Wow! The market’s up, the market’s down. It’s crazy! Now I don’t give advice about stocks—it’s actually against the law for me to give advice about stocks—but I do give advice about taxes. Here are some things you need to know about your taxes during all this market craziness.
1. On your tax return, you only acknowledge a gain or a loss if you actually sell the stock. Let’s say you own 100 shares of Billy Beer stock that you bought at $100 per share, that’s $10,000 worth of stock. If the price of the Billy Beer drops to $90 a share, then you have $9000 worth of stock right? So technically you’ve lost $1,000. But, the loss only counts if you actually sell the stock for the $90 a share. If you keep the stock, nothing about Billy Beer goes on your tax return.
2. Stocks that are held within a 401(k) plan or an IRA can be sold at a gain or a loss and it never gets reported on your tax return. The whole point of your retirement plans is that you can have tax free gains. Most of the time, your money is growing inside these vehicles and you’re not getting taxed on it. When you do have a loss inside your 401(k), you don’t get to claim a deduction for it.
3. The maximum loss from a sale of stock that you can use to offset your ordinary income (like wages) is $3,000. Let’s say you sold off some stock and had a loss of $10,000. Sales of stock are considered to be passive income or passive losses. (To be blunt—it’s called passive income because it’s possible to sit on your butt and make money.) The maximum amount of passive income loss you can have on your tax return for any given year is $3,000. Any extra loss you have can carry forward to the next year. You can use the passive loss from the sale of your stock to offset other types of passive income also, such as income from a partnership or rental real estate. The important thing to know though is that if you have a loss of $100,000 in the stock market, you’re not going to get to write it all off at once.
4. Just because the market has taken a nosedive, it doesn’t mean that you really have a loss on your stock. Remember, your gain or loss is based upon what you bought the stock for and what you sold it for. This is especially important for senior citizens to remember. Back in 2008, we had some serious stock market drops. When tax time came around, I had several clients tell me how much money they lost in the market, but when I did the paperwork they really had large gains because they had held the stocks for so long. They were very surprised to be paying so much money in capital gains tax.
5. You must report the sale of stock on a Schedule D form. One of the most common IRS letters is to people who sold stock and forgot to report in on a Schedule D form on their tax return. Stock sales are reported to the IRS. Using the Billy Beer example, let’s say you bought it for $100,000 back in 2007 and sold it for $90,000 this year but you forgot to report it on your tax return. You’ll get a letter from the IRS saying that you owe them $22,500 (if you’re in the 25% tax bracket) in income tax plus penalties and interest. (And the penalties will be huge because you “forgot” $90,000 in income!) The reality is that you should show a loss on your Schedule D and you’re probably due a refund ($750 if you’re in the 25% tax bracket.) Always remember to report your stock sales on your tax return.
Does this sound like you? You’re pretty sure that you owe taxes this year so you’ve had no motivation to get them done. You know you have until April 15th so all through February and March you’re not even thinking about it. April 1st rolls around and now it’s like, “Oh yeah, I’ve got to get that done.” But life gets in the way and the next thing you know, it’s April 14th and you’re starting to panic. You go online to do your return and realize that you’ve got some funky tax issue that you can’t handle by yourself so you need professional help. You head down to the big box tax store and wait in line with 20 other folks who are in the same boat as you.
Don’t do that!
Don’t do your taxes on April 14th. (Okay, for 2011 the tax deadline is April 18th, but everybody knows the 15th is tax day even if the IRS likes to mess with us about that.) But that’s just another good reason not to file your taxes on the 14th because you have until the 18th this year.
But it’s more than that. More mistakes get made on tax returns on April 14th than any other day of the year. This isn’t a statistical fact, it’s just my observation. I do audit work helping people who have tax trouble. I notice that tax returns done on April 14th have more mistakes. Not necessarily big mistakes, but missed deductions and credits.
