Five tax deductions for landlords

For many rental property owners, tax deductions can mean the difference between making and losing money. Fortunately, landlords can take advantage of federal tax deductions in the form of the following:

1. Loan interest

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 Loan interest is generally the single largest expense that rental property owners have to pay. Landlords can deduct interest on mortgages for the rental property, interest on credit cards, and interest on personal loans used to maintain or improve the rental property.

2. Repairs

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 Landlords spend a lot of money each year in repairs: the costs of re-painting walls, replacing broken tiles, or fixing leaky water heaters, and other similar activities qualify for this type of tax deduction. As long as the repairs don’t extend the life of the property or add material value to the property, the rental property owner can write them off.

3. Local and long distance travel expenses

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 Landlords can deduct travel expenses as long as the trips were made in connection to the property, for example, showing prospective tenants around the property. For local travel, landlords can apply for a tax deduction every time they drive to the property. Landlords can deduct the cost of fuel, car repairs, and maintenance. Long-distance travel expenses typically include transportation costs, lodging, and meals.

4. Legal and professional fees

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 If a landlord hires a lawyer, accountant, real estate agent, or some other professional for assistance in running his business, the fees that the landlord pays are deductible.

5. Casualty losses

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The loss or damage of a property due to an unexpected, sudden, and unusual event like earthquakes, hurricanes, and floods is tax-deductible. The amount that could be written off depends on the amount of damage undergone by the property and the coverage of the landlord's insurance.

Before attempting to claim any tax deductions, in case of an audit, landlords must keep permanent records of tenant leases, legal documents, permits, and property titles, and short-term records, like lists of repairs, advertising costs, and wages paid.  

Isidor Hefter is a certified public accountant specializing in tax planning and research for corporations and individuals with high net worth. For more tax-related articles, subscribe to this blog.

REPOST: Supreme court agrees to hear landmark case on whether states may tax income earned in other states

Does a state violate the U.S. Constitution if it collects income taxes from its residents when the income was earned from another state?  This Forbes article provides some answers.
 

The Supreme Court had a busy day on Tuesday. When the dust settled, however, it had only granted one new case – but it was a big one. The nation’s highest court granted certiorari to Comptroller v. Wynne, setting the stage for a fight that could rewrite tax laws in states across the country.

As noted before, lawyers and judges like to use Latin. Granting certiorari (or “granting cert” for the really cool hipster lawyers) means that the Supreme Court will hear the matter.


Some cases have what’s called “original jurisdiction” in the Supreme Court; those cases, which are defined by statute (28 U.S.C. § 1251) go straight to the Supreme Court. The typical case associated with original jurisdiction would be a dispute between the states. Most cases, however, don’t go that route. To be heard at the Supreme Court level without having original jurisdiction requires the losing party at the appellate level to file a petition seeking a review of the case. If the Supreme Court grants the petition and decides to hear the matter, it’s called a writ of certiorari. And that’s what happened here.

Image source: Forbes.com

The question presented in the Petition for Certiorari in Wynne (downloads as a pdf) is:

Does the United States Constitution prohibit a state from taxing all the income of its residents — wherever earned — by mandating a credit for taxes paid on income earned in other states?

Procedurally, the question found its way to the Supreme Court after the Court of Appeals of Maryland “reached the unprecedented conclusion” that a state is in violation of the Commerce Clause in the U.S. Constitution if it collects income taxes from its residents when the income was earned from sources in another state and is subject to tax by the other state.


In this case, a married couple, the Wynnes, reported taxable net income of approximately $2.7 million. More than half of that amount represented a share of earnings in an S corporation with operations in several states. The Wynnes claimed a credit on their Maryland tax returns for taxes paid to 39 other states but not for any county or local government taxes. The State of Maryland denied the credits and issued a notice of deficiency and the Wynnes appealed. At a hearing, the assessment was affirmed.


Eventually, the Wynnes amended their petition to claim that the tax credit statute was in violation of the Commerce Clause of the United State Constitution. That claim was rejected. At appeal, the Wynnes argued that the state of Maryland was constitutionally required to extend the credit for taxes paid to other states to the county as well as the state, raising the question of whether a state had the unconditional right to tax all income based on residency. The Circuit Court agreed with the Wynnes.


