Sal Curcuru
Report Foreign Financial Accounts to IRS by June 30 or Face Penalties
More and more attention is being paid to taxpayers hiding assets offshore to purposely evade taxation. At the same time, many people don’t realize that U.S. citizens and permanent U.S. residents are taxed on their worldwide income. These people inadvertently avoid paying tax on their foreign income.
Taxpayers must now comply with two separate reporting requirements for offshore assets. The first requirement is the Foreign Bank and Financial Account Report (FBAR). The second is the Foreign Account Tax Compliance Act (FATCA). This post will focus on the FBAR requirements.
The Foreign Bank and Financial Accounts Report (FBAR)
If you have:
- a financial interest in OR
- signatory authority over
a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account to the IRS annually by filing Form TD F 90-22.1.
When you have a domestic financial account, the domestic financial institution holding the funds will report interest, dividend, capital gain, and other taxable income to the IRS. Because foreign financial institutions may not be subject to the same reporting requirements, the IRS requires taxpayers with foreign accounts to report their holdings of foreign financial accounts.
The FBAR is also a tool to help the U.S. Government identify people who may be using foreign financial accounts to circumvent U.S. law. Investigators use FBARs to help identify or trace funds used for illegal purposes or to identify unreported income held or earned offshore.
YOU MUST FILE A FBAR IF YOU ARE A U.S. CITIZEN OR PERMANENT RESIDENT AND:
- YOU HAD A FINANCIAL INTEREST IN OR SIGNATORY AUTHORITY OVER AT LEAST ONE FINANCIAL ACCOUNT LOCATED OUTSIDE OF THE U.S.; AND
- THE TOTAL VALUE OF ALL FOREIGN ACCOUNTS EXCEEDED $10,000 AT ANY TIME DURING THE CALENDER YEAR TO BE REPORTED
The foreign account must be reported even if the account produces no taxable income.
The FBAR must be received by IRS on or before June 30 of each year.
Penalties for Not Filing 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
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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.
Which NEW Employees Must be Offered Health Care?
The Affordable Care Act requires certain employers to provide affordable health insurance coverage to their full time employees. The Act defines full time as 30 hours per week. The 30 hours per week standard is more complex than you would think because several different types of employees work varying hours per week.
The IRS has written 80 pages of regulations to “help” employers determine which of their employees are full time. There are separate rules for existing employees and for newly hired employees. This post will address the rules for determining the full time status of newly hired employees.
Newly Hired Employee Reasonably Expected to Work Full Time
If a new employee is reasonably expected to work at least 30 hours per week, the employer must provide that employee with health insurance coverage by the end of the employee’s initial three full calendar months of employment. The employer will not be subject to a penalty for not providing health insurance coverage during the initial three months of employment. However, if the employer does not provide health insurance coverage after the initial three months of employment, the employer will be subject to a penalty not only for subsequent months, but also for the initial three month period.
Newly Hired Employees Working Varying Hours per Week
If an employer cannot determine if a newly hired employee will work at least 30 hours per week at the hire date, the employer must examine the employee’s total hours worked during an initial measurement period. The initial measurement period must begin on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date.
The initial measurement period must last at least three months. The employer determines the employee’s average hours worked per week during this measurement period.
Employee is Full Time
If the employee averages at least 30 hours per week, the employer must provide the employee health insurance coverage for a subsequent stability period. The stability period must be at least six months long, must at least be as long as the initial measurement period, and must be as long as the stability period offered to existing employees
In addition to the initial measurement period (where the employer examines the average hours per week of the employee) and the stability period (where the employer provides health insurance coverage to the employee), the employer can have an administrative period in which the employer actually examines the hours worked during the measurement period, notifies employees of their eligibility, and enrolls employees in coverage. The administrative period cannot exceed 90 days.
Employee is Not Full Time
If the employee does not average at least 30 hours per week during the initial measurement period, the employer does not have to provide health insurance coverage to the employee during the stability period. The stability period for a non-full time employee can be no more than one month longer than the initial measurement period, and cannot exceed the remainder of the standard measurement period used for existing employees.
Examples
The following examples have the following facts: ABC Corp has a measurement period of November 1 to October 31 each year to test existing employees. It has an administrative period of November 1 to December 31 to conduct testing and enroll eligible employees. The stability period during which it provides health insurance coverage is January 1 to December 31.
