Roth IRA’s

Roth IRA’s

Roth IRA’s are individual retirement accounts that are subject to the same rules as a traditional IRA with some major distinctions.

  • Roth IRA contributions are not deductible.
  • Qualified distributions are not taxable.
  • You can continue to make contributions after you reach age 70½.
  • There are no required minimum distributions.

Who can contribute?

You can open and contribute to a traditional IRA if:

  • You have taxable compensation, and
  • Your modified adjusted gross income is less than

o   $188,000 if you are married and filing a joint return

o   $127,000 if you are single, head of household or married filing separate and did not live with your spouse at any time during the year.

o   $10,000 if you are married filing separately and you lived with your spouse at any time during the year.

How much can I contribute?

The maximum contribution for 2014 is the lesser of $5,500 ($6,500 if you are 50 or older at the end of the tax year) or the amount of your taxable compensation.  If you contribute to both a traditional IRA and a Roth IRA, your total contribution is limited to $5,500 ($6,500) total for both plans.  The amount that you can contribute depends on your income.

  • If you are single, head of household or married filing separate and did not live with your spouse at any time during the year, your allowable contribution begins to phase out when your modified adjusted gross income reaches $112,000.  Once your modified adjusted gross income exceeds $127,000, you are not allowed to make a contribution.
  • If you are married filing a joint return, your allowable contribution begins to phase out when your modified adjusted gross income reaches $178,000.  Once your modified adjusted gross income exceeds $188,000, you are not allowed a contribution.
  • If you are married filing a separate return and did not live with your spouse at any time during the year and covered at work, your contribution completely phases out when your modified adjusted gross income reaches $10,000.

When can I contribute?

Contributions must be made by the due date of your tax return, not including extensions.  This is usually April 15th.

Distributions

A qualified distribution is not included in your taxable income.  To be considered a qualified distribution, the payments must meet certain requirements.

It must be made after the five year period that begins when you make the first contribution to your Roth IRA account, and

o   You have reached age 59½, or

o   You are disabled, or

o   It is paid after you death, or

o   It meets the requirements for a first home purchase.

 

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

 

 

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Repairs or Improvements – the new tangible property regulations for small business.

The IRS has released the final regulations, effective January 1, 2014, that govern when you must capitalize and when you can deduct expenses related to tangible property.

Here we will discuss some of the provisions for small businesses (generally those without audited financial statements).

Generally you should assume that all tangible property, except inventory, must be capitalized and depreciated.  However, as usual, there are exceptions to that rule.

Materials & Supplies

The final regulations define materials and supplies as tangible property that is used or consumed in the taxpayer’s business operations that is not inventory and is generally used or consumed within 12 months and costs less than $200.  Items that meet these safe harbor criteria may be deducted instead of capitalized.

Repairs & Maintenance

Under the new routine maintenance safe harbor rules, payments are deductible if they are for recurring expenditures that keep an item in efficient operating condition.  The activities are considered routine if you plan to perform the activities more than once during the class life of the item.  This safe harbor also applies routine maintenance on buildings if you plan to perform this maintenance at least twice during a ten year period.

Amounts Paid for the Acquisition of Tangible Property

Under the new safe harbor rules, businesses without an applicable financial statement can elect to deduct up to $500 per item.  This is an all or nothing proposition.  If the cost of an item exceeds $500, the entire amount must be capitalized and depreciated.  If your business has an applicable financial statement, this threshold can rise as high as $5,000.

Amounts paid for the Improvement of Tangible Property

The final regulations continue to require that improvements to tangible property be capitalized and depreciated.  Improvements are defined as, betterments, restorations, and adapting the unit of property to a different use.  There is an exception for small taxpayers who own buildings.  Under this exception, you are not required to capitalize improvements if the total amount spent for maintenance, repairs, and improvements does not exceed the smaller of $10,000 or 2% of the buildings original cost.  In order to take advantage of this exception, an annual election must be made on a timely filed (including extensions) tax return.

The new regulations are extremely complex and this summary just scratches the surface.  If you would like to discuss how these regulations affect your business, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

 

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How are Children Taxed? The Kiddie Tax on Investment Income.

There are a set of rules that apply to the taxation of children and investment income.  This set of rules is known as the Kiddie Tax.  The Kiddie Tax applies to children with investment (unearned) income who are under age 19 or under age 24 and a full-time student.  For purposes of this discussion, we will ignore other types of income, such as wages, which are taxed under the same rules that apply to everyone.

The Kiddie Tax is essentially a 3-tiered structure.

  1. The first $1,000 of investment income is tax free.
  2. The next $1,000 is taxed at the child’s rate.
  3. Any investment income over $2,000 is taxed at the parent’s rate.  This computation is made on Form 8815.