On appeal by the state, the Court of Appeals agreed with the Circuit Court. The Court wrote that, based on its belief that the Constitution prohibits “double taxation” of income earned in interstate commerce, a state may not tax all the income of its residents, wherever earned.


That decision, it was argued by the state, conflicted with a number of “fundamental precepts” involving the “well-established principle” that “a jurisdiction… may tax all the income of its residents, even income earned outside the taxing jurisdiction.” However, in Wynne, the Court of Appeals concluded that the Commerce Clause imposes restrictions on a state’s power to tax its own residents: in other words, Maryland was not allowed to tax all of its residents’ income if the resident paid taxes on that income to another State.

The state argued that this finding was inconsistent with prior law and was, in a word, wrong. The consequences, according to the state’s petition, could be the “significant loss of revenue that will amount to tens of millions of dollars annually.”


And that’s why you should care. Not only does this decision have consequences for Maryland but it “has potential repercussions beyond Maryland,” according to the petitioner (downloads as a pdf). The reply brief for the petitioner specifically notes that “while most states provide full credits for income taxes paid to other states, many local jurisdictions do not.” The result, if the Wynne decision holds, according to the state is that “any jurisdiction taxing its residents’ entire income will face needless uncertainty about the viability of its tax system and its potential exposure to onerous refund claims.”


In other words, an affirmation could cost local and state governments millions of dollars.

The loss shouldn’t matter, according to Dominic Perella, a lawyer with Hogan Lovells who is representing the Wynnes. He said, about the case: “Maryland’s approach is unfair to people who make money in more than one state.”

The question is big enough for the feds to weigh in. The Obama administration issued an amicus curiae brief in April of this year, supporting the petitioner’s position (downloads as a pdf). Amicus curiae is Latin (yes, more Latin) for “friend of the court” and describes an argument made by someone who is not a specific party to the proceedings but believes that the court’s decision may affect its interest. Under the Rules of the Supreme Court of the U.S., “An amicus curiae brief that brings to the attention of the Court relevant matter not already brought to its attention by the parties may be of considerable help to the Court. An amicus curiae brief that does not serve this purpose burdens the Court, and its filing is not favored.”


The feds argued in their brief that “though States often choose to grant tax credits to their residents for income taxes paid in other States, nothing in the Commerce Clause compels a State to offer such credits or otherwise defer to other States in the taxation of its own residents’ income.” Further, “[t]he decision… may lead to challenges to similar tax schemes in other jurisdictions; and is inconsistent with statements made by the highest courts in other States.”


The U.S. Supreme Court clearly agreed that this was a matter that needed to be resolved. Granting cert doesn’t mean that the court believes that the petitioner is correct: the regular court rules apply. There will be arguments and more (!) briefs before the Court reaches a decision.
These matters do not move quickly: you shouldn’t expect oral arguments on this matter until fall of this year. But expect plenty of speculation – and interest – before then.

Isidor Hefter is an expert in federal and state income taxes.  Follow this Twitter page for more updates about taxation.

REPOST: Last Minute Tax Tips For First Time Filers

This Forbes.com article shares that tax time is learning time. Continue reading to find out why.

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Being a kid has many perks. You get summer vacations, superhero costumes are acceptable garb for most occasions and a firm belief that you’re destined to live in the White House is adorable. Plus, you don’t have to file taxes–or, if you do, your parents curse the “kiddie tax” and complete the forms for you. A 1985 New Yorker cartoon sums up the jealousy adults feel about this fact well, “Remember, son, these are your tax-free years. Make the most of them.”

But now, you’re gainfully employed –which is a good thing–and ready to undertake an adult rite of passage: filing your tax return at the last minute. (Ask your parents to tell you about the lines at the US Postal Service before the advent of online filing.) Sure, you could get an automatic six month extension by filing form 4868. But you’d still have to fill out that form and pay all you owe by April 15. The IRS takes deadlines very seriously–or at least those it imposes on taxpayers, if not itself. Moreover, if you’re an employee who has taxes withheld from your paycheck, you’re likely to be getting a refund anyway. So really, there’s no reason not to tackle your 1040 now.

Paying taxes is not fun, but if you’re prepared filing can be painless and even free.