If you’re going into the big box tax store on April 14, those preparers are busting their behinds trying to make sure that everybody gets taken care of. They’re probably exhausted from the long hours already. If you go in at night, most of those folks have already put in eight hours at their day job already. If there’s a line of people in the chairs, the office manager is probably cracking the whip, “Let’s keep it moving people!” This is not the day that they’re going to ask you all of the questions they need to ask to give you the best service possible. They have the built in questions in their software that they’re required to ask you, but don’t expect anything above and beyond the minimum if you go in during rush time.
If you go into a big box store on April 14th (or 15th or one of those late days) and there’s a big line and it looks crazy, the best thing for you to do is just file an extension. If you think you owe, make a best guess as to how much you owe and pay it (keeps you from paying late payment penalties.) An extension is an extension of time to file, it does not give you an extension of time to pay. The penalty for filing late is much higher than the penalty for paying late though so even if you don’t pay, you’re still better off filing the extension than filing your return late.
If you’re at the big box store, they’re going to pressure you to file your return now instead of doing the extension. Here’s why: they get paid a commission for the tax returns they prepare during the tax season. Most of them get laid off after the last filing date. The few preparers who work during the summer get paid an hourly wage for the off season work and it’s not anywhere near the rate they get for their seasonal work. Filing your extension doesn’t pay them much if anything so that’s why they don’t want to do it.
Now if you go someplace and it’s not a mad house and you find someone there that makes you feel confident, by all means go ahead and file. Do it and be done with it. Sometimes, while the 14th may be a madhouse, the 15th will be quite calm and a good time to file. Use your good judgment. Don’t file a tax return while feeling panic. Fixing a bad return costs more than doing it right the first time.
I’ve been posting a lot of last minute tax tips for people who have excess money to donate to charity or invest in retirement plans. Somebody asked me, “What about the rest of us? Do you have any good tax tips for people who don’t make a lot of money?” To be honest, I don’t have as many tips there. If you’re income is low enough that you wind up not paying income tax, you don’t need a lot of strategies for sheltering your income. But that said, you do want to make sure that you protect what’s coming to you and I can help with that.
This is the time of year when I hear the question, “My son’s father wants to claim him on his tax return but he doesn’t have custody and doesn’t pay child support. How can I stop him?” Usually these questions are about the Earned Income Credit (EIC.) When you combine EIC with the child tax credits, you can potentially have over $6,000 in tax refund money. It’s no wonder that people fight over who claims the children. Be sure to know the rules before you file.
In order to qualify to claim an Earned Income Credit, your child must meet three tests:
Relationship: son, daughter, stepchild foster child, brother, sister, half brother, half sister, step brother, step sister or a descendant of any of them, and
Age: the child must be younger than the person claiming EIC and under age 19 (or under age 24 if a full time student) or be any age if permanently and totally disabled at any time during the year, and
Residency: the child must have lived with the taxpayer in the United States for more than half of the tax year. If you are in the military and stationed overseas, that counts as a temporary absence and you qualify as living with your child for the time that you are on active military duty.
The residency requirement is the one that’s going to prevent the absentee father from being allowed to claim the child. Now that doesn’t mean he’s not going to try—there’s between $12 and $14 billion of EIC fraud every year. But if you are the custodial parent, you should be claiming your child on your tax return.
So how do you make sure that no one else claims your child on your return?
Protect your child’s identity: I cannot stress enough how important it is for you to protect your child’s social security number. Especially this time of year, there is a lot of child identity theft. Most of the time, if someone steals your child’s identity, it’s someone you know, but I once dealt with a case where a thief was stealing baby ID’s from the hospital. The tax windfall from an Earned Income Credit (EIC) can be pretty large, and it makes people do bad things. If an identity thief has your child’s social security number, date of birth, and the correct spelling of you name, they’ve got you. The social security card has two out of three. Keep it safe.
If someone does claim your child illegally, (you’ll know because your tax return will be rejected when you try to electronically file it) fight back. If you are in the right, go ahead and file your tax return exactly the way you’re supposed to; claiming your child and all the tax credits you are entitled to. You will have to mail the tax return in and it will make for a horrible delay in processing your refund. But the identity thief will get audited, you will win your case and you will get your money. If you are not in the right, do not waste your time. You will be audited too. You’ll get 11 (sometimes 22) pages worth of questions you have to answer to prove you really do have custody of your child. If you’re legit it’s easy, if not it’s a nightmare.
