DIVIDENDS May 2011
What's Next?
Taxes are filed and your organizational resolutions have started anew.
Summer is just around the corner and along the Gulf Coast we are thinking about long, sunny days, and the sand and the surf. We are also thinking about the air conditioning bills and paying for vacation.
Maybe you are thinking about renting out your vacation home during peak season. Perhaps the end of the school year has you wondering how you are going to pay for college.
We know your finances don’t take a summer vacation. We are here for you and can answer all of your tax and accounting questions.
2011 Planning: Rental Real Estate Activity Compliance
Being a landlord can seem like easy money...
Rental real estate offers tremendous tax advantages and opportunity for tax planning. Taxpayers can depreciate property, deduct interest on borrowed capital, exchange rather than sell properties to defer tax on gains, use installment sales to defer tax on sales, and profit from preferential rates on long-term capital gains. Most importantly, you can generate or monthly income, with depreciation deductions that effectively turn the actual income into tax losses.
Deductions Are Not Unlimited
Real estate income and loss is generally considered passive income and loss for tax purposes. Taxpayers generally cannot use passive activity losses (PALs) to offset ordinary income from employment, self-employment, interest and dividends, or pensions and annuities. The rental real estate loss allowance and real estate professional status are two important exceptions to this rule.
As one exception to the PAL rules, taxpayers with adjusted gross incomes of $150,000 or less can claim a rental real estate loss allowance of up to $25,000 for property they actively manage. Active management does not require regular, continuous, or substantial involvement. However, it does require that the taxpayer own at least 10% of the property. Also, to qualify for the exception, married taxpayers must file jointly.
The second exception allows real estate professionals not to treat their rental activity as a passive activity - losses are not limited to passive income. This exception requires material participation by the taxpayer which is demonstrated by meeting one of seven tests. These tests are complex and include the number of hours of participation and the facts and circumstances of the participation in the activity.
Vacation homes, however, are taxed depending on how long the homeowner rents the property. If you rent your vacation home for fewer than 15 days during the year, no rental income is includible in gross income. If you rent the property for 15 or more days during the tax year and it is used by you for the greater of (a) more than 14 days or (b) more than 10% of the number of days during the year for which the home is rented, the rental deductions are limited. Under this limitation, the amount of the rental activity deductions may not exceed the amount by which the gross income derived from such activity exceeds the deductions otherwise allowable for the property, such as interest and taxes.
School’s Out for Summer… You’re One Year Closer to Paying for College
As each school year ends, college looms closer. And for parents, the impending expense bears down like a freight train.
A 529 plan is a tax-advantaged savings plan, legally known as a “qualified tuition plan.” These plans are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board.
There are two types of 529 plans: pre-paid tuition plans and college savings plans:
Pre-paid Tuition Plan
Pre-paid tuition plans mean you can purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board.
College Savings Plan
College savings plans establish an account to pay eligible college expenses. An account holder may choose among several investment options, which the college savings plan invests on behalf of the account holder. College savings plans can generally be used at any college or university. College savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.
However, if you withdraw money and do not use it on an eligible college expense, you generally will be subject to income tax and additional federal and state tax penalties.
Source: www.sec.gov
Important Dates
Businesses should compare actual progress to goals. Now is the time to tweak strategies to meet year-end goals.
May 15:
Nonprofit returns are due.