Image Source: forbes.com

Software

Free, you say? In 2003, eager to head off free tax preparation by the Internal Revenue Service, a group of for-profit tax software companies,operating as the Free File Alliance, agreed to provide free filing for low and moderate income taxpayers. Each of the 14 alliance companies sets its own eligibility criteria, but anyone with 2013 adjusted gross income of $58,000 or less will be able to find at least one free federal filing options.

The IRS vets the software for security and privacy standards and offers a handy Help Me Find Free File Software tool, which uses your age, estimated adjusted gross income and home state to recommend the best software for you. There are also yes or no questions about your earned income tax credit eligibility (if you’re childless, you can’t claim this credit if you earned more than $14,340 in 2013 or were younger than 25 at the end of the year) and whether you or your spouse received military pay last year. When determining what software is right for you, keep in mind that some will prepare select state returns for free as well, while others will hit you up with a charge for state filing that can run to $40 or more.

The tax software market is dominated by Intuit’s TurboTax program, with H&R Block software a distant second. Both companies offer easy to use programs with a fair amount of explanation and produced identical results when I tested them (which, of course, they should). Free options will cover the average 20-something wage-earner’s tax filing needs. The sites can even import W-2 information for you, although it may be worth entering the information manually at least once so you understand what is on there and just how much is withheld from your paycheck. (A W-2 reports your annual wages and the amount already withheld to pay federal and state income, Social Security and Medicare taxes. Your employer sends the IRS a copy and the IRS computer matches the information on it against your 1040, so if the numbers on your W-2 are wrong, ask immediately for a corrected form. Ditto for any 1099s you’ve gotten reporting interest or miscellaneous income.)

For all the talk of “free filing,” if you’re self-employed or do a little freelancing and have to file Schedule C, you’ll likely have to shell out for a paid version of the software—-up to $99.99 list (but you can get it for $79.99 on Amazon) for the TurboTax Home & Business version. If you’re an investor, check out the offers from your broker or mutual fund company; Vanguard and Fidelity, among others, offer discounted access to TurboTax. The other catch is that both TurboTax and H&R Block charge extra to electronically prepare and file your state returns. (Insult to injury department: TurboTax also upped its prices for filing after March 21.)

A cheaper option is the third largest player in the market, TaxAct, which offers free federal filing no matter what forms you must fill out or what you earn. It charges just $17.99 for an “ultimate” version with state filing included.

As your return gets more complicated however—say you’re self-employed and pay other independent contractors or Grandma left you some shares in partnerships that generate indecipherable Schedule Ks—you may want to consider upgrading to human advice. “I would caution people,” says Clarence Kehoe, head of the tax department at accounting firm Anchin Block & Anchin, “under the old garbage in, garbage out scenario – the information you get out of that computer is going to be as good as the information you put in. You have to be careful.”

Hiring a pro can run into hundreds of dollars. “Most people who are starting out really can’t justify going to a tax preparer,” says Margaret Starner, a financial advisor with Raymond James. But for people who feel they need guidance beyond what software (or their parents) can provide she recommends going to a preparer one year, and then, after seeing how a pro does it, using that example to do it yourself. “You should understand every line on your return,’’ Starner says. (Or at least have a good enough idea that if you enter something wrong in TurboTax you’ll be able to notice when it spits errors.)

Be careful whom you hire—here are 11 questions to ask when hiring a tax preparer. Ultimately your tax return is your legal responsibility and neither “my tax pro was a dishonest idiot” or “the software didn’t ask me” is a valid excuse for excluding income or grabbing deductions and credits you’re not entitled to. (You really don’t want to mess with the IRS; you could waste the best years of your life on hold waiting to plead your case with a human being at the IRS and if you let problems fester you could be hit with tax liens that sink your credit scores for years.) On the flip side, if you don’t know what you’re doing or skip sections in the software you could miss out on a bigger refund. The IRS won’t mind, but your bank account might.

For more read Kelly Phillips Erbs’, “A Beginner’s Guide To Taxes: Do I Need To Hire A Tax Preparer Or Can I Do My Return Myself?”

Getting Organized

But we are getting a bit ahead of ourselves. Kehoe points out,  “Planning for your taxes is a yearlong event, not something you do on April 14th.”Adding, “Maybe this is just me because after a little while you lose your memory, but it’s very very hard to remember what you did on January 1^st a year and a half later.” 