Some people will electronically file their return to get whatever refund they can first and then file an amended claim to add their child. If possible, file the return correctly in the first place. It gives you a stronger case in the IRS’ eyes and it will actually be processed faster than if you do the amendment.
One piece of advice I saw on a message board about this was to “Go ahead and file your return before he does, even if it’s wrong so that you beat him to it.” Although filing your return as soon as possible will help prevent someone else from claiming your child, you need to know that it is illegal for a professional to e-file tax returns without having the actual W2s or 1099s. You’d be amazed at how often the final check stub is a little different from the actual W2. Don’t file until you have everything you need.
In an ideal world, you wouldn’t have to be afraid of people stealing your child’s identity for financial gain. We’re not dealing with ideal though. Protect yourself and your child by keeping his social security card and other personal information safe.
Filed under: Charitable Donations, IRA, Last Minute Tax Tips
UPDATED FOR 2013
The Charitable IRA Rollover is still available for 2013!
What is an IRA Charitable Rollover? If you’re 70 and 1/2 or older, you’re required to make required minimum distributions (RMD) from your Individual Retirement Account (IRA.) Even if you don’t need the money, you have to take it out and you pay tax on it. If you don’t, the penalties are even worse than any tax you’d have to pay. Additionally, many seniors don’t get the benefit of claiming their charitable donations on their income tax returns because they don’t have enough other things to deduct like mortgage interest.
The IRA charitable rollover helps with this problem by allowing you to take money out of your IRA and make a direct contribution to a charity. The distribution counts towards you RMD and it’s tax free to you because it went to the charity.
Can you make a contribution of more than your RMD? Yes you can. You can actually make a charitable distribution of up to $100,000 from your IRA with no federal income tax impact. $100,000 – that wasn’t a typo. If you’re in a financial position to make a donation like this, that would be $100,000 to a charity of your choice with no limitations as to its deductibility because it’s part of an IRA charitable rollover.
I realize that I’m plugging the Missouri Tax credits quite a bit, but when you’re choosing a charity, they really give you the best bang for your buck. You don’t just get a federal income tax deduction, you also get a 50% tax credit to offset your Missouri state income tax liability. The other thing that I really like about the Missouri Tax Credits is that the money you donate to these charities is staying right here in Missouri, helping our friends and neighbors. It’s a win/win/win situation.
Today I’m going to talk about the Center for Head Injury Services. The Center serves over 800 people each year who have head injuries or other cognitive disabilities. Their programs include employment assessment, job placement and day services. Their newest program is the Midwest Adult Autism Project (MAAP) which serves young adults with severe autism.
The Missouri tax credit available falls under the category of Neighborhood Assistance Program (NAP) tax credits. It’s available to businesses or individuals who have business, rental or farm income. That means, if you want to claim this credit, you need to be filing a schedule C (sole proprietor), a schedule F (farm income), or a schedule E (rental real estate) forms with your tax return. Or your business (partnership or corporation) makes the donation directly. So there’s a little bit of a limitation as to who can claim this credit. (If you don’t have this kind of income, check out one of the other tax credit programs in this blog. There’s bound to be a program for you.)
Charities that qualify for Missouri Tax Credits have already been pre-screened by the state and meet pretty strict requirements about how they spend your money. The idea behind these grants is that a well run non-profit organization can provide these valuable services better than the state can.
So why is the Center for Head Injury Services so important? Many reasons. Did you realize that over 2 million people suffer from brain injuries every year? And what most people don’t realize is that brain injuries can cause permanent limitations and chronic health conditions that require long term support. Brain injuries aren’t like a disease that can be cured. The Center for Head Injury Services is a comprehensive resource to all types of head injury victims and their families.
They provide adult day care and therapy for persons with severe injuries and vocational and employment services to persons with less severe injuries. They also provide counseling to families having trouble adjusting to disability issues. They serve people with all types of head injuries whether its from a car accident, a stroke or an aneurysm. Bottom line: they do good work.
