This is the fourth installment of Tax Deductions & You: What You Need to Know which can also be downloaded from our free eBook library.

Although most people understand that mortgage interest is deductible, many people may not be aware that there are certain situations in which it actually creates a greater savings not to claim a deduction as mortgage interest.

Under Treasury Regulation 1.163-10T(o) a taxpayer may elect to treat mortgage debt as not secured by a qualified residence.

Once this election is made, it is effective for all subsequent years and can only be revoked with IRS permission. The advantage of this election is if a taxpayer has allowable mortgage interest that is limited by the $1,000,000 or $100,000 rules on indebtedness.

Let’s say you have a home equity loan that is used for a business. The interest deducted on a business return or “Schedule C”, in most cases, will create a greater tax savings than if the interest was deducted as mortgage interest.

Here’s an example:

A taxpayer takes out a $180,000 home equity loan to start a business. The interest on this loan will be limited to $100,000 in loan value and deducted on schedule A. This may be further limited depending on a taxpayer’s Adjusted Gross Income. If you make the above election, you will be able to deduct the full amount of the interest from business income. This will reduce Adjusted Gross Income, which in turn will reduce any applicable AGI limitation, further adding to the cash savings.

Internal Revenue Code 266 is an annual election made to capitalize carrying cost (i.e. real estate taxes, interest, maintenance cost) into the basis of vacant lots of real estate.

This election is only available for vacant property. If you have real estate that includes any type of structure, you will need to treat this as a rental property or investment property. Therefore, expenses need to be deducted on the appropriate schedule A or E.

This election does not create an immediate tax savings. However, if you are currently caught up in the Alternative Minimum Tax or have no taxable income, then real estate taxes and miscellaneous itemized deduction are of no benefit to you in the current year.

The tax savings will come when the property is sold, as cost basis in the property will be increased by the capitalized expenses.

First Time Homebuyers
If a first time home buyer purchases a home in November or December of a given year, he or she may not generate enough deductible interest and points to exceed their standard deduction. By electing to amortize the points over the life of the loan, the deduction may be small each year. However, it will generate more cash flow than deducting the points in a year that they have no benefit.

By reviewing your option to deduct points paid in the year paid or amortize them over the life of the mortgage, you could create a cash flow savings over time.

Refinancing
One common misunderstanding, when it comes to refinancing a current mortgage, is that all of the interest is deductible. This may not be the case. Any dollar over the existing balance, at time of the refinance, is considered home equity debt unless it is used to improve the existing home. Remember, only $100,000 of home equity debt interest is deductible.

As with most areas of the Tax Code reviewing and planning for interest paid should be an annual conversation you have with your tax professional. As you have read above there are options and planning opportunities for all types of interest.

To discuss mortgage interest in more detail, please come see me at Makara & Associates, a Naples CPA firm. I would be happy to review your situation. We offer many accounting services to meet your needs including; cash flow planning, social security planning, and so much more. As always, if you have any questions, concerns or comments, please feel free to contact me online or give me a call directly at (239) 384-9688. Also, don’t forget to connect with Makara & Associates on Facebook.

- Mark

Due to this continued growth, I am happy to announce that we have welcomed two new staff members to our team at Makara & Associates. We would like to introduce you to Stan English and Theresa Cosey. Please feel free to contact them at any time with questions regarding your tax returns or other accounting needs.

As we advance into 2012, the staff at Makara & Associates is continuing to find ways to ensure that you receive unparalleled customer service. In addition to increasing our staff, we have also created online resources which provide you with information and answers to your questions, 24 hours a day, 7 days a week.

Some of these resources include a new website, www.Makara-Assoc.com. This website provides you with in-depth information about various services that are available to you through Makara & Associates. It also includes a “Learn More” page, which outlines common questions about accounting practices, payroll, tax planning, controllership, Social Security, Quickbooks, and much more, providing you with comprehensive answers to these questions. In addition, we have also implemented a Blog site, www.cashflowplanningforlife.com, which further provides tips and informational resources about everything to do with accounting and financial stability for you, your family, and your business.

Again, we thank you for your continued loyalty to Makara & Associates, your referrals, and for your help in making the past 5 years a success. We look forward to many more to come!

Wishing you and your loved ones a wonderful Holiday season and a happy, prosperous New Year!

Sincerely,

Mark Makara and the Staff at Makara & Associates

P.S. You can also connect, follow, or like us on:

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This is the second installment of Tax Deductions & You: What You Need to Know which can also be downloaded from our free eBook library.

Any loans that fall under the nondeductible category need to be reviewed along with your cash or equity availability. If possible, they also need to be re-characterized to a deductible form of interest.

