If you are ready to purchase your dream home, a careful tax analysis about different types of mortgages must be done. If you want to know about big tax write-off a mortgage can give you, you should learn how mortgages work and then sit down with a tax advisor or an accountant and determined whether a 30-year mortgage is better or worse for you than the 15-year mortgage. This task might be confusing and you need to make sure you have a clear picture and help from your tax accountant. You can use mortgage calculators to compute the monthly payments on a 30 years or 15 years mortgages. This tool will help you budget your personal expenses and you will see how much the monthly payment will be on your new mortgage.

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The interest that you pay on your home mortgage loans is a very important factor in your financial tax strategy. The good thing about mortgage loan is that mortgage interest may be tax deductible. This is one of the popular tax deductions that you, the taxpayers, look forward to. However, you must adhere to some rules so as to get the benefit of mortgage interest tax deduction. As the mortgage holder, you must fulfill requirements of filling out form 1040 with a schedule A. Schedule A allows you to itemize or in other words deduct your mortgage interest. The person, who is filing for the tax deduction, must be the owner of the property. No you don’t need to be an owner of the mortgage; you need to be an owner of the property. (It is not required in every case for you to have a true debtor-creditor relationship with your lender to take the mortgage interest deduction. Title 26 Code of Federal Regulations section 1.163-1(b) provides, quote “interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”) The mortgage interest paid paid on your primary or secondary homes is reported by the lender on form 1098.

There are several types of interest on mortgages which may be tax deductible. It include: the interest amount that you paid on loans to purchase a home, home equity lines of credit, and construction loans. However, there is a limit to the amount of deduction on some loans i.e. Home Equity Line of Credit. Interest that you pay on your third and fourth homes is not tax deductible.

Mortgage interest payment is very popular tool to receive a significant tax benefit. There are mainly two types of mortgage interest payments which are used for tax deduction, acquisition debt and equity mortgage. In the acquisition debt, the mortgage interest is paid to purchase a new home, build a new home or to remodel a home. Interests on these types of mortgages qualify for tax deductions. Equity mortgages are the mortgages where you use your equity in your home so as to obtain the equity mortgage loan. Per current tax regulations you can deduct the first 1.1 million in qualified home mortgage indebtedness and/or 100K in home equity line of credit.

 

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There are two types of interest in a partnership: Capital Interest and Profits Interest.  Both Capital Interest and Profit Interest are determined based on the contribution of property to the partnership and or services performed for the partnership.  The Tax Court has described a Capital Interest is any interest that would entitle the holder to receive a share of partnership assets upon liquidation of the partnership.  Profit Interest is any interest that would not entitle the holder to receive assets on an immediate liquidation but that does give the partner the right to share in future partnership profits or earnings (Mark IV Pictures Inc. v. Commissioner, T.C. Memo 1990-571), Reg. 1.721-1(b)(1) and Reg. 1.704-1(e)(1)(v) respectively.

If a partner receives an interest in the partnership in exchange for services, is beginning basis the partnership interest is the amount of income required to be reported for the transaction.  Under Reg. 1.721-1(b)(1), service provided is not a property that will satisfy the regulation for non taxable transaction.  Therefore, the LLC is deemed to have paid the individual partner for services in cash and the individual partner in return, contributed an equal amount of value (cash) to the partnership in acquisition of an interest in the partnership.  

When services are contributed to a partnership, the tax consequences will depend on the type of partnership interest received by the partner, i.e. whether or not that interest is restricted to the service partner in some way.  If non-restricted interest is received by the service partner, the fair market value of the interest is taxable to the service partner as ordinary income.  The LLC deducts or capitalizes that interest, based on the type of services rendered.  For example, if the service rendered by the partner was related to a capital project e.g. computer programmer created a code that will be used for a software, this type of service must be capitalized by the LLC and cannot be deducted as ordinary expense.

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If you have a small business like a sole proprietorship or an independent contractor, or you operate as Single Member LLC, you generally would consider yourself to be a self-employed.  For tax purposes, you must file IRS Schedule C, Profit or Loss From Business or Schedule C-EZ, Net Profit From Business with your individual income tax return Form 1040.  Here are some important facts for you to know:

If you are self-employed, your net earnings (after business deductions) are subject to Self-employment Tax. This tax consist of Social Security tax and Medicare tax.  Currently, for 2010, you would pay 15.3% of SE tax (subject to Social Security maximum cap).