If the child’s investment income is less than $10,000, the parents can elect to report the child’s income on their personal income tax return.  This is done by completing Form 8814.  The tax calculations should be run both ways to assure that the lowest possible tax is paid.  One note of caution; including the child’s income on the parent’s return may result in a loss of deductions and/or credits due to various phase outs as income increases.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

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Can’t Pay Your Tax Balance?

You just received you tax return and can’t pay the balance due in full.  What do you do?

  • FILE YOUR RETURN ON TIME.  This avoids the penalties for late filing.
  • RESPOND TO ALL NOTICES.  “Do Not” ignore the taxing authorities.
  • Pay as much as you can when you file the return.  The outstanding balance is subject to interest and late payment penalties.  Paying as much as you can will minimize these charges.
  • The IRS will give you up to an additional 120 days to pay in full.  Interest and penalties still continue to accrue.
  • If you can finance the full balance, the interest charged by your bank or credit card company is usually less than the combination of interest and late payment penalties.
  • You can enter into an installment agreement with the IRS and state taxing authorities.  There is a one-time user fee to set up the IRS installment agreement.  The installment payments can be made by a variety of methods:

o   Direct debit from your bank account;

    • Payroll deduction from your employer;
    • Payment via check or money order;
    • Payment by Electronic Federal Tax Payment System;
    • Payment by credit card via phone or Internet; or
    • Payment by Online Payment Agreement.
  • If your liability cannot be satisfied through any of the methods listed above.  You may, repeat may, be eligible for an Offer in Compromise due to doubt as to collectability if your assets and income are less than the full amount of tax liability.  The IRS is stingy in accepting Offers in Compromise, and as such; they should be viewed as a last resort.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

 

 

 

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Are you taking advantage of the tax deductions on your settlement sheet?

If you are a landlord, most items on a settlement sheet have to be capitalized and amortized over the life of the mortgage, however:

  • Interest expense from the time of settlement until your first mortgage payment is deductible.
  • The amounts that you reimburse the seller for property taxes, utilities, homeowner’s association dues, etc. are deductible rental expenses to you.
  • Likewise, any of these items that you have to pay because the seller did not are also deductible to you.
  • Additionally, amounts paid in advance such as mortgage insurance and homeowner’s insurance are also deductible.

If you are purchasing a principal residence or a second home, then only mortgage interest and property taxes are deductible.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

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Can you claim the small employer health insurance tax credit?

The small employer health insurance tax credit was enacted as part of the Patient Protection and Affordable Care Act (Obamacare).  The purpose of this part of the law is to help small employers defray some of the cost of providing health insurance for their employees.

Prior to 2014, employers often found that complex calculations yielded very little or no credit at all.  For 2014, the maximum credit has increased from 35% of employer paid premiums to 50%.

To qualify, the employer must:

  • Pay at least 50% of the cost of single employee coverage under a qualifying plan.
  • Have fewer than 25 full time equivalent employees.
  • Pay average yearly wages for less than $50,800 for 2014.
  • Owners and their families are excluded from these calculations.

Owners and their families are excluded from these calculations.

The credit phases out between 10 and 25 employees and wages of $25,400 to $50,800.

Beginning in 2014, an employer can only claim the credit for 2 years.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

 

 

 

 

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What is the Alternative Minimum Tax?

What is the Alternative Minimum Tax?

In 1969 the Alternative Minimum Tax was enacted to assure that the rich pay at least a minimum amount of tax.  This is accomplished in a number of ways.

The first is by eliminating certain deductions. Some of these are:

  • Taxes
  • Miscellaneous itemized deductions
  • Personal exemptions

The second is by adding items of income, such as:

  • Interest from specified private activity bonds
  • Exercise of incentive stock options

Another way is to use a different method to compute allowable deductions.  For example:

  • Depreciation on assets placed in service after 1986
  • Intangible drilling costs

If your taxable income after applying the necessary adjustments exceeds a certain amount ($80,800 for married couples filing jointly in 2013) then you may be subject to the tax.  The alternative minimum tax is computed and compared to your regular tax computation.  You pay the higher of the two taxes.

If you pay alternative minimum tax due to deferral items such as depreciation and incentive stock options, you are entitled to a credit in future years when your alternative minimum tax computation is less than your regular tax.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

 

 

 

 

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Tuition Tax Incentives

There are several tax incentives in the form of credits and deductions currently available to help offset ever increasing higher education expenses for you, your spouse, and dependents.

Tax Credits

Currently there are two tax credits available.

The first is the American Opportunity Tax Credit.  This credit is available to qualified students for their first four years of higher education.  The credit is computed by taking 100% of the first $2,000 of qualified expenses plus 25% of the next $2,000.  The maximum credit is $2,500 per student.  Up to 40% of this credit is refundable, meaning that if the credit reduces your tax to zero, 40% of the unused credit will be refunded to you.