For newly hired employees, ABC Corp uses an eight month initial measurement period, 60 day administrative period, and a one year stability period.
Example 1: ABC Corp hires Joan on May 1, 2013. Joan’s initial measurement period runs from May 1, 2013 to December 31, 2013. During the administrative period from January 1, 2014 to February 28, 2014, it is determined that Joan averaged less than 30 hours per week during the initial measurement period and ABC Corp does not have to provide her with health coverage during the stability period. Here, the initial stability period must end before the earlier of:
- November 30, 2014 (the stability period for non-full time employees cannot exceed the length of the initial measurement period plus one month. Here the initial measurement period is eight months, so the stability period cannot exceed nine months. The stability period begins after the sixty day administrative period ends on February 28, 2014
- October 31, 2014 (the end of the standard measurement period for existing employees).
Example 2: Same facts as example 1 except that Joan averages more than 30 hours per week during the initial measurement period. ABC Corp must offer health insurance coverage to Joan for the one year stability period beginning March 1, 2014 and ending February 28, 2015.
Transitioning from a New Employee to an Existing Employee
A new employee generally starts working after a standard measurement period begins. This is why an initial measurement period that begins on the employee’s start date applies for new employees. After a new employee has been working for a while, they will be employed at the beginning of a standard measurement period and will be tested under the rules for existing employees. However, if the employee qualified as a full time employee during the initial measurement period, her health insurance coverage cannot be terminated before the end of the initial stability period.
Example: Same facts as Example 2 above—Joan is a full time employee during the initial measurement period. ABC Corp must provide Joan with health insurance during a one year stability period beginning March 1, 2014 and ending February 28, 2015.
Joan is now employed during the standard measurement period beginning November 1, 2013 and ending October 31, 2014. If Joan does not average 30 hours per week during this standard measurement period, ABC Corp would not have to provide her with health insurance coverage for the one year stability period beginning January 1, 2015. However, because Joan average at least 30 hours per week during her initial measurement period, ABC Corp must continue to offer health insurance coverage to Joan during her one year initial stability period ending February 28, 2015. ABC Corp may discontinue her health insurance coverage on March 1, 2015.
If Joan averaged at least 30 hours per week during the standard measurement period, she would qualify for health insurance coverage during the one year standard stability period beginning January 1, 2015 and December 31, 2015. Here, her coverage would be extended from February 28, 2015 through December 31, 2015.
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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.
Extended & Expanded: Tax Credit for Employers Hiring Certain Employees
The Work Opportunity Tax Credit is available for a portion of first-year wages paid to certain qualifying employees who begin work during 2013. The credit is available for employers who hire members of the following targeted groups:
- Veterans
- Ex-felons
- Long term family assistance recipients
- Vocational rehabilitation referrals
- Summer youth employees
- Nutrition assistance recipients
- Social security income recipients
- Designated community residents
- Qualified IV-A recipients
This tax credit existed during 2012, but it was only available to employers hiring veterans (although in prior years it was available for all of the above targeted employees). The American Taxpayer Relief Act of 2012 extended the tax credit for the all of the above employees who begin work during 2013.
The credit is 40% of qualified first-year wages for certified workers who work at least 400 hours, and 25% for certified workers who work at least 120 hours, but less than 400 hours. These employees must be certified by designated local agencies, either in advance or immediately after employment begins. IRS Form 8850 guides employers through the certification process.
Qualified first-year wages are limited to:
- $6,000 for any targeted employee
- $14,000 for a veteran who was unemployed for at least six months within one year prior to the hire date
- $12,000 for a veteran entitled to compensation for a service-connected disability with a hire date within one year after having been discharged or released from active duty in the U.S Armed Forces
- $24,000 for a veteran entitled to compensation for a service-connected disability who is unemployed for at least six months within one year prior to the hire date
- $3,000 for a summer youth employee for wages paid during any 90 day period between May 1 and September 15
Each of the targeted employee groups above must meet eligibility requirements.
In the following examples, assume the employee worked at least 400 hours during the year and the employer is therefore eligible for the full 40% credit.
Example: ABC Corp hires Joan, a qualifying ex-felon on October 1, 2013. Joan earns $25,000 in wages during her first year of work. ABC Corp is eligible for a tax credit of $2,400 (40% times the maximum qualifying wages of $6,000).