Half of the SE Tax can be deducted above the line, meaning, this deduction reduces your AGI (Adjusted Gross Income)

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A taxpayer who trades securities, reports his/her trades on schedule D of form 1040. He/she is subject to the $3,000 annual limitation that applies to net realized capital losses. Also, securities are subject to the Wash Sales rules (in a nut-shell; loses will not be recognized for tax purposes if you sell a security at a loss and within 30 days you buy identical security). However, if you devote a great deal of time (see later what this means) trading stock, bonds, options or any other security, you might be able to qualify as a Trader for tax purposes.

This is accomplished by electing IRS Code Sec 475(f), also know as mark-to-market (M2M). By doing so, the Trader elects to mark his/her stock holdings to market at the end of the year. Under this method, all gains and losses are treated as ordinary income or loss. All the securities held as of December 31st are deemed to be sold at the year-end market value. If you were profitable, the realized capital gains from trades are not subject to Self-Employment tax, under IRC Sec 1402 (a)(3)(A). So by making this IRC Sec 475(f) election, a Trader avoids the $3,000 limitation on net capital losses and also he/she is not subject to the Wash Sale rules. If you made mark-to-market election you should report all gains and loses in Part II of Form 4797, instead of Schedule D. Once this election is made, it become irrevocable and cannot be changed without prior approval from the IRS. With mark-to-market, you elect to treat open positions as being sold on the last day of the year at Fair Market Value and immediately re-acquired at FMV in first day of the following year.

After making this election, you also should change the method of accounting by filing Form 3115 Application for Change in Accounting Method as outlined in the Revenue Procedure 2008-52. The 3115 should be attached to the 1040 for the first effective year, and a copy should be sent to the national office. See "Special Rules for Traders in Securities" in Publication 550. Because you are changing the accounting method you need to figur out the Sec. 481 (a) adjustment. This adjustment can be an income or deduction and should be reported on Schedule C and labeled "Section 481(c) Adjustment."

Example: At the end of 2010 you held shares with $26,000 in cost basis (your cost or purchase price) but value of $28,000 (the FMV of those shares at the end of the year). You made the mark-to-market election effective beginning in 2011. On 1/1/2011 the FMV of those shares is $32,000. You will report $4,000 of capital gain (32,000-28,000), in addition, you have also a Sec. 481(a) adjustment of $6,000 (32,000-26,000) in the first year you made the change. The Sec. 481(a) adjustment is the unrealized gain or loss in a trader’s trading account at the end of the prior year. In other words, it is the difference between the cost of the securities owned at the end of the prior year and the market value on January 1st of the following year.

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If you are thinking or already attending a college, university or a graduate school, then you should know about several educational tax credits that you can claim on your personal income tax return.  If you are a dependent, your parent(s) can claim those credits on their personal income tax return. This article addresses The American Opportunity Credit.

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If you send your kid(s) to a summer camp(s) or day care facility, you might be able to deduct those costs by claiming dependent care expense tax credit.  Because you and your spouse work or are looking for work, you must arrange to care for your child(ren) under 13 years of age during the school vacation.  So camp might be a good tax deduction for you.  You can claim the child and dependent care expense credit on your personal income tax return.  Here are few facts that you should know about this tax credit.

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Do you have an IRA or an employer sponsored retirement plan such as: 401-K, 403-B, 457, DB, Profit Sharing Plan, or other qualified retirement plans?  Did you purchase a non-qualified annuity to protect your retirement assets?  If the answer is yes, then you should know what would happen tax-wise, if you take the money out early (taking premature distribution)?  In most cases withdrawing funds early out of a retirement plan or an IRA before 59 ½, is called “an early distribution”. 

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Capital Gains and Losses are recognized when you sell or dispose of an asset (property, stock, bonds, other securities, collectables, etc.)  Here are some facts you should know about capital gains and losses.

• When you sell a capital asset, you should know the original price.  It also referred to as “basis”.  The difference between the amounts you sold it for and your basis is the capital gain or capital loss.  So let’s say you purchased a stock XYZ for $25 (basis) and sold it for $45, you now have $20 of capital gain ($45-$25)

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If you have already filed your individual or business income tax returns and discovered that you made a mistake, or you forgot to add a dependent, or your accountant or a tax advisor missed a tax deduction, or reported wrong taxable income, or you need to make any other adjustments to the taxes; you should file an amended tax return Form 1040X*.  Amending taxes is a complex issue and it’s recommended to seek professional tax help from an accountant, CPA or a tax advisor to help you with the tax changes or corrections.  Here are few important facts you should know about correcting your already filed personal taxes.

