Editor’s Note: Ask Me (Almost) Anything is intended to be a local, community-oriented version of Reddit’s Ask Me Anything discussion threads. See below for discussion guidelines.
Tax time is just around the corner. If you have questions about tax preparation or taxes in general — you’re in luck. A local CPA will be answering your questions in the comments section until 4:30 this afternoon.
Certified Public Accountant Bobby Grohs started Arlington-based Tax Matters LLC in 1998. A University of Maryland grad, Grohs specializes in “comprehensive tax and consulting services for clients ranging from individual taxpayers, small businesses and nonprofits located throughout the greater Washington metropolitan area.”
Grohs will do his best to answer reader tax questions in the time allotted. If you’d like to reach him after the discussion is over, head to the Tax Matters website, email [email protected] or call 703-593-7391.
Please note that Mr. Grohs may not be able to answer every question asked. Also please note that in addition to our normal comment policy, we ask that questions and comments be of a civil tone. We welcome tough questions and critical comments, but anything of a mean-spirited nature will be removed.
Advice is provided on an “as-is” basis. The views and opinions expressed in the comments are those of their respective authors and not necessarily those of ARLnow.com.
What are some of the tax implications of owning an investment property?
On a similar note, what are some of the tax implications of moving out of a primary residence, e.g. a condo that one owns, renting it to a tenant, and then (a) buying or (b) renting a 2nd property? Can one still write off the mortgage interest of that original property? Any other things to consider?
You can deduct the mortgage interest on a rental. Note, on a rental property all expenses associated with running & maintaining the rental are deducted to offset the rent income received. You cannot deduct the mortgage interest and taxes as itemized deductions. Lot’s of things to consider, just briefly, you can depreciate the cost of the property over 27.5 years. A loss can be deducted from rental activities if you meet certain active participation rules and you income fall within the phaseout requirements.
You “can” depreciate? If/when you sell the property the IRS is going to adjust your cost basis to reflect depreciation. ie, if you don’t depreciate and you’ll get hosed when you sell.
Several depending on the use of the property. For example, if you own a mixed use rental property (i.e. a vacation home that is also rented) all rental income is reported and expenses are allocated based on the ratio of rental use/personal use. You also likely will be required to file a state tax return if the property is located in a state different from where you reside. There are obviously more implications but I don’t enough time to address this.
I refi’d my house and paid aprox $6k in mortgage insurance premiums at closing. Those charges weren’t reflected in my 1098 statements, for whatever reason. Is there any reason I cannot deduct those premiums (I am under the phase-out limit). Thanks!
Typically mortgage insurance premiums are not reflected on Form 1098 when paid at closing of a home purchase. However you are still entitled to deduct the premiums assuming you income is not above phaseout limits.
If I have a full-time job through which I contribute the maximum allowed to a 401(k), but I also have a side business, can I contribute some or all of my business profit to a tax-deferred SEP IRA?
Yes you can also contribute to a SEP-IRA for a side business even if you have already contributed the maximum to a 401K through your employer.
We also have a question: how will the “fiscal cliff” deal impact your average Arlington taxpayer?
Many of the bush era tax cuts were extended through 2013 for your average Arlington but there were some important changes as well. Here is a brief list of changes that may affect many in the DC area.:
Income tax rates made permanent. For 2013 and beyond, the top individual income tax bracket will increase from 35% to 39.6% for taxpayers with taxable income of $400,000 or more ($450,000 or more Married Filing Jointly). Taxpayers with income below the thresholds will not see an increase in tax rates.
Capital gain rates: Beginning in 2013, the maximum capital gains tax will increase from 15% to 20% for taxpayers with taxable income of $400,000 or more ($450,000 or more Married Filing Jointly).
Payroll tax holiday: The 2% reduction in Social Security tax for employees and self-employed individuals expired at the end of 2012 and will not be extended for 2013. An employee’s Social Security portion of FICA will increase from 4.2% to 6.2%, with a corresponding increase in self-employment tax.