Example 2: XYZ Corp hires Jane, a qualifying veteran who has been unemployed for six months immediately prior to the hire date. Jane earns $20,000 during her first year. XYZ Corp is eligible for a tax credit of $5,600 (40% times the maximum qualifying wages of $14,000 for a veteran who was unemployed for at least 6 months during the year prior to the hire date).
Example 3: Tim is a qualifying veteran who is receiving compensation for a service-related disability. Tim is hired by MNO Corp and is paid $30,000 in wages. Tim had been unemployed for 8 months immediately prior to the hire date. MNO Corp is eligible for a $9,600 credit (40% times the maximum qualifying wages of $24,000 for a veteran who is disabled and unemployed for at least 6 months during the year prior to the hire date.)
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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.
Special Rule for Deducting Restaurant Smallwares
Business owners who buy assets that have useful lives longer than one year usually cannot immediately deduct the costs of these assets. The costs have to be deducted over a number of years through depreciation.
Luckily for restaurant owners, there is an exception that allows restaurant owners to immediately deduct the costs of smallwares in the year they are purchased and used.
What Are Smallwares?
Smallwares include the following items:
- Glassware
- Flatware
- Dinnerware
- Pots and pans
- Table top items
- Bar supplies
- Food preparation utensils and tools
- Storage supplies
- Service supplies
- Small appliances that cost $500 or less individually
This Provision Helps Other Food Services Businesses, Too…
This provision applies to corporations engaged in the business of preparing food and beverages to customer order for immediate on-premises or off-premises consumption. In addition to restaurants and cafeterias, this provision also applies to caterers, mobile food servers, bars and taverns, and food or beverage services located in grocery stores, hotels and motels, amusement parks, theaters, casinos, country clubs, and similar social or recreational facilities.
Watch Out for These Traps
There are two situations where an immediate deduction will not be available and the business owner will have to deduct the costs of smallwares over a number of years. The situations are:
- When the smallwares are purchased before the business begins operations. In this situation, the smallwares are treated as start-up expenses. Start-up expenses of up to $5,000 can be deducted the year business operations begin. Excess start-up expenses are deducted over 15 years.
- When the smallwares are purchased and stored, rather than put to immediate use. In this situation, the smallwares are treated as inventory and become deductible when they are put to use.
Example: Janson Family Restaurant will open to the public in July 2013. Prior to its opening, it buys $10,000 of smallwares. Later during 2013, it buys $5,000 of additional smallwares. During 2014, it buys an additional $4,000 of smallwares. Finally, during the last week of 2015, it buys $10,000 of smallwares, but keeps them in storage until 2016.
Janson Family Restaurant can deduct the costs of smallwares as follows:
- The $10,000 of smallwares purchased before opening are treated as start-up expenses. It can immediately deduct $5,000 and deduct the remaining $5,000 over 15 years.
- The $5,000 of additional smallware purchased in 2013 after the restaurant opened are fully deductible in the year of purchase
- The $4,000 of smallwares purchased during 2014 are fully deductible in the year of purchase
- The $10,000 of smallwares purchased during 2015 must be recorded as inventory in 2015 since the smallwares aren’t being used. The $10,000 will be fully deductible in 2016 once they are used.
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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.
Which Employees Are Full Time Under the Affordable Care Act?
The penalty for employers with 50 or more full time employers who don’t offer affordable health insurance to their full time employees takes effect in 2014. 30 hours per week is full time. On a monthly basis, employers will have to determine if they have 50 or more full time employees. For this purpose, full time employees are determined on a full time equivalent basis.
Example: ABC Corp has 45 employees who work 30 hours per week. It also has 10 part time employees who work 15 hours per week. To determine the number of full time equivalents: multiply 10 employees by 15 hours per week and divided by 30. This equals 5 full time equivalents, which is added to the 45 actual full time employees. Since this employer has 50 full time employees, it is subject to the penalty.
However, the employer only has to provide health insurance for employees who actually work 30 hours per week. It does not have to provide health insurance for part time employees.
Figuring out which employees work 30 hours per week is more difficult that you would think since employees’ working hours may change from week to week. Additionally, some employees may leave for a period of time and then come back. The IRS has provided procedures that employers can use to determine if an employee is a full time employee. There are different tests for existing employees and for new employees. This post will cover the test for existing employees.