An example of this would be having availability on a home equity loan (balance after transfer must be below $100,000) and paying off an auto loan or credit card. This will increase cash flow two fold:

1. The interest rate charged on a home equity loan will, in most cases, be lower than the rate charged on an auto loan or a credit card balance.
2. The interest that is paid will be deductible on your personal tax return, saving you money each year when filing your return.

When considering this method of converting non-deductible interest into deductible home equity interest, you should consider the length of time you plan on staying in your current home.

If the home will be sold within the next 12 to 24 months, this may not be in your best interest. This is because you will be forgoing the down payment on your next home purchase. Job changes and other unforeseen circumstances happen without warning, something to consider before pulling the trigger on extending the home equity loan.

A second example of equity availability would be if you are the owner of a business with the availability to extend a shareholder loan.

To discuss these strategies in more detail, please come see us at Makara & Associates, a Naples CPA firm. We would be happy to review your situation. We offer many accounting services to meet your needs including; cash flow planning, benefits of a controllership, social security planning, and so much more. If you have more questions or would like more information contact us online, call (239) 384-9688 in Naples, (239) 768-5008 in Fort Myers, or connect with Makara & Associates on Facebook.

- Mark

There is no doubt that bankruptcy must always be the last resort. Before filing a bankruptcy, you should try every option available. It may be either credit counseling or debt settlement programs. You can also go for a debt consolidation through a home equity loan or ask your creditors for a reduced payment plan or a discounted lump sum payment. In this article, we will discuss about the last method as it has some pitfalls.

Often, lenders agree to compromise the balance if it is paid in one lump sum payment. However, troubles arise when they compromise more than $600 on the bill. If done so, the bank has to file form 1099C with the Internal Revenue Services (IRS) declaring that discount as an income. Now, you have to pay tax on that money, as IRS will consider it as taxable income. The IRS has a very instructive publication on this issue. However, there are always exceptions. In this case, there are the following:

• You are bankrupt at the time when the debt is written-off. The IRS has defined it very transparently.
• You file insolvency before the debt is written-off and form 1099C is issued.
• You are a homeowner of a foreclosed home whose mortgage lien was not paid in full and further, the debt was written-off during 2007-2012.  Here, the Mortgage Forgiveness Act of 2007 may be fruitful to you. You may see the IRS’ website to make sure you qualify for this exception.

Therefore, if you file insolvency before the issuance of the 1099C, or the forgiveness that aroused from the sale of your residence between 2007 and 2012, there is no tax liability.

Hence, if you are going to make any sort of deal with your creditors, do so with the advice of a qualified accountant to know better about the tax implications of that deal. If you have the necessary money to pay off the debt and the taxes, then go ahead. Now, the form 1099C will not arrive as a surprise and you will be ready to pay the taxes when you file your return. If nothing helps, think of filing bankruptcy and consult it with your attorney.

…also make your tax planning easier, as you can get an income tax deduction.

If you’re a sole proprietor or a husband and wife partnership (in other words, not a corporation) you can create an income tax deduction and you will not have to match (employer’s share) the Social Security or Medicare tax normally due for an employee.

You will be required to withhold the Social Security and Medicare tax from your Child’s pay.

Don’t think you just found a wind-fall, the work performed and wage paid needs to match your Child’s ability and be consistent with a comparable employee.

I.e. your 14 or 15 year old would not be allowed on a construction site.

You also MUST review all applicable state child labor laws.

Planned correctly this can add up to a nice tax savings for you and begin to teach your children cash management skills.

If you have any questions, comments, or concerns about Tax Planning, or think I can help you in any other ways, contact me, or give me a call at (239) 384-9688.

- Mark

This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

…you can create a nice tax break.

Your tax planning will definitely benefit from doing this!

A simple transaction can be a win-win for both you and your parents or in-laws.

Assuming your parent’s home is paid off or the interest deduction added to other itemized deductions is less than the standard deduction, a tax savings can be created.

This will also put needed cash into the hands of your parents or in-laws without them having to refinance or dip into a home equity loan.

You must pay fair market value for the home when purchased, however courts have allowed landlords to charge up to 20% below fair market rent to relatives (L.A. Bindseil, TC Memo 1983-411).

Any losses generated by the rental property will fall under the passive activity rules, which will need to be reviewed prior to making the transaction.

Besides writing off expense that would not normally be a deduction (i.e. operating expenses for the property), once your parents or in-laws are no longer living in the home you will have options;

• Sell it
• Rent it to another tenant
• Move in.

Moving in can create a bonus benefit; if you make the home your principle residence for 2 or more years you will be able to shelter another $250,000 or $500,000 worth of capital gains income though the IRC Section 121 deduction.

If you have any questions, comments, or concerns about tax planning, or think I can help you in any other ways, contact me, or give me a call at (239) 384-9688.

- Mark

This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

…tax deductions and year-end planning yet?