Other taxes: The taxes contained in the new legislation are in addition to the 0.9% increase in Medicare tax on earned income and the 3.8% increase in Medicare tax for unearned income for taxpayers with earned/unearned income in excess of $250,000 (MFJ), $125,000 (MFS), and $200,000 (any other filing status) that were implemented as part of the Affordable Care Act of 2010.
Alternative Minimum Tax (AMT)
The AMT “patch” is applied retroactively to January 1, 2012, and made permanent. For 2012, the AMT exemption amounts will be $50,600 for individuals and $78,750 for married couples. The bill also allows nonrefundable personal credits to offset AMT.
Extenders
Child Tax Credit: The $1,000 amount for each child for the Child Tax Credit has been extended permanently.
Extenders
Child Tax Credit: The $1,000 amount for each child for the Child Tax Credit has been extended permanently.
American Opportunity Credit: The partially-refundable American Opportunity Credit has been extended for five years.
State and local general sales taxes: The deduction on Schedule A, Form 1040, for state and local general sales taxes has been extended through 2013.
Educator expenses: The adjustment to income for educator expenses for primary and secondary teachers has been extended through 2013.
Qualified principal residence indebtedness: The exclusion from income for qualified principal residence indebtedness has been extended through 2013.
Mortgage insurance premiums: The deduction for mortgage insurance premiums as mortgage interest on Schedule A, Form 1040, has been extended through 2013.
Tuition and fees: The adjustment to income for tuition and fees has been extended through 2013.
Charitable distribution of IRAs: The provision allowing tax-free distributions from IRAs for charitable purposes has been extended through 2013.
AGI Phaseouts
Phaseout on itemized deductions: Beginning in 2013, itemized deductions will begin to phase out for taxpayers with AGI of $250,000 or more Single, $275,000 or more Head of Household, or $300,000 or more Married Filing Jointly.
Phaseout of personal exemptions: Beginning in 2013, personal exemptions will begin to phase out for taxpayers with AGI of $250,000 or more Single, $275,000 or more Head of Household, or $300,000 or more Married Filing Jointly.
This is more of a question for next year, but I like to plan ahead: My fiancee and I are getting married in June of this year and we plan on moving from Arlington to DC around the same time. Our jobs and pretty much every other financial matter will stay the same (other than combining our finances).
When it comes to 2013 taxes, we’re not sure how to file. Separate single returns? Married? Married filing separately on the same return? There seem to be many options and I’m not sure how a marriage + moving to a different “state” play into how we should file.
Thanks!
When you are married you only have two choices, married filing joint or married filing separately. Moving to VA has not impact on this. Note – it is rare that couples using the married filing separately will result in tax savings. Most competent tax software can tell you which is more beneficial. Just make sure you tell you employer when you move so VA tax is withheld from you pay.
I closed my small, unprofitable business. Am I supposed to file something with the IRS to say it’s closed and will there be any negative repercussions if I don’t?
It depends, how was your business structured? Were you the only owner?
Can federal employees leverage sequestration to minimize next year’s tax burden?
We are planing on putting an addition on our house (primary residence). We’ll be using a construction loan to fund a majority of the project and coming out-of-pocket on some smaller items.
1. Is any or all of our construction expense (financed and/or out-of-pocket) eligible for a deduction?
2. Is the interest paid and/or closing costs of our interest only construction loan deductible?
3. Will our subsequent refi closing costs (at the completion of our construction) be deductible?
Thanks in advance! Very much appreciated.
No construction costs are deductible on a personal residence. However, you should keep records because they will add to the cost basis which will be useful when selling the home.
Mortgage interest on the construction loan is deductible. Most closing costs are not deductible, however, some are such as points, real estate taxes paid (or refunded, which reduces the taxes allowed as a deduction. Best to have a qualified tax professional review the closing document (Form HUD-1) to ensure proper treatment.
Thank you for your time and the info Bobby.
I know I can carry over excess capital losses year to year indefinitely, but how do I do that? Where is that balance stored?
Capital losses not used in the current year are carried over indefinitely and reported on Schedule D. Note you can deduct up to $3,000 of capital losses against ordinary income each year.
My wife and I got married last year, and this is our first joint return. Last year, we both itemized on our individual returns. She got a refund from Virginia. For this year’s return, we’re not sure how to calculate the taxable portion of her Virginia refund. Do we base it solely on her individual return from last year? Do we combine the numbers from our individual returns, as if we had filed a joint return last year?
