Tax Info Blog

2009 HSA Limits Announced

The IRS released the 2009 HSA limits today.  Here are the new levels:

• Contribution Limit: $3000 ($5950 family)
• High-Deductible Health Plan Minimum Deductible: $1150 ($2300 family)
• Out-of-Pocket Maximum: $5800 ($11600 family)
• Over 55 Catch-Up Contribution: $1000 ($2000 if both spouses age 55 or older)

Most HSA plans have a deductible of at least $1200 single/$2400 family, so this shouldn't affect too many people.  The extra contribution amount is yet another incentive to save more tax-free for future health needs.

Depreciating Leasehold Improvements

Q: What happens if I'm leasing a business space, and make an improvement on it?  Can I get any sort of tax deduction for it?

A: Yes, assuming Congress extends this currently-expired "leasehold improvement" rule by the end of the year.  If you rent a business location and make an improvement to it (say, a new carpet), you can elect to depreciate the improvement over 15 years (instead of the 39 years you would have to for other non-residential business real property improvements).  The straight-line method must be used, usually with the half-year convention.

The improvement must be made by either the lessor or the lessee.  The area must be exclusively for the use of the lessee.  It has to happen at least three years after the overall building is placed in service as a business asset.  Additions, elevators and escalators, common area improvements, and structural improvements are not allowed.  Transfers to new owners have complicated rules.

IRS Releases FAQs on Stimulus Rebate

I've been getting quite a few questions about the stimulus rebate, so hopefully this new FAQ from IRS.gov will be a good resource.

Lifetime Learning Credit and the Economic Stimulus Payment

Q: Will a non-dependent who claims the Lifetime Learning Credit be eligible for the economic stimulus payment?
Rocky

A: Yes, assuming that the taxpayer is otherwise eligible.  Consult my post on this for eligibility rules.

Home Office Deduction for Partners and S-Corporation Owners

Q: What's the difference in the home office deduction for general partners and S-corporation owners?
Bonnie

A: Readers should first consult my posts on the home office deduction, partnerships, and S-corporations.  There are two very different treatments, indeed:

1. General partners can take a home office deduction as an unreimbursed partnership expense (UPE) on page 2 of the Schedule E, if they are required to do so under the partnership agreement.  Be sure to attach Form 8829, home office deduction.
2. S-corporation owners are considered to be employees of the S-corporation.  For them, the home office deduction is an unreimbursed business expense, and must be taken as an itemized deduction on Schedule A using Form 2106.  These expenses are considered to be miscellaneous itemized deductions, and as such are subject to the 2% of AGI haircut, the Pease phaseout, and a total AMT disallowance.

Ouch.  So how to make things more palatable for the S-corporation owner?  Simply have the S-corporation reimburse the owner for business use of the home under an accountable plan.  If 10% of the home is business use, have the S-corporation pay for 10% of costs that would be allowable as a home office deduction.  It's a straight deduction from S-corp profits.

The owner will have to then reduce the deduction he takes for mortgage interest and property taxes, and keep track of the depreciation on his home (for recapture upon sale).

Stimulus Payment and Railroad Retirees

Q: Does "Tier 1" railroad retirement income count toward "qualifying income" for the stimulus payment?
Nancy

A: If you need to know what the economic stimulus payment is, click here.

"Tier 1" railroad retirement income is (roughly speaking) the equivalent of Social Security for people who work in the railroad industry (why they weren't just looped into everyone else's Ponzi scheme--err, I mean "retirement plan"--is beyond me).

The IRS has a handy Q&A on their website.  In it, you will find that Railroad Retirement Income is, indeed, qualifying for the credit.  Of course, you have to file a tax return for 2007.

The Mechanics of a Solo 401(k) For an S-Corporation Owner

Q: Could you walk me through how a Solo 401(k) would work for an S-corporation owner?
Randall

A: The first thing to keep in mind is that a Solo 401(k) can only be used at a business with no employees besides the owner and spouse.  If you have other employees, a regular 401(k) or another plan (SEP-IRA, SIMPLE, etc.) must be used.

A S-corporation is a strange beast indeed.  Read more about them here before proceeding.

By now, you know that an S-corporation owner must pay herself a "reasonable salary" (that is, what one could expect to receive on the open market, influenced by the facts and circumstances of the business).  This is where we must begin...

How to Deal with Mortgage Points

Q: Can I deduct points I have on my mortgage?
Scott

A: It depends.  If the mortgage point is used to buy or build a main home, then you can probably deduct the point on your Schedule A (Itemized Deductions) in full.  If the point is paid for virtually any other purpose (refinancing, home equity loans and lines of credit, second homes, rental homes, etc.) then it must be amortized ratably over the term of the mortgage it is connected to.  This is done on a monthly basis.  So, if you have a 15-year mortgage, that's 180 months.  If you get the mortgage in September, you can deduct 4/180ths of the point value the first year, and 12/180ths in future years until you've exhausted it.

