However, they cannot deduct as moving expenses any part of the purchase price of your new home, the cost of selling a home or the cost of entering into or breaking a lease. If their employer later pays them for the cost of a move that they already deducted on their tax return, they may need to include the payment as income. They report any taxable amount on their tax return in the year they get the payment. When moving, taxpayers should be sure to update their address with the IRS on Form 8822 and the U.S. Post Office. If they purchased health insurance coverage from the Health Insurance Marketplace, they may receive advance payment of the premium tax credit in 2014. It is important that they report changes in circumstances, such as a move to a new address, to their marketplace.
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Dont Wait Until October 15 Tax Extension Deadline to File
October 15 is the last day to file 2014 tax returns for most taxpayers who requested an automatic six-month extension. However, they can file any time before Oct. 15 if they have all the required tax documents. If your clients are among the nearly 13 million taxpayers who asked for more time to file your federal tax return this year, they dont need to wait until Oct. 15 extension deadline to file their returns. You can file their taxes during the summer if they are ready.