The second is the Lifetime Learning Credit.  This credit is available to qualified students for eligible expenses, such as graduate school, that are not covered by the American Opportunity Tax Credit.  The credit is 20% of eligible expenses.  The maximum credit is $2,000 and unlike the American Opportunity Credit, it is on refundable.

You cannot claim both credits in the same year.

Tuition and Fees Deductions

This deduction is for qualified expenses up to $4,000.  This is an adjustment to income so you do not have to itemize deductions in order to take advantage of this.

This deduction can be taken instead of (but not in addition to) one of the credits discussed above.

Each of the credits and deductions is subject to its own eligibility requirements and income limitations.  Your situation should be analyzed carefully to determine which choice is the right one for your situation.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

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Understanding the Home Mortgage Interest Deduction

If you itemize deductions, chances are that you are taking a deduction for home mortgage interest.

Here are a few things that you should know:

  • Home acquisition debt is defined as a mortgage used to buy, build or improve either your principal residence or a second home.  It must be secured by the home.
  • You can only deduct interest on the first $1,000,000 of home acquisition debt.
  • You can only deduct interest on the first $100,000 of home equity loans that are not used for improvements.

Example 1

The original mortgage used to purchase your primary home was $500,000.  When the mortgage balance is down to $200,000, you refinance for $400,000.  Assuming that none of the proceeds of the refinancing are used for improvements, your home acquisition debt is $200,000, your home equity debt is $100,000 and the $100,000 balance is personal debt.  In this example, only 75% of the interest paid on the $400,000 is deductible.

Example 2

You have paid off your original mortgage.  You take out a new mortgage for $500,000.  Assuming that none of the proceeds of the mortgage are used for improvements, none of the mortgage qualifies as home acquisition debt.  $100,000 will be home equity debt.  In this example, only 20% of the interest paid on the $500,000 is deductible.

Example 3

Your average home acquisition debt for the year for your primary residence is $800,000.  Your average home acquisition debt for your vacation home is $600,000. In this example, $1,000,000 is treated as home acquisition debt and $100,000 is treated as home equity debt.  Only 79% (1,100,000/1,400,000) of the interest paid would be deductible.

There are other more complicated rules that apply to home mortgage interest deductions.  As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

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When does a real estate investor become a dealer and what are the consequences?

Well, as with most tax questions, the answer is, it depends.

Investor vs. Dealer.

When we think of a real estate investor, we think of someone who purchases and holds real estate for rental income and/or appreciation over a period of time.  A typical investor might own a few rental properties, keep them for several years and eventually sell them.  An investor is thought of as being in it for the long term.

Being a real estate dealer is more involved. The IRS considers a dealer to be someone who is engaged in the business of selling real estate to customers with the purpose of making a profit from those sales, such as flipping and wholesaling.  A dealer is more of a short term proposition.  Determining who is a dealer is subjective and open to interpretation.  The IRS and the courts use several factors that have been developed through numerous court cases.  These factors are:

  • The taxpayer’s purpose in acquiring the property;
  • The purpose for which the property was subsequently held;
  • The taxpayer’s everyday business and the relationship of the income from the property to the taxpayer’s total income;
  • The frequency, continuity, and substantiality of sales of property;
  • The extent of developing and improving the property to increase the sales revenue;
  • The extent to which the taxpayer used advertising, promotion, or other activities to increase sales;
  • The use of a business office for sale of property;
  • The character and degree of supervision or control the taxpayer exercised over any representative selling the property; and
  • The time and effort the taxpayer habitually devoted to sales of property.

No one of these factors is, by itself, conclusive in determining if you are a dealer.  However, the Tax Court has indicated that the frequency, continuity, and substantiality of sales of property are the most important factors to consider.

 

Tax consequences of being an investor vs. a dealer.

For an investor, rental income is generally taxed at ordinary income rates and is not subject to self-employment tax (Self-employment tax is a tax of up to 15.3% on your net income from self-employment.  Self-employment tax is in addition to your regular income tax).  If you hold your investment property for at least a year, your gain on sale will be taxed at favorable long term capital gain rates.

If you are classified by the IRS as a dealer, all of your income will be taxed at ordinary income rates.  There is no favorable long term capital gain treatment.  Installment Sales and Like Kind Exchanges are not available to dealers.  Additionally, you will be subject to self-employment tax on your profits.

If the IRS classifies you as a dealer, then all of your real estate income, including rental income, will be subject to dealer treatment.  To avoid this treatment, it is important to use separate entities for different types of real estate activities.   The best example of this would be holding rental properties in an LLC while using an S-Corporation for wholesaling and flipping.

As always, this is only meant as a brief overview.  If you feel that we can be of further assistance to you, please contact our office to set up an appointment.

Email us at: [email protected]

Call us at: 302-239-3500

Visit our website: http://www.dohertyandassociates.com

– Doherty & Associates Team

 

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Phone: 302-239-3500
Fax: 302-239-3600
[email protected]

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