Even if you’re unable to qualify for a Missouri Tax credit, a donation to the Center for Head Injury would be money well spent.
One final thing, the Center for Head Injury Services has an equipment loan program. If you have equipment that you are no longer using, they could use crutches, walkers, canes, wheel chairs, bath & shower chairs and benches, commodes, and other types of rehabilitative equipment. Donating these items doesn’t qualify for the Missouri Tax Credit, but it would certainly be a good use of these items. You also might be able to qualify for a deduction on your federal return for “non-cash” contributions.
To learn more about the Center for Head Injury Services, click here: http://www.headinjuryctr-stl.org/index.html
And to find out more about the Midwest Adult Autism Project, click here: http://www.maap-stl.org/
Here’s another charity that you might want to take a look at, it’s called Almost Home. Almost home serves teen mothers and their children with up to two years of housing, counseling, education and other support services. Since they opened back in 1993, Almost Home has served over 1,500 mothers and their children.
Almost Home currently has Missouri tax credits available to individuals and corporations for donations of between $100 and $100,000. Many of the tax credit programs don’t even start until you make a donation of $1,000 or more, so this is a good program for persons with a smaller charitable donation budget. As usual with Missouri tax credit programs, the credits are good for a 50% credit against your Missouri state income tax liability. This tax credit is in addition to the usual deductions that you get to claim for charitable contributions on your federal and state income tax return.
For a donation to Almost Home to count towards the Missouri Tax Credit, the donation must be in cash, stocks, bonds, securities or real property. If you can’t make that type of contribution but would still like to help Almost Home, they have a wonderful wish list on their web site. Donations of clothing, toys or supplies won’t qualify for the Missouri tax credits, but would be most graciously and gratefully accepted by the organization.
Almost home qualifies for Missouri Tax Credits under the Missouri Maternity Home Tax Credit program which is admistered by the Department of Social Services.
For more information about Almost Home and the tax credit program, please click on the link to their website: http://www.almosthomestl.org/donate/tax-credits
For information on the Missouri Maternity Tax Credit program, click on the Missouri website: http://www.dss.mo.gov/dfas/taxcredit/maternity.htm
Almost Home was established by the Franciscan Sisters of Mary. Their primary areas of concern are establishing and achieving personal goals related to health care, emotional stability and education; teaching appropriate parenting skills; and empowering members for independent living.
Do you own your own small business as a sole proprietorship? Do you have kids? If so, did you know that you can pay your kids to work in your business and they won’t be subject to social security and Medicare taxes? Now if you pay them more than their standard deduction, they could be subject to income tax withholding but even so, not having to pay the employment tax is a big savings. You also don’t have to pay Federal Unemployment taxes either.
Why is this good to know? Well if you pay your kids wages from your business, it’s a business deduction and that’s money you’re keeping in the family and not paying self employment taxes on. It’s important to keep the wages commensurate with work that the kids actually perform. The IRS isn’t going to buy the idea that your 4 year old is earning $50,000 a year doing statistical analysis for your company. But what can your kids actually do?
My first job was handling all of the scut work that the secretaries in the office wouldn’t do. I cleaned the white board in the meeting room, made the coffee, made photocopies and ran errands. I was happy because I was getting paid, the secretaries were happy because they didn’t have to do those jobs any more, and the boss was happy because his staff was happy. I was 15 at the time, but frankly a much younger kid could have handled that job.
My son’s in college now, but he used to be my IT guy. For the cost of a Chucky Cheese pizza and some tokens, he’d take care of any computer problems I had. After he left for school, I had to hire a professional to help me. The freelance IT person I hire costs me $99 per hour. I had no idea how valuable my son was as an employee until he went away. I had never paid him a wage. (Granted, I’m paying through the nose for tuition but that’s another story.) What I should have done was pay him a wage and let him buy his own pizza. That would have reduced my self-employment taxes.
So what about your kids, do they help you with your business? Can they? Would they? If the answer is yes, then you might want to consider putting them on the payroll.