Read more.

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More about tax planning and guides can be found on this Isidor Hefter blog site.

REPOST: A Surprising Number of Americans Think Cheating on Taxes Is ‘A-OK’

According to a recent survey, 12% of Americans say it's okay to cheat on taxes. Read more in this Time.com article.

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Cheating on your taxes by fudging the numbers “a little here and there” or “as much as possible” is totally OK with 12% of Americans, according to a survey of 1,000 people from the Internal Revenue Service Oversight Board.

That number is up from a low of 9% in 2008 and a slight increase over the 11% who felt cheating was OK in 2012, CNN Money reports.

That trend is matched by an increase in the numbers of Americans who have a bad opinion of the IRS. A record low of 39% said the tax agency “maintains a proper balance between its enforcement and service programs.”


Subscribe to this Isidor Hefter Facebook page for more related news in the fields of tax planning and research for individuals and enterprises.

REPOST: Planning For An Uncertain Life Expectancy In Retirement

This Forbes.com discusses the importance of setting realistic goals in retirement.

When figuring out how much to save for retirement or how to withdraw assets during retirement, one of the thorniest issues is not knowing how long the individual is going to live. Living longer than expected, which is often referred to as longevity risk, can increase the likelihood of other risks occurring, driving up certain retirement expenditures such as long-term care costs. For those moving into retirement, this is particularly tricky because part of the planning must include a way to secure an adequate stream of income for an unpredictable length of time. For example, let’s say that you build your retirement plan expecting to live to age 82. However, it turns out that you live to 92. How are you going to make your money last an additional 10 years?

The uncertainty of an individual’s lifespan cannot be eliminated. However, planning to have sufficient assets requires setting realistic expectations of how long retirement will last. According to the Social Security Commission, the average life expectancy for those still alive at age 65 is 84 for males and 86 for females. Planning, however, needs to take into consideration living longer than average, or half of retirees could run out of money before they die. So another consideration is the possibility of living longer than average. The data shows that one in four people alive at age 65 will live past age 90 and one in ten will live past 95.

To help identify the average life expectancy for a stated age and gender, the Social Security Administration provides a life expectancy calculator. The calculator indicates that a 60 year old male born in 1953 has an average life expectancy of 83.4 years. If that same person lives to age 66, life expectancy extends to 84.6. Furthermore, if he lives to age 70, his life expectancy extends to age 86. This demonstrates a critical point about life expectancy—the longer you live, the longer your life expectancy. This means that as people age they need to alter their expectations about the length of their life and retirement.

Estimating life expectancy may begin with a table or calculator, but the next step must take into consideration personal and family health history. One online calculator, the living to 100 Calculator, takes these personal factors into consideration when creating a life expectancy estimate. By entering information about your current health, lifestyle habits, and family’s health history, the calculator is able to create a more accurate personal life expectancy estimate.

Solutions for an Uncertain Lifespan

Since planning requires making educated choices about an uncertain retirement period, many will want to plan to age 90, as one in four people are expected to live that long. However, fewer may want to plan for living past age 95, as only one in ten people are expected to live that long. Those with a greater concern about outliving their assets will choose a longer planning horizon. As such, an individual’s perceived life expectancy and risk aversion will impact his or her retirement planning decisions.

One common strategy for all types of risk management is to transfer the risk to a third party. Transferring the risk of living too long can be accomplished by increasing or acquiring sources of lifetime income. This can be accomplished through a variety of mechanisms:

Deferring Social Security benefits, which are an inflation protected lifetime income stream, up to age 70 results in a larger portion of one’s retirement income that will be payable for life.

Electing life annuity payments from an employer sponsored retirement plan will provide lifetime income. Unfortunately, most employees who have the option to take a lump sum make this election, forgoing the annuity alternatives.

Purchasing a life annuity can create a stream of income for either the life of a single individual or over the joint lives of a couple. Immediate annuities can be purchased at retirement or layered over time adding flexibility.

Purchasing a deferred income annuity (a life annuity that begins at a later date) allows for the pre-purchase of lifetime income for those that want to build retirement income prior to retirement or want to buy an annuity that begins later in life, which can be a cost effective way to protect against longevity risk.