You based this on your wife’s individual return.
My wife and I made a nice contribution to our kid’s 529; but we have to file a 709 using gift-splitting and the 5-year rule. This doesn’t seem like it should be that hard, but the instructions are a little confusing as to how exactly to fill this out, so I need some help (I saw Obama do this on his released tax return, but the form/instruction has changed a bit since then). Is there any software that can accomplish this? We tried going to a chain tax preparation, but the effort was a bit discouraging. Do we need to bite the bullet and hire an accountant?
You should probably hire an accountant. There really is no commercial software available for cheap to help you prepare a gift tax return. Please contact me for a assistance and I can give you a free estimate.
if you sell a house at a loss that was your primary residence how is that loss treated differently if it was a rental property. wouldn’t the property then be a capital asset and the capital loss could be carried over indefinitely?
No loss is allowed on the sale of a primary residence. Of course the gain may be subject to tax depending on the facts. You can deduct a loss on the sale of a rental property in the year sold.
only in the year sold? I thought it would be a capital asset and the capital loss would then be able to be offset against future capital gains…
That is not true for a rental property. You deduct a loss from the sale of a rental property in the year sold.
I received 2 cancelation of debt statements for my use when filing my taxes. One is or a partial amount and one is for the full amount of cancelation. Do i put both in my tax return and which one will i have to actually pay taxes on?
In general, if you are liable to pay tax on a debt that is canceled. There are certain exclusions and this gets fairly complex, but here are exclusions:
Debt canceled in a Title 11 bankruptcy case
Debt canceled during insolvency
Cancellation of qualified farm indebtedness
Cancellation of qualified real property business indebtedness
Cancellation of qualified principal residence indebtedness
The exclusion allows taxpayers to exclude up to $2,000,000 ($1,000,000 if married filing separately) of “qualified principal residence indebtedness.”
Help! Each year, we get a bigger and bigger hit from the AMT. Adjusted gross income this year (married filing jointly) is about $300,000; and the added AMT penalty is $7,200 (plus losing some deductions, I think, based on my reading of our Turbo Tax file).
Anything we can do for 2013 to lessen the penalty? less income (or do the tax changes help)? thanks
posted this below by mistake:
Ah the most asked question I get from my clients, finally! There are few things you can do:
Contribute to your 401K or employer provided retirement plan, as much as possible. If you have children in day/nanny care max about the dependent care (up to $5000). These two items could lower your taxable income by up to $40,000 for a married couple with at least once child. This will help lower your taxable income.
For a taxpayer with a more basic tax situation there really is not much planning you can do to avoid AMT other than what I have noted above. Or course less income helps, or a lot more so you are above the AMT range.
I was divorced in 2012. My ex-wife and I also sold the house before the divorce was finalized in 2012. The mortgage was only in my name, hence I am the only one that gets a 1098. The title of the hosue was in both of our names. The mortgage itnerest and property taxes were paid from a joint account. My ex-wife is fine with me talking the whole deduction. Is this allowed since the mortgage was just in my name? She would ened up filing with just the standard deduction.
You can take the entire mortgage interest and taxes on your tax return.
After purchasing a house for the first time last year, I’m realizing that my husband and I may need to seek the advice of a tax professional when doing our taxes this year. We obviously will be itemizing since we can now deduct mortage interest, but our tax return should be fairly simple (other than the purchase) since we both only have one job each – how much should I expect to pay someone to file our Federal and VA taxes?
That varies based on experience, certifications (i.e. CPA) and the size of the firm. You could expect to pay me $250-$300 to prepare a less complex tax return like the one you describe. A small firm would probably charges $500-$600.
Ah the most asked question I get from my clients, finally! There are few things you can do:
Contribute to your 401K or employer provided retirement plan, as much as possible. If you have children in day/nanny care max about the dependent care (up to $5000). These two items could lower your taxable income by up to $40,000 for a married couple with at least once child. This will help lower your taxable income.