The procedures involve three main time periods:
- Measurement Period: Employees who average 30 or more hours per week during a measurement period are full time employees who must be offered health insurance during the subsequent stability period.
- Stability Period: This is the period of time during which the employee must be offered health insurance.
- Administrative Period: This period of time exists between the measurement period and the stability period. Employers will need time after the end of a measurement period to determine which employees are full time employees, to notify these employees of eligibility, and to complete necessary administrative tasks such as enrolling the employees in health coverage.
Measurement Period
The measurement period must last between 3 and 12 months. The employer determines when the measurement period begins and ends. Additionally, the employer may change its stability period length and period from year to year, but generally cannot change a measurement period once it begins.
Example: XYZ Corp uses a five month stability period of April 1 to August 31 of 2013. In 2014, it may use a six month period between April 1 and September 30. However, it would have to change the measurement period before April 1, 2014 because it cannot change a measurement period once it begins.
An employer can use measurement periods that differ in length or that differ in start/end dates for the following categories of employees:
- Salaried employees and hourly employees
- Employees whose primary places of employment are in different states
- Collectively bargained employees and noncollectively bargained employees
- Each group of collectively bargained employees covered by separate collective bargaining agreements
Stability Period
Each employee who is determined to be a full time employee during the measurement period must be offered health insurance coverage during the stability period. A stability period must last at least 6 months, but cannot be shorter than the measurement period. The employer can change a stability period from one year to the next, but it cannot change a stability period once it has begun.
An employer can use stability periods that differ in length or that differ in start/end dates for the following categories of employees:
- Salaried employees and hourly employees
- Employees whose primary places of employment are in different states
- Collectively bargained employees and noncollectively bargained employees
- Each group of collectively bargained employees covered by separate collective bargaining agreements
An employee who is a full time employee during the measurement period must be offered health insurance throughout the stability period regardless of the number of hours the employee works during the stability period.
Example: ABC Corp has a measurement period of April 1, 2013 to October 1, 2013. It then has a ninety day administrative period. It has a one year stability period of January 1 to December 31. Timmy averages 30 hours per week during April 1, 2013 to October 31, 2013, and is therefore a full time employee during the measurement period. During the 90 day administrative period from October 2, 2013 to December 31, 2013, ABC Corp tests which employees average 30 hours or more, and enrolls eligible employees in health coverage which lasts during the one year stability period from January 1, 2014 to December 31, 2014.
Beginning February 1, 2014, Timmy starts working 20 hours per week consistently. Even though Timmy is now a part time employee, his health coverage must last throughout the entire one year stability period from January 1, 2014 to December 31, 2014.
However, during the 2014 measurement period, Timmy will only average 20 hours per week. He will not have to be offered coverage during the 2015 stability period.
Employees Who Leave & Come Back
When employees leave for a period of time and then resume employment, it is questionable whether they should be treated as an existing employee (rules discussed in this blog) or a new employee (rules discussed in a future blog).
If an employee does not work for at least 26 consecutive weeks and then returns to work, the employer can treat the employee as a new employee. Any hours the employee worked during the measurement period prior to the leave do not count (i.e., the hours are reset when the employee resumes employment).
If an employee is on leave (or quits) and resumes employment within 26 weeks, the employer treats the employee as an existing employee and hours worked within the measurement period before the leave are counted. Since the employee will have zero hours during the period of absence, the period of absence will lower the employee’s average hours worked per week. If the absence is long enough, the employee’s average hours per week will likely fall below 30, and the employee will be ineligible for health coverage.
However, for special unpaid leave, the employer excludes the absence period from the average hour calculation so that the average hours may not fall below 30. Special unpaid leave is unpaid time from work subject to the Family Medical Leave Act, jury duty, or under the Uniformed Services Employment and Reemployment Rights Act (USERRA).
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.
Renting Out Your Old Home? Avoid This Tax Trap!
Homeowners pay real property taxes on their homes. Principal residences are exempt from the 18-mill tax for school operating purposes. This reduction in property taxes is known as the homestead exemption—not to be confused with the Homestead Property Tax Credit which is a refundable tax credit claimed on Michigan income tax returns.
The 18-mill exemption reduces a homeowner’s property tax bill by 1.8% of the home’s taxable value.