If you haven’t, then you probably haven’t heard of all the latest and sometimes obscure tax deductions that you can take advantage of.

Make sure that you check out the following posts to learn about all the tax deductions and year-end planning that you can before the end of the year.

Six Tips to Recover the
 “Not-So-Common” Charitable Tax Deductions

• Six Tips to Recover the
 “Not-So-Common” Charitable Tax Deductions – Part 1

• Six Tips to Recover the
 “Not-So-Common” Charitable Tax Deductions – Part 2

Six Tips to Reduce Your Personal Income Taxes

• Six Tips to Reduce Your Personal Income Taxes – Part 1

• Six Tips to Reduce Your Personal Income Taxes – Part 2

Five Tips for Business Year-End Tax Planning After the Small Business Jobs Act of 2010

• Five Tips for Business Year-End Tax Planning After the Small Business Jobs Act of 2010 – Part 1

• Five Tips for Business Year-End Tax Planning After the Small Business Jobs Act of 2010 – Part 2

To access all of the year end tax saving tips, download my free ebook: 17 Year End Tips for 2010. It’s a quick read that will save you a ton!

If you have any questions about tax planning or think I can help you in any other ways, contact me, or give me a call at (239) 384-9688.

- Mark

This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

…charitable deductions this year?

If you are working on your tax planning, then you should know about all of the different deductions that you can get from being charitable.

There are probably a few things that you didn’t realize you could deduct.

You can make charitable tax deductions if you host a foreign exchange student in your home.

There are a few rules that you need will need to follow in order to be able make this deduction.

Did you know that you can deduct fund-raising dinners?

Only a specific portion of the cost can be deducted but, you should always remember that these deductions can add up.

Most importantly, you should keep receipts from any charitable activities that you are involved in.

This way, when you go to do your taxes, you will have all of your charitable contributions easily accessible as well as having a record of them in case you require documentation.

To read about all of the Year End Tax Tips, check out my free ebook: 17 Year End Tips for 2010 for more in-depth tips!

If you have any questions about tax planning or think I can help you in any other ways, contact me, or give me a call at (239) 384-9688.

-Mark

This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

…and help those in need?

While you can’t deduct the time or effort you spend on charitable causes, there are a few things that you can deduct.

Charitable tax deductions can include any donations or out-of-pocket expenses and they can make your tax planning a lot easier.

If you keep track of these expenses you can create a nice tax deduction.

For example you could get a deduction from transportation used to get to and from a charitable event.

This includes any parking fees or tolls on the way!

Pretty neat if you ask me.

Have you been making phone calls looking for volunteers?

That’s right, you can deduct that as well.

Did you know that any uniforms that you get on the behalf of a charity are deductible?

It can’t be just a plain t-shirt, as this is considered casual clothing.

You should always know exactly what you are allowed and what you are not allowed to deduct, which is why you should check out my free eBook: “17 Year End Tips for 2010” for more in-depth tips!

If you have any questions about tax deductions or think I can help you in any other ways, contact me, or give me a call at (239) 384-9688.

- Mark

This information is based on facts, assumptions and representations as stated and authorities that are subject to change. We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER: The information within this blog is for informational and educational purposes only and is not tax advice and should not be used as such. The facts of each individual situation can have significantly different outcomes when applying tax law. The hiring of a CPA is an important decision not to be based solely on advertisements.

the 2009′s highest income tax rate was 35%, so:

If your estate was larger than the 2009 exemption amount of $3.5 million you may have been able to save 10% in estate taxes by converting to a Roth IRA.

This is a complex issue and should be reviewed with your legal and tax professional(s) but should not be over-looked when making the Roth conversion calculation decision.

As with any tax law change the financial news publications do a good job of giving the basic’s, however tax law changes always require digging deep into the law change to bring out the additional tax savings and long-term cash flow opportunities.

The Roth conversion is no different; this law change could be the biggest in your life-time.

The options are limitless and require you and your tax professional to stand back and review them all.

Some could affect your family’s finances 70, 80 or even 100 years for a Roth conversion completed in 2010, depending on your age.

Think of the tax-free compounding affect on any assets for that length of time, not to mention the other benefits mentioned above.

If you have any questions, comments or concerns about Roth IRA’s, or think I can help you in any other ways, contact me, or give me a call at (239) 384-9688.

- Mark

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This information is based on facts, assumptions and representations as stated and authorities that are subject to change.  We will not update this information for subsequent legislative or administrative changes of future judicial interpretations.

LEGAL NOTICE AND DISCLAIMER:  The information within this post is for informational and educational purposes only and is not tax advice and should not be used as such.  The facts of each individual situation can have significantly different outcomes when applying tax law.  The hiring of a CPA is an important decision not to be based solely on advertisements.