Renting Your Vacation Home?

A vacation home can be a house, apartment, condominium, mobile home or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short.

In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence.

Here are some tips from the IRS about this type of rental property.

• You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.
You may also be subject to paying Net Investment Income Tax on your rental income.

• If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. The number of days used for each purpose determines how to divide your costs.
Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.

• If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

• If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.

Get Publication 527 for more details on this topic.

Additional IRS Resources:

• Publication 527, Residential Rental Property (Including Rental of Vacation Homes)
• Tax Topic 415 - Renting Residential and Vacation Property

Tips for Employers Who Outsource Payroll Duties

Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents. Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.
Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients’ best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on IRS.gov.
Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee’s share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on IRS.gov.
Here are some steps employers can take to protect themselves from unscrupulous third-party payers.

• Enroll in the Electronic Federal Tax Payment System  and make sure the PSP or RA uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477or visit www.eftps.gov.
• Refrain from substituting the third-party’s address for the employer’s address. Though employers are allowed to and have the option of making or agreeing to such a change, the IRS recommends that employer’s continue to use their own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds.
• Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933 or visit a local IRS office. See Receiving a Bill from the IRS on IRS.gov for more information.
• For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, reporting agents are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer’s responsibilities including a reminder that the employer, not the reporting agent, is still legally required to timely file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on IRS.gov for more information.
• Become familiar with the tax due dates that apply to employers, and use the Small Business Tax Calendar to keep track of these key dates.

Discharging Income Taxes in Chapter 7 Bankruptcy

The three general rules for taxes to be discharged in a Chapter 7 bankruptcy are the following:

1.  The taxes must be three years old, computed from the most recent date the tax return was due, typically April 15 of the year following the taxable year.  Note: if extension was filed the three year time frame starts as of the extension time frame, typically October 15, even if the tax return was filed prior to October 15.

2. The tax return must have been filed more two years preceding the filing of the bankruptcy.  Note: was there a Substitute return filed by the services, prior to the taxpayer actually filing their own return, if yes, even if the rules are met the taxes may not be discharged.

3.  The tax claim was assessed at least more than 240 days preceding the filing date of the bankruptcy. 

While these are the three general rules, there are many areas to be wary of when determining the dischargaablity of taxes.  A complete review of the tax transcripts should be the first step in the reveiw process.  A tax trascript can be acquired from the IRS by calling to request a trascript be faxed or mailed.  The transcript should be reviewed to determine the date of filing the tax return, any extensions filed, any tax liens filed, any fraud penalties.

Even if the taxes are discharged in bankruptcy, if a lien has been filed, it will attach to the pre- petition assets and survive the bankruptcy.   

Special Tax Benefits for Armed Forces Personnel

If you’re a member of the U.S. Armed Forces, the IRS wants you to know about the many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return.
Here are ten of those benefits:

1. Deadline Extensions.  Qualifying military members, including those who serve in a combat zone, can postpone some tax deadlines. This includes automatic extensions of time to file tax returns and pay taxes.

2. Combat Pay Exclusion.  If you serve in a combat zone, you can exclude certain combat pay from your income. You won’t need to show the exclusion on your tax return because qualified pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Some service outside a combat zone also qualifies for this exclusion.

3. Earned Income Tax Credit.  You can choose to include nontaxable combat pay as earned income to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay remains nontaxable.

4. Moving Expense Deduction.  If you move due to a permanent change of station, you may be able to deduct some of your unreimbursed moving costs.

5. Uniform Deduction.  You can deduct the costs and upkeep of certain uniforms that regulations prohibit you from wearing while off duty. You must reduce your expenses by any reimbursement you receive for these costs.

6. Signing Joint Returns.  Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duty or conditions, the other may, in some cases sign for both spouses, or will need a power of attorney to file a joint return.

7. Reservists’ Travel Deduction.  If you’re a member of the U.S. Armed Forces Reserves, you may deduct certain travel expenses on your tax return. You can deduct unreimbursed expenses for traveling more than 100 miles away from home to perform your reserve duties.

8. Nontaxable ROTC Allowances.   Educational and subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

9. Civilian Life.  After leaving the military, you may be able to deduct certain job hunting expenses. Expenses may include travel, resume preparation fees and job placement agency fees. Moving expenses may also be deductible.

10. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.

Tips for Taxpayers Who Travel for Charity Work!

Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.
1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified.
2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.
3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
5. Deductible travel expenses may include:

• Air, rail and bus transportation
• Car expenses
• Lodging costs
• The cost of meals
• Taxi fares or other transportation costs between the airport or station and your hotel

How setting up an IRS Installment Agreement may reduce related Penalties.

Certain taxpayers who enter into installment agreements on timely filed returns will have the failure to pay penalty reduced from a half to a quarter percent per month for any month in which an installment agreement is in effect as long as the following conditions are met:

1. the installment agreement was entered into on or after January 1, 2000;
   
2. the balances are due from an individual;
   
3. the tax return(s) was timely filed, including extensions; and
   
4. no CP 504, LT 11, or Letter 1058 was sent, increasing the failure to pay penalty from one-half (0.5) to one (1) percent.
   
    
    

IRS Allows Additional Time File for those Affected by Boston Marathon Explosion

The Internal Revenue Service today reminded Boston area taxpayers and others affected by the April 15 Boston Marathon explosions that their individual income tax returns and tax payments are due Monday, July 15.
This relief applies to all individual taxpayers who live in Suffolk County, Mass., including the city of Boston. It also includes victims, their families, first responders, others impacted by this tragedy who live outside Suffolk County and taxpayers whose tax preparers were adversely affected.
The relief gives eligible taxpayers until July 15, 2013, to file their 2012 returns and pay any taxes normally due April 15. No filing and payment penalties will be due as long as returns are filed and payments are made by July 15. By law, interest, currently at the annual rate of 3 percent compounded daily, will still apply to any payments made after the April deadline.
The IRS automatically provided this extension to anyone living in Suffolk County. Eligible taxpayers living outside Suffolk County must have claimed this relief by calling 866-562-5227 before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have these penalties abated.