Example: Joan buys a home for $200,000. The home’s initial taxable value is $100,000. The total property taxes on her home equal 56 mills. Her total property taxes for the year are $5,600. However, since Joan uses the home as her principal residence, she qualifies for the homestead exemption which reduces her millage by 18 points down to 38 mills. Her total property taxes with the homestead exemption are now $3,800 (saving her $1,800 dollars)
The homestead exemption applies only as long as the home is being used as a principal residence. When the home is no longer used as a principal residence, the homeowner has to notify the assessor that it is no longer her principal residence. The assessor will then remove the homestead exemption and increase the millage by the 18 mill school operating assessment.
When homeowners move out of their principal residences and rent it out, they must be sure to notify the assessor that the home is no longer being used as their principal residences since the homes are now rented out.
Example 1: Same facts as above, except that Joan buys a new home and rents out the old one. Joan will claim a homestead exemption on the new home and must relinquish the homestead exemption on the old home. Her property taxes on the old home will increase. She should increase the rent she is charging the tenant to cover this increase in property taxes.
Failing to notify the assessor will result in the assessment of back taxes (the 18 mill school operating assessment) against the homeowner plus penalties and interest.
Example 2: If Joan decides not to notify the assessor, she risks the assessor finding out that the old home is rented. The assessor will assess back taxes for the years the home was rented with the homestead exemption in place. Joan will also be subject to penalties and interest.
There is an exemption for people who are no longer using their homes as a principal residence because they are on active duty in the military.
There is also an exemption for people who are selling the home if the home remains unoccupied and for sale for up to three years.
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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.
Deducting Bad Loans to Family Members
Loans often exist among family members. It is not unprecedented that some of these loans don’t get paid back. When loans among family members aren’t paid back, it is possible for the lender to take a tax deduction for the bad debt.
While the IRS allows people to claim bad debt deductions for loans to family members, because of the close relationship between lender and borrower, the deductions are subject to close scrutiny. Unless the lender can prove that a bona debt exists, the loan will be treated as a gift to the borrower and no deduction will be allowed.
Proving the Amount Loaned is a Real Loan and Not a Gift
To establish that a family debt is bona fide, the intent of the parties to create a binding debt is significant as well as how similar the loan arrangement is to normal commercial arrangements.
The following characteristics help establish that a debt is bona fide:
- A written loan agreement
- A reasonable rate of interest is charged
- There is a fixed payment schedule
- Security or collateral is obtained
- The borrower is solvent when the loan is made
- The borrower makes payments on the loan
- The lender makes a demand for repayment when the borrower is delinquent
Legal action is not required to show that an effort was made to collect on the loan. If the circumstances indicate that legal action would be futile, worthlessness of the loan can be established without legal action.
Rules for Nonbusiness Bad Debts
A loan between family members will generally be considered a nonbusiness bad debt. As such, it is treated as a short term capital loss. Short term capital losses are deductible against capital gains, then against up to $3,000 of ordinary income each year. If the lender does not have capital gains (or can’t sell assets to create capital gains) it may take several years to fully deduct the bad debt.
Example: Tina lends $50,000 to her son, Timmy, so he can start a business. There is a written loan agreement, a reasonable interest rate is charged, and Timmy makes monthly payments on the loan. After a year Timmy’s business fails and he is insolvent. The loan balance is $45,000. Tina makes a demand for payment, but Timmy can’t pay her back. Legal action will probably be futile since Timmy is insolvent and near bankrupt. Tina can probably claim a $44,000 nonbusiness bad debt. If Tina has no capital gains, she can only deduct $3,000 of this bad debt per year.
Example 2: Tina has $10,000 in capital gains in the year Timmy defaults. Here, Tina can offset the $10,000 of capital gains with the bad debt and she can deduct an additional $3,000 of the bad debt against her ordinary income. The remaining balance of the bad debt deduction can be carried forward.
Example 3: Same facts as example 1, except that Tina has no current capital gains. She does; however, have stock that has appreciated $40,000. She can sell this stock, recognize a $40,000 capital gain, offset $40,000 of the capital gain with the bad debt deduction, and deduct an additional $3,000 of the bad debt against her ordinary income. The remaining $1,000 of bad deduction will be carried forward.
