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Archives for June 2014

Deducting Business, Medical, and Charitable Mileage

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mileage ratesMany people know that the business use of a vehicle can be deducted based on a standard mileage rate.  What may surprise some people is that mileage driven for

charitable, medical, or business/employee moving purposes can also be deducted under a fixed rate per mile.

The standard mileage rates that went into effect January 1, 2014 for the use of a vehicle are:

  • 56 cents per mile for business miles driven
  • 23.5 cents per mile for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The business, medical, and moving expense rates went down one-half cent from 2013.  The charitable rate is based on statute and does not change from year to year.

The standard mileage rate for business is based on both fixed and variable expenses of the vehicle.  Fixed expenses include expenses such as depreciation and insurance; variable expenses include expenses such as gas, oil, and maintenance. The mileage rates for medical, moving, and charitable mileage is based only on variable expenses; fixed expenses for these purposes is not deductible.

Taxpayers always have the option of deducting the actual operating costs of their vehicles, but many choose to use the standard mileage rates due to the lower recordkeeping requirements.  However, a log must still be maintained to establish the dates, purpose, and times of the mileage.

A taxpayer may deduct, as separate items, parking fees and tolls attributable to the use of the automobile for charitable, medical, or moving expense purposes. Interest relating to the purchase of the automobile and state and local personal property taxes are not deductible as charitable, medical, or moving expenses.  However, interest on business use of a vehicle may be deductible and personal property taxes may be deducted as an itemized deduction for property taxes.

If you have any questions on how this applies to you, please feel free to give us a call.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

How to File as Head of Household

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When it comes to filing status, people are most familiar with married filing jointly, married filing separately, and single filing.  While people have heard of head of household filing, most are unfamiliar with its requirements and benefits.

If you qualify as head of household, your tax rate will usually be lower than the rates for single or married filing separately.  You will also receive a higher standard deduction than if you file as single or married filing separately. 

You may be able to file as head of household if you meet all of the following requirements:

  • you are unmarried or considered unmarried on the last day of the year
  • you paid more than half the cost of keeping up a home for the year
  • a qualifying person lived with you in the home for more than half the year (except for temporary absences such as school).  A qualifying person includes a dependent parent.  If the qualifying person is your dependent parent, he/she does not have to live with you (however, you still have to pay more than half the cost of keeping up your parents main home).

 Married or Considered Unmarried

Your marital status on December 31 of each year determines whether you are married or unmarried for the entire tax year.  So if you get married on December 31, you are married for the entire year.  If your divorce is finalized on December 31, you are unmarried for the entire tax year.

You are considered unmarried if you meet all the following tests:

  • you would otherwise file married filing separately
  • you paid more than half the cost of keeping up your home for the year
  • your spouse did not live in your home during the last 6 months of the year
  • your home was the main home of your child, stepchild, or foster child for more than half the year
  • you must be able to claim the child as a dependent.  You can still meet this test if the only reason you cannot claim the child as a dependent is because the noncustodial parent can claim the child under divorce tax rules

This provision mainly applies to marriages that are under some strain, and allows the spouse to file as head of household rather than the less desirable married filing separately.

Keeping Up a Home

You must pay more than half the cost of keeping up a home for the year.  Expenses to consider include:  rent, mortgage interest, real estate taxes, insurance, repairs, utilities, and food.  If you received public assistance to pay part of keeping up your home, you cannot count the assistance as money you paid.

You cannot include clothing, education, medical treatment, vacations, life insurance, or transportation.

 Qualifying Person

The following explains who could be a qualifying person, and under what circumstances.

If the person is your QUALIFYING CHILD (such as a son, daughter, or grandchild who lived with you more than half the year)

AND…

(1) he/she is single, THEN that person is a qualifying person, whether or not you can claim an exemption for the person.

OR

(2) he/she is married and you can claim an exemption for him/her, THEN that person is a qualifying person.