Who’s allowed to do this? There are only two categories of businesses where you can put your children on the payroll without paying employment taxes. One is sole proprietors; that’s businesses that file a schedule C with their 1040 tax return. The other is partnerships where both of the partners are the parents of the children working. If there is even one partner who is not a parent of the child, then you must pay the payroll taxes. Also, if you own a corporation of any kind, you must pay employment taxes on your child’s wages.
With the year end fast approaching, and winter break heading this way, now might be a perfect time to test the waters for hiring your kids. The money you pay them now will reduce your taxable income for 2010.
Filed under: capital gain, capital loss, Charitable Donations, Last Minute Tax Tips
First, if you have stock that has appreciated in value, you want to give the charity the stock and let them sell it for cash, instead of you selling it and giving them cash. The reason is because you get to claim the charitable deduction for the fair market value of the stock you gave away, but you don’t have to pay any capital gains tax on the increase. You have a win/win/win situation. (No capital gains, plus charitable deduction, plus the charity gets stock they can sell for cash=win/win/win.)
Second, if you have stock that has gone down in value, you want to sell it first and then give the cash to the charity. This is exactly the revese of the above. By selling stock that’s gone down in value, you get to claim a capital loss which can offset you capital gains or up to $3,000 of your ordinary income. Once again you have a win/win/win situation. (Claim loss against income, get charitable deduction, plus charity gets cash.)
Although December 30 and 31 are the highest giving days for charity donations, you need to do this a little earlier in the month so that your brokerage has time to do all the transactions. Make sure you have some wiggle room for your stock transactions to actually close and get it all done before Christmas. Earlier if possible.
Bottom line: stock goes up — give it directly to charity, stock goes down — sell first then give money to charity. It’s that easy.
Are you caring for a spouse or a parent who is over 60 years of age and physically and/or mentally incapable of living alone? If you live in Missouri, there may be a tax credit for you. It’s called the Missouri Shared Care Tax Credit and it could be worth up to $500 off of your Missouri state income taxes.
In order to qualify for this tax credit, you must live in the same residence as the person you’re caring for for more than 6 months during the tax year and you must not get paid for providing care.
The person you’re caring for must not receive funding or services through Medicaid or social services block grant funding. (Medicare is fine, it’s just Medicaid that’s not allowed.)
To qualify for a tax credit, you will need to have your physician, or the Division of Senior and Disability Services, Missouri Department of Health, sign a certification form that says the person you care for is incapable of living alone and must acquire necessary home care to avoid placement in a care facility. That’s why I’m putting this in the “to do in December” list–getting the certification part may take some time.
When you think about the stress and the cost of caring for someone at home, this doesn’t really seem like much of a tax credit. On the other hand, there are already so many people already caring for an elderly spouse or parent at home and not getting anything for it, I wanted to make sure that I got this message out. By the way, if you’ve been caring for someone for a few years, you can go back and amend old state returns to claim this credit. You can go back up to three years.
To learn more that the Shared Care Tax Credit, click on this link to the Missouri Department of Revenue website: http://dor.mo.gov/taxcredit/sct.php
The idea of tax deductions for high income earners must sound preposterous, especially if you’re a high income earner. You know how it goes, you try donating money to charity or taking advantage of any of the other tax deductions only to find that your deduction is “limited due to your income.” So what’s the point?
Well this year, there is a point. Itemized deductions and exemptions aren’t phased out for high income taxpayers for 2010. Last year, if you earned over $166,800 you started to lose out on your deductions. The higher your income, the less valuable your deductions were. Only for 2010 are you allowed all of your itemized deductions. You also get 100% of your exemptions also.
But what about the Alternative Minimum Tax or AMT? Won’t that get us anyway? Well, yeah. AMT is a problem for high income earners. But, and this is important, charitable deductions aren’t eliminated in the AMT calculation. AMT dings you for your state tax payments, miscellaneous deductions (like employee business expenses), and some types of mortgage payments. Your charitable contributions still count as a deduction in the AMT calculation. Even if you’re stuck paying AMT, you’re still better off having that charity deduction on your tax return.
Bottom line: If you are a high income earner, there has never been a better time for you to make a charitable contribution.