For a taxpayer with a more basic tax situation there really is not much planning you can do to avoid AMT other than what I have noted above. Or course less income helps, or a lot more so you are above the AMT range.
Hi!
I’m working through this year’s filing and I am eligible for the Energy Efficiency tax credit based on an ENERGY STAR AC unit I had installed in 2012. As of right now, TurboTax is telling me that I cannot efile my return because the IRS cannot accept an electronic version of the required form. Do you have any idea if the IRS will, at some point, update their systems and accept my efiling, or should I just print it and mail it now and be done with it?
Thanks!
Per the IRS you can e-file form 5695 beginning in March (no specific date is provided).
My wife and I have a beach property that we rent out to others and depreciate. Just having put on a new roof and also added central A/C in 2012, in what category of property should they be depreciated, e.g., 5yr., 7yr., or.. ? Thanks for your answer.
Roof 27.5 yrs
A/C 27.5 yrs
Hi – if I contribute to a 529 plan before April 15, 2013, can the amount be deducted on my 2012 tax return? ($4000 per year per child is what I heard). I was wondering if it only could be taken in the year I contribute for the first year.
thanks!
sorry it can only be deducted on your state tax return in the year the contribution is made.
thanks! that’s what I thought.
As an Independent Contractor receiving a 1099-MISC Box 7 income, besides having them pay an S Corporation (they wont based on current laws, must be assigned to my social #) is there any way to reduce the SE tax burden besides your typical business expenses and (SEP) IRA contributions that I should be considering?
First – SEP-IRA contributions do not reduce the SE tax. It’s only reduces ordinary income.
Beside capturing all eligible expenses you are entitled to, there is not much else. Some clients of mine have two jobs, one employed and other other self-employed. The W-2 job exceeds the social security threshold for SE tax, thus, the business income is only subject to medicare taxes at for medicare 2.9%. So get another job!
I asked this on quora but didn’t get an answer. Would an individual pay more taxes over their lifetime with a Roth IRA or a traditional IRA?
With Roth, I’d be paying taxes for 30+ years before I retire, but I enjoy tax free distributions. With traditional, I don’t pay taxes until I retire. Assuming I retire at 65 and live till 85, I’d only be paying taxes for 20 years. Additionally, even if I ended up in the 35% tax bracket prior to retirement, I can choose to receive distributions that will put me in the 28% tax bracket.
Not a simple question to answer. Assuming all else is the same, it would generally makes sense to fund a Roth if you believe tax rates will be higher in the future than currently. A traditional IRA generally makes sense if tax rates will be the lower in the future than currently.
Am I correct in saying that the Arlington County Vehicle tax that I paid in 2012 is tax deductible? The Turbo Tax software does not list VA as a state for which vehicle taxes are deductible but the tax is based on the estimated value of the vehicle so it seems like it should be.
Correct, however, only the tax is deductible. Make sure you don’t include any decal fees.
I started a real estate rental company in 2012 and purchased a property. This purchase is what initially got the company started and on its feet. Could the down payment on the rental property be considered an initial capital expenditure and be tax deductible? Obviously other properties purchased down the road could not have this consideration but since this was the one that got the ball rolling and started the company could it be deducted?
The down payment is part of the cost basis of the property which is depreciated. There is no separate treatment of a down payment.
I received a notice from the IRS that I had an error in my IRA deduction calc. I paid the extra tax and interest . I then found a corresponding change elsewhere that means the total tax I paid originally was correct. I guess I need to file an am ended return. Which form do I file to get the interest back?
Report all tax, interest and penalties paid on Form 1040X page 2.
I received a 1099 in the mail for about $4,000 for some contractor work I did in addition to my normal 9-5 job. I had several expenses to earn this $4,000 in extra income – purchased a new laptop, suits. I was told to file this under something called schedule C? is this correct and if I can come up with 4k in expenses, will the taxes be offset? thanks
Correct – schedule C. I doubt you can deduct the cost of suits. If you can come up with $4K in expenses then yes you will offset the $4K income.
I received a class action settlement check for a past position for time not payed. With the check, there were two forms, W-2 for wages & 1099 for attorney fees, etc. The directions also state it may be possible to deduct the attorney fees. Can you tell me what needs to be done to deduct the attorney fees? How does the 2% deduction rule apply?