OR

(3) he/she is married and you cannot claim an exemption for him/her, THEN that person is NOT a qualifying person

——————————————-

If the person is your QUALIFYING RELATIVE who is your mother or father

AND…

(1) you can claim an exemption for him/her, THEN that person is a qualifying person

OR

(2)  you cannot claim an exemption for him/her, THEN that person is NOT a qualifying person

——————————————-

If the person is your QUALIFYING RELATIVE other than your mother or father

AND…

(1) he/she lived with you more than half the year and you can claim an exemption for him/her, and you are related to him/her in certain ways (see below), THEN that person is a qualifying person

OR

(2) he/she did not live with you more than half the year, THEN that person is NOT a qualifying person

OR

(3) he/she is not related to you in certain ways and is your qualifying relative only because he/she lived with you all year as a member of your household, THEN that person is NOT a qualifying person.

OR

(4) you cannot claim an exemption for him/her, THEN that person is NOT a qualifying person.

 Related to You in Certain Ways

Related to you in certain ways includes the following relationships:

  • Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)
  • Your brother, sister, half brother, half sister, stepbrother, or stepsister.
  • Your father, mother, grandparent, or other direct ancestor, but not foster parent.
  • Your stepfather or stepmother.
  • A son or daughter of your brother or sister.
  • A son or daughter of your half brother or half sister.
  • A brother or sister of your father or mother.
  • Your son­in­law, daughter­in­law, father­in­law, mother­in­law, brother­in­law, or sister­in­law.

Any of these relationships that were established by marriage are not ended by death or divorce.

As you can see, these rules can get tricky.  If you have any questions on how this applies to you, please feel free to give us a call.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Foreign Accounts Must be Reported to IRS by June 30

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The IRS is cracking down on people who hide assets offshore in an attempt to evade paying taxes.  The IRS requires people with interests in fbarforeign financial accounts to report information on these accounts annually through what is known as an FBAR filing (FBAR refers to Reporting of Foreign Bank and Financial Accounts).  This form must be filed even if the income from the foreign accounts is already being reported on the income tax return.  There are substantial penalties for not filing the FBAR.

 Who is Required to File the FBAR?

 The requirement to file the FBAR is triggered when:

  • a United States person
  • has a financial interest in or signature authority over an account
  • that account is a foreign financial account
  • and the combined value of the account(s) exceed $10,000 at any time during the year

 What is a U.S. Person

 A United States person is a U.S. citizen (regardless of where they live), a U.S. resident (generally a Green Card holder or someone who has a substantial presence in the U.S.), and U.S. entities.  U.S. entities include any entity created or organized in the U.S. or under U.S. law such as a corporation, an LLC, or a trust.

 What is a Financial Interest?

 A person has a financial interest in an account when that person is the record owner or holds title directly to the account.  A person also has a filing requirement when someone else holds title for the benefit of that person.  There is also a filing requirement when a person owns an account indirectly, such as through a corporation.  Generally, the person would have to own more than 50% of the entity to be subject to the filing requirement.

 What is a Foreign Account?

 A foreign account means the physical location of the account is outside of the U.S.  The following locations are considered in the United States:

  • the states
  • the District of Columbia
  • U.S. territories and possessions
  • Indian lands

 Combining Accounts to Reach the $10,000 Filing Threshold

Financial assets include monetary and non-monetary accounts.  For example, gold bullion stored overseas would have to be valued and reported on the FBAR.  People are more familiar with monetary accounts such as bank, brokerage, investment accounts, insurance and annuity policy cash values, and mutual funds.  Real and personal property is usually not required to be reported.

To determine if the combined value exceeds $10,000, you must determine the highest value of each account during the year and combine these amounts.  If the sum exceeds $10,000, then an FBAR must be filed.  Accounts that you have a financial interest in are combined with accounts that you have signature authority over.  Accounts held directly are combined with accounts that are held indirectly (such as through a corporation).

 When Must the Form be Filed?

The form is due June 30 of each year.  The form must now be filed electronically.

 Penalties for Not Filing the FBAR:

 A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation.  If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations may also be subject to criminal penalties

If you have any questions on how this applies to you, please feel free to give us a call.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.