Deferred annuities can also be used to create income for life, as these can be annuitized at a later date, allowing the owner to lock in lifetime income. Deferred annuities can be purchased with riders that provide for lifetime withdrawals at a rate specified in the contract. Lifetime income is also available through life insurance contracts. When a death benefit becomes due, a spouse can choose a life annuity form of payment. Also, cash value life insurance contracts can be exchanged under code section 1035 without tax consequences for a life annuity. While increasing sources of lifetime income is one strategy to protect against longevity risk, there are other options when planning for an uncertain retirement time period. As such, some sources of income are payable for an indefinite period of time, which can provide some protection from longevity risk without specifically having to set aside the assets for the sole purpose of lifetime income.

With reverse mortgages under the Home Equity Conversion Mortgage program (HECM) one of the withdrawal options is the tenure option. This is a specified monthly payment for as long as the last borrower remains in the home.

Rental income can provide a lifetime income stream and serve other purposes as well. That could be renting out a basement apartment, vacation home, or commercial property.

Dividend paying stock has no time limit on the payment of dividends and can provide lifetime income, potential investment gains, and company ownership rights.

Those with active business interests can also receive ongoing payments. This can be anything from owning part or all of a company to receiving royalties from books, television shows, or other property interests.

For retirees who fund their living expenses with withdrawals from their portfolio, it is important to carefully consider how much can be withdrawn each year while still ensuring the portfolio lasts a lifetime. This is a difficult decision that should involve consideration of academic research, professional assistance, an individual’s goals and risk tolerance, and changes in market conditions over time.

Another option is the use of a contingency fund, which can be built to address longevity concerns as well as other risks. With this approach, it is important to understand that when individuals live longer they increase exposure to other risks as well, such as inflation risk, public policy risk, and the risks associated with aging, such as the need for long-term care and increased medical expenses. Accordingly, a contingency fund should be part, but not all of the solution.

• A contingency fund for this risk can be a diversified portfolio with investments that emphasize long-term growth.
• A Roth IRA makes a good tax wrapper for this type of account since the value is not diminished by taxes, and if the funds are not needed, the Roth is a very tax efficient vehicle to leave funds to heirs.
• A contingency fund could also be the cash value of a life insurance policy—i.e., the goal may be to provide the death benefit for heirs, but if needed the cash value can be withdrawn or borrowed from the policy.
• A reverse mortgage with a line of credit payout option is another good contingency plan.

Ultimately, the uncertain length of retirement and longevity risk make planning for retirement extremely difficult because the retiree must have income to meet an uncertain amount of expenditures over an uncertain time period. While this risk cannot be completely eliminated, it can be planned for and managed through a variety of techniques, financial products, and planning strategies.

Isidor Hefter holds a Bachelor’s degree in accountancy, which he completed at the City College of New York. More updates in the world of finance can be found by visiting this Facebook page.

REPOST: Making It Safe for Banks to Take (Legal) Pot Money

Read about the banks effort to be able to safely process payments from people or companies involve in marijuana. Bloomberg.com

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Colorado’s pot sellers are open for businesses and enjoying brisk sales since recreational marijuana became legal under state law on New Year’s Day. What those stores do with the revenue they bring in, however, is a different question—one that’s gaining salience and attention as more and more legal pot businesses open up shop.

Anti-money laundering rules forbid banks from processing payments or holding accounts for businesses that deal in drugs that remain illegal under federal law. That has left pot businesses forced to operate largely in cash, hauling bags of bills in to pay state taxes and manage their books. As marijuana legalization spreads, with Washington State permitting recreational use and additional states embracing medical uses, more businesses will face this cash conundrum.

The governors of Colorado and Washington have pressed federal bank regulators to let financial institutions open accounts for businesses that follow the state’s pot regulations, and yesterday the Denver City Council passed a resolution (PDF) “urging swift federal action to provide guidance for banking and other financial institutions to serve legal marijuana businesses.”

They are seeking clarity in the banking world similar to what the U.S. Justice Department has already provided by saying it generally won’t pursue criminal drug cases against businesses or users following state laws. In August, the DOJ said that it could decide to bring cases if a situation violates any of eight conditions, such as failure to prevent sales to minors or to customers who illegally resell pot across state lines.