The legal fees are subject to the 2% of AGI threshold and are deducted on Schedule A Line 22.
Just to make sure I got this straight, say your AGI is 54,000 and the attorney fees are 2,600, I put 1,586.00 on Line 22?
Input the total amount paid on line 23. The 2% limit will be reflected on line 26.
Two questions related to my wife’s self-employment income (Sole Proprieter and we report on Schedule C):
1) Least year her client furnished a 1099 that matched her income. This year they included $8,000 in expense reimbursements that were made to her for work travel. When questioned, they said this is how the IRS is now requiring in, This is NOT income, but how do I indicate that to the IRS?
2) I understand Income Tax preparation is subject to the AGI threshold to be deductible. But can it be treated as a business expense on Schedule C (even if most of the “tax preparation” work is related to personal taxes, not necessarily self-employment)?
1) They should not include reimbursements on 1099, however, since they did, reflect the $8,000 as “reimbursed expenses included in 1099” as an other expense at the bottom of Schedule C.
2) Yes it can – I allocate a portion of the tax prep fee to Schedule C.
Thanks for doing this, Bobby.
My wife and I have always filed jointly, but she had some large out-of-pocket medical expenses in 2012 and I’m fairly certain that because of the 7.5% cutoff, we’d be better off filing separately. My question is about how we deduct expenses like mortgage interest. It was paid out of a joint account, so does that mean we should (have to?) split it evenly?
You might be better of filing separately. I am almost certain you can split the mortgage any way you like.
What does it mean when we read (as above) that itemized deducations and personal exemptions *BEGIN* to phase out at certain incomes? Where can i get the details? My spouse and I both work multiple jobs and I have a side consulting business (4 W2s and a whole bunch of 1099s), with a total combined income of about $360K to $420K each year. But we normally have over $80K in deductions. We don’t want to work 75 hours a week only to have LESS in the bank than if we only worked 50.
The re-instituted phase-out limitation on itemized deductions cuts the amount of deductions you can take by 3% of adjusted gross income (AGI) above the specified thresholds but you cannot lose more than 80% of the affected itemized deductions. This means that tax payers whose AGI is greater than the specified income thresholds won’t be able to take all of the deductions associated with items like home mortgage interest, charitable donations and state/local income tax payments. While a lot of itemized deductions are affected by the 2013 itemized deduction limitation, some such as medical expenses, investment interest and gambling losses are not subject to the limit.
For an example of the above consider a married couple with income of $400,000 who file their tax return with $50,000 in itemized deductions. This couple is $100,000 above the itemized deduction AGI threshold ($400,000 – $300,000) meaning that their allowed deductions would be reduced by about $3,000 to $47,000—potentially adding to their tax liability by about $1,000.
Personal Exemptions
You are allowed to deduct the personal exemption for yourself, your spouse, and your eligible dependents. The IRS estimated the personal exemption was worth $3,800 on average under 2012 rules. But with the new Personal Exemption Phase-out (PEP) the value of each personal exemption is reduced from its full value by 2 percent for each $2,500 above the above specified income thresholds. So using the example of the above couple, the couple would see a $2000 cut [(0.02*2500) * ($100,000/$2500)) in their personal exemption claims.
Phew!
And thanks for providing a very valuable afternoon of community service today.
You might be better of filing separately. I am almost certain you can split the mortgage any way you like.
Hi Bobby, in 2012 I received a tax form that listed my state income tax return from 2011 and instructed me that I had to report this as income for my 2012 return. I had not received that form prior to 2012 and did no receive on this year. Where did that come from, and why I have to report a tax return as income? I don’t view it as income, it’s money that was returned that I should not have had to pay in the first place.
State tax refunds may be taxable on your federal return in the year received. They are not taxable on your state return. For example a 2011 state tax return is filed in 2012, thus the refund is received and potentially taxable in 2012. Depending on if you itemize deductions and are subject to AMT will generally determine if the refund is taxable or not.
Thank you for a great conversation, everybody. We’re closing the comments at this time.
By popular demand, Bobby will be joining us for another tax chat next month.