It is important to keep in mind that the family member who’s loan is being forgiven may have debt forgiveness income. However, the debt forgiveness income may be tax-free if the borrower is insolvent, bankrupt, or in certain other circumstances.
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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.
The IRS is Offering Relief Because of Delayed Tax Forms
On January 2 of this year, Congress passed the American Taxpayer Relief Act of 2013. Many provisions of this tax law applied retroactively to 2012. The IRS had to update its 2012 tax forms to reflect the changes and update their computer systems to be able to process these updated forms.
These updates caused delays in the availability of these forms and in the IRS’ ability to accept the forms for processing. These delays may affect the ability of some taxpayers to timely estimate and pay their 2012 tax liabilities.
Make Sure to File an Extension
Taxpayers who are filing later than normal are encouraged to file an extension. However, an extension only extends the due date for filing the tax return–it does not extend the due date for paying the tax. To qualify for an extension, taxpayers must estimate their tax liability using any available information and report that tax liability on the extension application.
When taxpayers are late in paying their taxes, the IRS automatically assesses the late payment penalty (0.5% per month) and sends notice and demand for payment to the taxpayer. The IRS also charges interest in addition to the penalty. Penalties may be avoided if taxpayers demonstrate reasonable cause for paying late and that they lacked willful neglect to pay late.
Penalty Relief Available
For taxpayers who file an extension to file their 2012 tax return that includes one of the forms below, the IRS will deem the taxpayer to have demonstrated reasonable cause and lack of willful neglect. Taxpayers must put forth a good faith effort to properly estimate the tax liability on the extension application, the estimated tax amount must be paid with the extension, and any additional tax must be paid when the tax return is filed by its extended due date.)
The IRS will grant relief from late payment penalties only—it will still charge interest on any late tax payment. Additionally, this relief is not automatic—the IRS will still send notices even if proper extensions with payments were filed. Relief has to be requested by submitting a letter to the IRS explaining the taxpayer’s eligibility for relief, identifying which of the tax forms below was included with the taxpayer’s return, and referencing “Notice 2013-24” in the relief request. Finally, this relief does nothing to prevent the State of Michigan from assessing its own late payment penalty if Michigan taxes are paid late.
The affected forms include:
• Form 3800, General Business Credit
• Form 4136, Credit for Federal Tax Paid on Fuels
• Form 4562, Depreciation and Amortization (Including Information on Listed Property)
• Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
• Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
• Form 5695, Residential Energy Credits
• Form 5735, American Samoa Economic Development Credit
• Form 5884, Work Opportunity Credit
• Form 6478, Alcohol and Cellulosic Biofuels Credit
• Form 6765, Credit for Increasing Research Activities
• Form 8396, Mortgage Interest Credit
• Form 8582, Passive Activity Loss Limitations
• Form 8820, Orphan Drug Credit
• Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit
• Form 8839, Qualified Adoption Expenses
• Form 8844, Empowerment Zone and Renewal Community Employment Credit
• Form 8845, Indian Employment Credit
• Form 8859, District of Columbia First-Time Homebuyer Credit
• Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)
• Form 8864, Biodiesel and Renewable Diesel Fuels Credit
• Form 8874, New Markets Credits
• Form 8900, Qualified Railroad Track Maintenance Credit
• Form 8903, Domestic Production Activities Deduction
• Form 8908, Energy Efficient Home Credit
• Form 8909, Energy Efficient Appliance Credit
• Form 8910, Alternative Motor Vehicle Credit
• Form 8911, Alternative Fuel Vehicle Refueling Property Credit
• Form 8912, Credit to Holders of Tax Credit Bonds
• Form 8923, Mine Rescue Team Training Credit
• Form 8932, Credit for Employer Differential Wage Payments
• Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit
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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 be
Tax Rules for Household Employees
Household employees include caretakers, housekeepers, maids, babysitters, gardeners, and others who work in or around your 
private residence as your employee.
Social Security and Medicare Taxes (Federal Insurance Contributions Act – FICA)
If you pay a household employee cash wages of more than the amount specified by law in a tax year ($1,800 for 2012 and 2013), you generally must withhold Social Security and Medicare taxes from all cash wages you pay to that employee. You should withhold 7.65% of the gross wages paid to the employee to cover Social Security and Medicare taxes. If you decide to pay the employee’s Social Security and Medicare taxes, this amount will be additional income to the employee.
