Reporting Gambling Winnings

You may know when to hold ‘em and when to fold ‘em, but do you know how and when to report ‘em? Whether you are playing cards or the slots, it is important to know the rules about reporting gambling winnings and loses.

Here are seven things the IRS wants you to know about reporting what Lady Luck has sent your way.

1. All gambling winnings are fully taxable. Even if your total losses exceed your total winnings, the gross winnings must be reported as taxable income.

2. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, poker tournaments and casinos. It includes cash winnings as well as the fair market value of prizes, such as cars and trips.

3. A payer is required to issue you a Form W-2G if you receive certain gambling winnings or if you have gambling winnings subject to federal income tax withholding.

4. Even if a W-2G is not issued, all gambling winnings must be reported as taxable income. Therefore, you may be required to pay an estimated tax on the gambling winnings.

5. You must report your gambling winnings on page one of Form 1040.

6. If you itemize your deductions on Schedule A of Form 1040, you can deduct gambling losses you had during the year, but only up to the amount of your winnings. Your losses are not subject to the 2-percent of adjusted gross income limitation.

7. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both winnings and losses.

Please give our office a call (619-294-4286) or visit our website www.sdbizadv.com and click on APPOINTMENTS if you would like more information on paying the estimated tax on your winnings, or on keeping the proper records to substantiate your losses.

Thank you.

Mortgage Debt Forgiveness

The IRS has posted tax facts for struggling homeowners as part of its Tax Tips series. These tax tips are designed to familiarize taxpayers with special relief that is available if their mortgage debt is partially or entirely forgiven.

Background. When a lender forgives any portion of a mortgage loan, cancellation of debt (COD) income generally results. The amount that is included for COD purposes is equal to the difference between the amount of the debt being cancelled and the amount used to satisfy the debt. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.

Exclusion for Discharge of Qualified Principal Residence Indebtedness. Cancellation of debt income is excludable from income if it is incurred with respect to the taxpayer’s principal residence for debts forgiven after January 1, 2007 and before January 1, 2013. This exclusion of discharged qualified residence indebtedness is limited to $2 million ($1 million for married taxpayers filing separately).

Principal Residence. Your home must be owned and used by you as a principal residence for 2 years or more during a 5-year period to qualify as a principal residence. In addition, pertinent facts such as your place of employment and mailing address serve to support or refute whether a home is your principal residence.

Acquisition Indebtedness. Acquisition indebtedness must be secured by the principal residence, and incurred in the acquisition, construction, or substantial improvement of the residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only to the extent that the amount of refinancing does not exceed the debt being paid off.

Non-Qualifying Events. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax-relief provision. In addition, the exclusion is not available if the discharge of indebtedness is on account of services performed for the lender, or if the discharge is not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. 

Reporting Guidelines. If your mortgage debt is forgiven, you must apply the excluded amount to reduce the basis of your principal residence, but not below zero. Your lender should report the amount of debt forgiven and the fair market value of any property given up through foreclosure on Form 1099-C, Cancellation of Debt. The exclusion of part or all of your COD income should be reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) and attached to your Form 1040.

Exclusion for Home Affordable Modification Program (HAMP) Payments. HAMP is a key component of the U.S. Government’s Homeowner Affordability and Stability Plan, which helps at-risk homeowners modify their mortgages to avoid foreclosure. “Pay-for-Performance-Success-Payments” under HAMP reduce the principal balance on your mortgage, and are excludable from income if you make timely payments on your modified loan.

We would be happy to discuss your principal residence debt in order to maximize your tax relief. Please call our office (619-294-4286) at your earliest convenience to arrange an appointment or go to our website at www.sdbizadv.com and click on APPOINTMENTS.

Thank you.

Look ahead to change in Roth IRA rules

Taxpayers with adjusted gross incomes over $100,000 have had to sit on the sidelines when it comes to converting their traditional IRA to a Roth IRA. But a provision from a 2006 tax law goes into effect January 1, 2010, repealing the income limit for converting to a Roth.

 Why would you want to convert? A major attraction of Roth IRAs is that distributions are tax-free, provided you meet the age and holding period rules. And there are no required annual distributions once you reach age 70½. In contrast, you’ll generally pay tax at ordinary income rates on distributions from a traditional IRA.

With a Roth IRA, you can enjoy tax-free growth and distributions whenever you want throughout your retirement years, or you can leave the Roth for heirs to receive tax-free distributions.

 When a taxpayer converts a traditional deductible IRA to a Roth IRA, the amount converted is added to taxable income and is taxed at ordinary income rates. There is a special incentive to do a Roth conversion next year.

If you convert in 2010, you can report half of the income on your 2011 tax return and the remaining half on your 2012 tax return. If you choose, you can report all of the conversion income on your 2010 return.

 It’s important to weigh the pros and cons of a Roth conversion in your individual situation and to look at steps you can still take in 2009 to capitalize on the new rule. For a review of how you might benefit, give us a call now at 619-294-4286 and schedule a tax planning appointment.

The IRS launches major drive to inform taxpayers

The IRS is going all out to promote taxpayer awareness of the tax benefits in the “Recovery Act” passed earlier this year. The Service is using YouTube videos, iTunes podcasts, radio public service announcements, and informational flyers to remind both individual and business taxpayers about these tax breaks, many of which will expire soon.

 INDIVIDUALS. Among these limited-time tax benefits for individuals:

 * First-time homebuyer credit of up to $8,000 for homes purchased before December 1, 2009.

 * Expanded credit of up to $1,500 for energy-efficient home improvements done in 2009 and 2010.