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If you are living and working abroad you may be entitled to the Foreign Earned Income Exclusion.  The foreign earned income exclusion is adjusted annually for inflation.  For 2009, you can exclude from the U.S. taxes the maximum annual amount of up to $91,400 per qualifying person.  The foreign exclusion is not a simple tax matter and it’s recommended to seek professional help from an accountant, CPA or a tax adviser.  You must have documentation that you can produce to evidence your qualification for the foreign earned income exclusion.  Here are few important facts that you should know:

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 This material was prepared by TaxBizPro, LLC ©: 2010 Have you spent money to care for your child(ren), or a dependent, or perhaps you are ...

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 This material was prepared by TaxBizPro, LLC ©: 2010 If you would like to contribute to a qualified retirement plans such as 401-K, 403-B,...

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If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim a special tax relief and exclude the debt forgiven from your income.  Here are some facts on this.

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  This material was prepared by TaxBizPro, LLC ©: 2010 Many clients ask us what to do if their employer did not provide them with the ...

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This material was prepared by TaxBizPro, LLC ©: 2010  Do you need to obtain a copy of filed federal tax return from the...

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 This material was prepared by TaxBizPro, LLC ©: 2010  If you have children, consider these important tax benefits available to you. ...

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This material was prepared by TaxBizPro, LLC ©: 2009  If you are filing an income tax return, you must know which filing status applies to ...

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This material was prepared by TaxBizPro, LLC ©: 2009 There are three individual tax return forms you can use to file your Federal Income Taxes. ...

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The following are the amounts that are exempt from Federal Estate Tax.

In 2005: First $1,500,000 in assets
In 2006-2008: First $2,000,000 in assets
In 2009: First $3,500,000 in assets
In 2010: First 1,000,000 in assets
In 2011-?: First 1,000,000 in assets

If your assets (Real Estate, IRAs, Life Insurance, Savings Accounts, CD, Stocks, Bonds and any other Investments or Properties) exceed the exemption amounts above, then for every dollar more than the exemption, the Uncle Sam will take following persentages:

Federal Estate Tax Rates
2005: 47 %
2006: 46 %
2007- 2009: 45 %
2010: No Estate Tax
2011-?: 55%

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Many business owners are curious and interested to know about different ways to save money on taxes.  This article will introduce you to a legal way of reducing businesses or corporate taxable income by paying your minor children. The payments to minor children have to be reasonable.  The minor child needs to be compensated for the services actually performed as a bona fide employee of your business or a corporation.  This tax deduction might be appropriate for some business owners.   Minor child is referred to a child between 7 to 18 years of age.  Each state has different guidance and laws about the definition of minor, so please consult your legal advisor.

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The corporation does not recognize gain when it distributes cash to its shareholders.  Also when a shareholder in exchange for cash, redeems a corporation stock, the corporation recognizes no gain. (Sec. 311(a)).  On the other hand, if a corporation distributes property in connection to stock redemption, this may result in corporate-level capital gain and/or ordinary income.

Generally a corporation will recognize capital gains when it distributes capital assets or Sec 1231 assets.  So what happens if a corporation (C Corp or S Corp) distributes property or stock other than cash to a departing shareholder?  The corporation will recognized gain (not loss) if the fair market value (FMV) of the property exceeds its adjusted cost basis (Sec. 311(b)(1)).  The depreciation recapture of certain capital assets will trigger ordinary income and/or special unrecaptured sec. 1250 gain that is subject to 25% capital gain tax.  Basically the non-cash distribution is treated as if the corporation (C Corp or S Corp) had sold that property to the exiting shareholder.  This taxable transaction is reported on Form 1099-DIV and Form 5452.

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This material is copyrighted and any distribution without permission would be in violation of copyright laws. This material was written and prepared ...

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If you were thinking of getting additional office help and wanted to hire someone on a part-time of full-time basis you need to understand the difference between employees and independent contractors. There is a major difference between employees and independent contractors when it comes to how much tax you as an employer has to pay and withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

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Here are some important facts you need to know before deducting charitable donations/contributions. Note that in order to deduct charitable contr...

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Religious organization can provide to clergy/ministers non-taxable benefits referred to as parsonage allowance. It’s done as part of total compensation paid to the minister. 

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With today’s technology many people can run and operate a business out of their homes. Many clients may be able to take a home office tax de...

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Generally, you cannot deduct amounts that you approximate or estimate. You should keep proper records to prove your expenses or have sufficient evidence that will support your own statement. You must generally prepare a written record for it to be considered Proper. This is because written evidence is more reliable than oral evidence alone. However, if you prepare a record on a computer, it is considered a proper record.

What Are Proper Records?  You should keep the proof you need in a log, account book, diary, statement of expense, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.

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Many clients ask me what they can deduct and what they can’t deduct? So I am providing the following lists of NON deductible expenses: Expenses ...

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Many clients ask me what they can deduct and what they can’t deduct? So I am providing lists of possible deductions. The lists are only mean...

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