HOWEVER, DO NOT withhold or pay Social Security and Medicare taxes from wages you pay to:
- Your spouse,
- Your child who is under age 21,
- Your parent, unless an exception is met; or
- An employee who is under age 18 at any time during the year, unless performing household work is the employee’s principal occupation. If the employee is a student, providing household work is not considered to be his or her principal occupation.
If you do withhold Social Security & Medicare taxes, pay the amount you withhold to the IRS with an additional 7.65 percent for your share of the taxes. If you pay your employee’s share of social security and Medicare taxes from your own funds, the amounts you pay on your employee’s behalf count as additional wages for purposes of the employees’ income tax. However, they are not counted as Social Security and Medicare wages or as wages for federal unemployment tax.
Federal Income Tax Withholding
You are not required to withhold federal income tax from wages you pay to a household employee. However, if your employee asks you to withhold federal income tax and you agree, you will need a completed Form W-4, Employee’s Withholding Allowance Certificate from your employee.
Form W-2, Wage and Tax Statement
If you must withhold and pay social security and Medicare taxes, or if you withhold federal income tax, you will need to complete Form W-2, Wage and Tax Statement, for each employee. You will also need a Form W-3, Transmittal of Wage and Tax Statement. To complete Form W-2 you will need to apply for an employer identification number (EIN) and report your employees’ social security numbers.
Federal Unemployment Tax Act (FUTA)
If you paid cash wages to household employees totaling more than $1,000 in any calendar quarter during the calendar year or the prior year, you generally must pay federal unemployment tax (FUTA) tax on the first $7,000 of cash wages you pay to each household employee. However, do not count wages paid to your spouse, your child who is under the age of 21, or your parent. The amounts you pay to these individuals are also not considered wages subject to FUTA tax.
Michigan Unemployment Tax
Household employment in a private home is subject to Michigan unemployment tax if the employee is paid $1,000 or more in any calendar quarter of the current or proceeding calendar year for such service. You will have to register as an employer with the Michigan Unemployment Insurance Agency.
Schedule H, Household Employment Taxes
If you pay wages subject to FICA tax, FUTA tax, or if you withhold federal income tax from your employee’s wages, you will need to file Schedule H, Household Employment Taxes. Attach Schedule H to your individual income tax return. If you are not required to file an income tax return, you must still file Schedule H to report household employment taxes.
Estimated Tax Payments
If you file Schedule H along with your Form 1040, you can avoid owing taxes with your return if you pay enough tax before you file your return to cover both the employment taxes for your household employee and your income tax. If you are employed, you can ask your employer to withhold more federal income tax from your wages during the year. You can also make estimated tax payments to the IRS during the year using Form 1040-ES.
You may have to pay an estimated tax underpayment penalty if you do not pay your household employment taxes during the year.
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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 be
Deducting Out-of-Pocket Expenses for Charity
The IRS does not allow charitable deductions for donating services to a charity. However, the IRS does allow charitable deductions for out of pocket expenses incurred while donating services to charity. The expenses must be nonpersonal, directly connected with, and solely attributable to performing the donated services.
Examples of deductible unreimbursed expenses include:
- Uniforms unsuitable for everyday use
- Equipment
- Copying charges
- Office supplies
- Phone charges
- Postage
- Transportation
- Travel expenses
Travel expenses and lodging (including meals subject to the 50% disallowance rule) are deductible only if:
- There is no significant personal pleasure, recreation, or vacation in the travel AND
- The performance of services is substantial
Example: Tommy volunteers on a church project where he fixes up houses for the indigent. Tommy buys small tools, cleaning supplies, and drives from house to house. Tommy can claim charitable deductions for his out of pocket expenses for the small tools, cleaning supplies, and transportation expenses.
Example 2: Johnny goes on a trip with his church group to Italy. They attend mass in several churches and spend a significant amount of time sight-seeing. In this case, it seems that Johnny derives significant personal pleasure from the trip so the travel expenses and lodging would not be deductible.
The use of a vehicle for charity is deductible at a rate of 14 cents per mile. Alternatively, taxpayers can deduct the actual gas and oil usage directly related to the charitable transportation. Parking fees and tolls are also deductible whether the standard mileage rate or the actual expenses method is used.
If you need help with small business taxes,
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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.
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