For more on this topic, consult IRS Publication 936, Home Mortgage Interest Deduction

401(k) Growing Pains

Q: I became a partner in a 5-partner LLC this January. We have one employee. We are thinking about creating a company-sponsored 401(k) plan, but are concerned that the partners' contribution limits will be affected by how much profit sharing the employee gets. What exactly are the rules here, and is the profit-sharing contribution limit for my individual 401(k) also affected by this?
Christian

There are two issues here: your own eligibility to make individual 401(k) contributions, and what to do with the employee...

Economic Stimulus Rebates and Widows

Q: My father passed away in 2007.  His wife is a widow.  In normal circumstances she could file a married filing jointly return for 2007.  Can she do that and be eligible for the decedent's $600 economic stimulus credit?
Dennis

A: The first point is that a joint return can and usually is filed the year that one spouse dies.  The occupation of the spouse that year is "deceased."

All that is needed to qualify for the $1200 rebate (assuming tax liability and earnings limit thresholds have been met) is the filing of a joint return.  This woman is eligible for the full $1200.

Tax Season Hiatus

See you on the other side of April 15th.  Happy tax prep.

Bipartisan Housing Tax Cut Announced

Late yesterday afternoon, Senate bipartisan leadership announced new tax cut plans as part of a housing package.  Specifically:

1. Businesses will be allowed a four-year NOL carryback for losses incurred in 2008 and 2009, but only if they waive 179 expensing and bonus depreciation
2. Homeowners who don't itemize their deductions will be allowed to deduct up to $500 in property taxes ($1000 MFJ).  Interestingly, this deduction won't be allowed for taxpayers living in jurisdictions that raise property taxes for the rest of this year
3. A new $7000 tax credit (spread over 2008 and 2009) for homes purchased in 2008 which were in foreclosure

IRS Dives Into YouTube, Releasing Stimulus Video

What Happens If My IRA Gets a K-1 Form?

Q: I own shares of a publicly-traded partnership as part of my Roth IRA.  I received a Schedule K-1 (Form 1065). Do I need to report partnership items on my tax return?  I thought a Roth account is exempt from reporting any gains or losses.
Mark

A: First, check to make sure that the recipient of the K-1 is not you personally, but rather your IRA.  The IRA should have its own tax ID number, and should be listed as something like "Custodial Roth IRA for Mark XYZ."

Assuming that's the case, then you can simply file the K-1 in your records.  No income needs to be reported, and no deductions are allowed to be taken.  When and if you sell the partnership shares, gain or loss is not recognized.

Child Tax Credit Claimer: Head of Household, or Non-Custodial Parent?

Q: In a divorced situation in which the children reside 100% with the custodial parent who files as head of household, yet it's the non-custodial parent who claims both children as dependents on his tax return due to stipulations of a divorce decree, which parent is eligible for the child credit?
Janine

A: Readers should first turn to my post on the child tax credit and IRS Publication 972, Child Tax Credit.

Normally, the question of claiming the child tax credit is pretty cut and dry.  But in this case, the custodial parent claims head of household, while the non-custodial parent claims the dependent exemption due to a divorce decree.  So who claims the child tax credit, assuming the taxpayer is eligible?  In this case, I was re-directed to the instructions for lines 6c (dependent exemption) and 52 (CTC) of Form 1040.

What we learn is that the non-custodial parent gets to claim the CTC if all the following apply:

1. The parents are divorced, legally separated, or lived apart for the last 6 months of the year
2. The child received the majority of his support from his parents
3. The child is in the custody of one or both of the parents for a majority of the year
4. The custodial parent fills out a Form 8332 waiving the dependency exemption, and the non-custodial parent attaches it to his return

If one or more of those conditions is not met, the custodial parent gets to claim the child tax credit.

Moving Expenses: Do I Have to Switch Jobs?

Q: Does the moving expense adjustment apply if I move within the same company from one office to another office without the move being mandated by my employer?
C.W.

A: First, you should read my article on the moving expense adjustment to income.

Second, let's examine IRS Publication 521, Moving Expenses. This deduction should be allowed (assuming all the conditions are met).  Provided you meet the distance test and the time test, and your move is related to the start of work (either by time or place), a deduction is allowed.

Often, a company will reimburse for moving expenses and report the reimbursement on Form W-2, Box 12, Code P.  Only allowed expenses exceeding this reimbursement are deductible.

IRS Releases Rebate Schedule(Assuming Timely Tax Filing)

Direct Deposit Payments
Last 2 Digits of Social Security Number:	Payment
00 – 20	2-May
21 – 75	9-May
76 – 99	16-May
Paper Check
Last 2 Digits of Social Security Number:	Payment
00 – 09	16-May
10 – 18	23-May
19 – 25	30-May
26 – 38	6-Jun
39 – 51	13-Jun
52 – 63	20-Jun
64 – 75	27-Jun
76 – 87	4-Jul
88 – 99	11-Jul