The Justice Department is already working on a memo to provide some guidance for banks, the Wall Street Journal reports. Whether one will provide enough clarity for banks to feel comfortable isn’t yet clear. Other agencies involved in the discussion include the Financial Crimes Enforcement Network, the Federal Deposit Insurance Corp., the Federal Reserve Board, the Office of the Comptroller of the Currency, and the National Credit Union Administration.

Meanwhile, Bob Hasewaga and three other Washington State senators have submitted a bill to create a state-run bank that would be the sole depository for Washington’s marijuana businesses. Hasegawa acknowledges that the bill is a long shot, but he argues that pot businesses need a solution. “They are hoping against hope that the Treasury Department and the financial regulators are going to come up a letter similar to what the U.S. attorney general produced,” he says. “The only alternative right now is cash-based, which is totally unacceptable and cannot adhere to the attorney general’s guidelines because it can’t track every last dollar.”

Isidor Hefter is a senior partner at Rosen Seymour Shapss Martin & Company LLPholds with over 20 years of experience. To know more about him, visit this Facebook page.

REPOST: Corporate reputation influences tax strategy

Corporate global tax planning and strategy are heavily influenced by its reputation.  This Forbes article explains why and how.  Read the article below: 

Perhaps it was the sight of some of the most well-known company CEOs testifying before Congress on the details of their global corporate tax strategies. Or, maybe it was the widely disputed Government Accountability Office (GAO) report on corporate tax rates that called out U.S. corporations for paying an average 13% tax rate in 2010. Whatever the specific impetus, the outcome is clear: reputation is increasingly becoming a factor that influences corporate tax strategy.

Image source: Forbes.com

We recently raised this topic to a panel of corporate tax experts representing some of the world’s largest accounting firms at our annual SYNERGY 2013 client conference and got some real-world insight into the challenges large companies are currently confronting when it comes to managing their global tax planning, a process heavily influenced by global supply chains and associated transfer pricing compliance. KPMG’s Rema Serafi explained:

“The transfer pricing environment is currently facing a perfect storm. Increased tax scrutiny combined with increased media attention around tax planning has magnified attention on transfer pricing. Interestingly, while there continues to be a focus on the pricing strategy, there is now increased focus on how pricing policies are implemented for accounting purposes. Stakeholders now include tax authorities, regulators, internal audit and  external auditors. Concern about getting the implementation right has moved from the tax department to the C- suite. CFOs, legal departments, risk controllers and those responsible for regulatory matters are now just as concerned about transfer pricing as tax departments. As such, companies are looking for more efficient ways to implement accurately by looking at technology solutions, among other things.”

She’s right. Governments and NGOs around the world, like the OECD, G20, UN and World Bank, are getting involved in the debate over global corporate tax strategies. Meanwhile, companies are facing increased tax complexity as they continue to expand in emerging markets and audits are on the rise. Add the fact that many established economies around the world have been running budget deficits since the recession and you start to see why, suddenly, just about everyone is interested in international taxes.

Hadley Leach, a partner with Ernst & Young LLP, cited the results of a recent survey her firm conducted¸ which found that 66% of companies identified “risk management” as their highest priority for transfer pricing, which was a 32% increase over surveys conducted in 2007 and 2010.  She added:

“There has definitely been a trend toward more conservatism among corporations on international tax strategy. We’re seeing a huge shift in perception around issues of reputational and audit risk and that’s really starting to affect how companies approach tax planning.”

It appears that evolving tax policies, including efforts by the OECD, are going to push harder to ensure that there’s substantive value creation assigned within countries where companies are reporting revenue, and therefore paying tax.

The clear consensus among all of the participants in our panel was that perception has become a serious factor driving corporate tax strategy. The current focus on international tax is rapidly becoming less about limiting tax exposure and more about limiting reputational risk exposure. As Serafi summed it up: “The optics matter.”

As companies continue to move in this direction, expect to see more collaboration between the tax department, finance, accounting and the CFO and more demand for company-wide synchronization of tax policy, global strategy and corporate message.

Isidor Hefter is a senior partner at Rosen Seymour Shapps Martin & Company LLP and specializes in tax planning for corporate and high-net-worth individuals.  Get more materials about tax planning by visiting this Facebook page.