 * Above-the-line 2009 deduction for state and local sales and excise taxes paid on up to $49,500 of the purchase price of a new car, light truck, motor home, or motorcycle.

 * American opportunity tax credit of up to $2,500 annually for qualifying higher education expenses for 2009 and 2010.

 BUSINESSES.  mong the tax breaks the IRS wants to remind businesses about:

 * The $250,000 limit for immediately expensing qualified new or used equipment purchases in 2009.

 * 50% bonus depreciation on purchases of new equipment,  software, and qualified leasehold improvements made in 2009.

 * Credit on employment tax returns for providing the 65% COBRA health insurance subsidy to former employees.

 * Lower requirement for estimated tax payments for those whose 2008 income is less than $500,000 and more than 50% of income is from a small business.

 For more information and planning assistance in using these and other available tax breaks, give us a call soon at 619-294-4286 or visit our website www.sdbizadv.com.

Use Tax Breaks to Offset College Expenses

The IRS has published facts about the tax deduction for tuition and fees that is available to help parents and students pay for post-secondary education. If you’re facing college expenses this fall, here’s what the IRS wants you to know.

* The deduction is up to $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less and joint filers with an AGI of $130,000 or less. If   income exceeds these amounts, the deduction drops to a maximum of $2,000 for an AGI up to $80,000 for single filers and $160,000 for joint filers. No deduction is allowed over these income thresholds.

* The deduction is “above the line,” so you don’t have to itemize to benefit.

* You can’t take the deduction if your filing status is married filing separately.

* You can’t take the deduction if you are claimed, or can be claimed, as a dependent on someone else’s tax return.

* You can’t claim the deduction if you or anyone else claims the American Opportunity or lifetime learning credit for the same student in the same year.

* The deduction can’t be based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds, tax-free savings bond interest, or employer-provided education assistance. This also applies to expenses paid with a tax-exempt distribution from a qualified tuition plan, except for expenses paid with the portion of the distribution that is a return of your contribution to the plan.

There are other tax breaks for college expenses, all with requirements and restrictions of their own. As you can see, the rules make planning necessary if you want to maximize your tax benefit for college costs. For help in identifying and utilizing the deductions and credits most beneficial in your situation, give us a call now.

New Car Tax Break Still Available!

The “cash for clunkers” program ended abruptly on Monday, August 24. The program, which provided up to $4,500 to those who traded in their old cars for more energy-efficient new ones, was so successful that the $3 billion in government funding was depleted long before the original November 1 deadline.

If you’re in the market for a new car, the IRS wants you to know there is still a tax break that may get you motivated to make your purchase this year.

Recent legislation provides an above-the-line tax deduction for the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motorcycle, or motor home. The IRS issued a clarification stating that other fees or taxes based on the vehicle’s sales price may be deductible in states that have no sales tax.

To qualify for the deduction on your 2009 tax return, the vehicle must have been purchased after February 16, 2009, and before January 1, 2010. The deduction is phased out for taxpayers whose adjusted gross income falls between $125,000 and $135,000 (single) or $250,000 and $260,000 (joint).

For more information or planning assistance, give us a call.

Keeping Good Records Reduces Stress At Tax Time

From the Internal Revenue Service  (www.irs.gov)

Summertime Tax Tip 2009-23

Although most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized.  Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.

Here are a few things the IRS wants you to know about recordkeeping.

Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.

Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• IRS Publication 552, Recordkeeping for Individuals (PDF)
• IRS Publication 583, Starting a Business and Keeping Records (PDF)
• IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)

Should you drain your IRA for a tax loss?

After the recent dismal performance of the stock market, you may be looking for ways to recoup any market losses you might have. Perhaps you’ve even read that you can deduct IRA losses. Before you rush to cash out your IRAs, you should understand what’s involved.

 While investment losses inside IRAs are typically not deductible, in some cases you can take a write-off when you close accounts you funded with after-tax money.

You could have a deductible loss if you close all your traditional IRAs, and the amount you receive is less than your total nondeductible contributions. Likewise, if you close all your Roth IRAs and the amount you receive is less than your Roth contributions, you might have a deductible loss.

 IRA losses are a miscellaneous itemized deduction subject to an income limitation. You can deduct losses only to the extent that your total miscellaneous deductions, including IRA losses, exceed 2% of your income. Before you close your IRAs, it’s important to estimate how much of your IRA loss will be limited by the 2% income threshold. Also keep in mind that, depending on how you reinvest the money, you could lose the opportunity to shelter any future earnings from tax.   

The rules in this area are complex, and planning is essential to get the best tax results. Contact our office for assistance.

Employee vs. Independent Contractor – Ten Tips for Business Owners

This is taken from the IRS Summertime Tax Tip 2009-20 (www.irs.gov).

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you 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.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.
2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
6. If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then your workers are probably independent contractors.
7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
8. Workers can avoid higher tax bills and lost benefits if they know their proper status.
9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.
10. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link.  Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).

Summer wedding? Don’t forget taxes!

Summertime is often wedding time. If you or someone in your family got married this summer (or is planning a wedding soon), remember to take care of a few taxing details.

* If your address changes, send a change of address to   the IRS, your bank and broker, and any current-year employers. Then your W-2s, year-end tax information, and IRS correspondence will get to you.

* Check your withholding for 2009 to see whether marriage makes changes necessary. The marriage penalty has not been completely eliminated, and you might find yourself facing a big tax bill and penalties if you don’t take care of this matter.

* If your name changes, notify the Social Security Administration.

* Update your will and other estate planning documents, and review beneficiary designations on IRAs, 401(k)s, and life insurance policies.

Many of these details need to be taken care of following other events too, such as divorce or a new baby. For more information or assistance with any tax concern, give us a call.