Tax Tips Blog

If reviewing your assessed value of your home is not a regular routine, given the current real estate trend, you may want to start making it one. Property tax bills are generated by taking the assessed value of your home and multiplying that value by the tax rate for the area where your home is located.

Your assessed value is suppose to come close to the fair market value of your home. If home prices are dropping, then your assessed value should be dropping as well, but it rarely does.

If you believe the house values in your neighborhood have been dropping confirm this by calling a realtor. Ask them for a print out of the recent sales prices of homes in your area. This is public information so there should be no problem obtaining this information.

Your neighbors assessed values are also public information. In most counties this information is available online. In others you may have to take a trip down to your local tax office - it’s usually worth the trip.

Take a look at how your assessed value compares to the recent sales in your neighborhood as well as the assessed values of your neighbors. Make sure that your property is listed accurately. The number of rooms, square footage of your house all make a difference when they compute your assessed value. Maybe you had an outbuilding that you removed years ago, but the tax office still believes you own it. It would reduce your assessed value if you had them correct your records.

Make a list of everything you believe would reduce the sales price of your home, if you were to list it for sale - wallpaper, akward floorplan, bad curb appeal, etc. Make sure your tax office has a copy of this list so they take it into consideration.

Many homeowners who challenge their property tax assessment succeed in reducing their property taxes, so it’s usually worth your effort to make sure your home value is properly stated.

Sally asks: I have been of the understanding that a yearly gift up to the amount allowed, this year being $11,000, has to be with no strings attached. The receiver has to be aware of and have access to use the gift. Lately, I’ve heard comments that hint the gift can be put in a trust for the receiver with stipulations as to use of the money. Is this correct? Thank you

My reply: Hello Sally! You’re kind of correct. The current annual gift tax exclusion is $12,000, not $11,000.

You really didn’t supply enough information for me to know for sure, but most likely, you are hearing about a trust with Crummey powers. Assuming this is the case, the gift is made to the trust. This gift does not qualify for the annual exclusion, as it is not made to an individual.

However, each beneficiary of the trust has a limited time to request their share of that gift out of the trust. If they do not make that request, the money stays in the trust and is subject to the trust document. The key is that giving the beneficiary the power to withdraw their share of the gift to the trust effectively makes the gift one to the individual beneficiary instead of directly to the trust. And so the gift qualifies for the annual exclusion.

Often, these Crummey powers are used with a life insurance trust. The trust uses the annual gift to purchase life insurance. That life insurance is then used to pay estate taxes on the passing of the grantor of the trust.

I hope this satisfactorily answers your question.

Best wishes, Gina

www.GLGcpa.com

Brandon asks:I opened custodial stock accounts for each of my kids when they were born. If I sell some of the stocks that I bought do I need to file tax returns for each of my kids? Do I need to pay taxes on the gains (they should be around $15,000 each)? Someone told me that any gains from minor children do not need to be reported. Thanks, Brandon

My reply: Hello Brandon.

Yes, each of your children will need to file a tax return.

If your children each realize $15,000 in gains from the sale of their stock, then they will owe Federal income tax. I would not listen to tax advice from anyone who told you otherwise.

I guarantee you that if you sell stock a 1099 will be issued and the IRS will certainly start writing you love letters if they don’t receive a tax return.  All the IRS will know about is the sales proceeds, not the cost basis or net gain, until you tell them what the gain was. So, if you sold $50,000 of stock for a $15,000 gain, the IRS is expecting you to pay tax on $50,000 of income until you tell them that it was only $15,000.

If your children are old enough to sign their names, they can sign their respective returns. If not, you can sign for them.

If by chance you sell their stock at a loss, the loss is carried forward and can be used in the year the kids have other taxable income to offset.

Best wishes, Gina

www.GLGcpa.com

I am a pastor and I’m looking into buying a home. I want to make sure the home I purchase does not have a fair rental value greater than what I’m receiving as a housing allowance. How do I know what this amount is?

My reply: Your housing allowance is determined by negotiating that amount with your religious organization. You are allowed to exclude from Federal income tax the LESSER of the Fair Market rental value of your housing (including furnishing, utilities, etc.), the amount officially designated (in advance of payment) as a rental or housing allowance, or the actual amount used to provide a home assuming it does not exceed what is reasonable pay for your services.

Any payment received must be used in the year you receive them.

If you receive more money than the fair market rental value of your house or the actual amount that your housing costs you or what is considered reasonable pay for your services the remainder is taxable and should be included on your W-2 (but it’s actually taxable even if it’s not included on your W-2).

Please see the IRS for further information.

This article is a general overview of clergy and their obligation to pay self-employment taxes in response to an anonymous reader. I strongly recommend that you discuss this article with your qualified tax professional.

If you are an ordained, commissioned or licensed member of a religious order or a christian science practitioner and you object, based on religious reasons, to receiving government assistance for the religious work that you perform you may request an exemption from self-employment tax.

You are not allowed to request this exemption because you don’t want to pay the taxes, think they are unfair or think they should not apply to you. You are allowed to request the exemption if you have a religious objection to accepting the benefits that paying these taxes would allow you to receive.

To request this exemption you are required to file Form 4361 with the IRS and they will contact you to make sure you understand what governmental benefits you are giving up. Once this exemption has been approved you cannot revoke it.

You must file this form by the due date of your income tax return (including extensions) for the second tax year in which you have net earnings from self–employment of at least $400.00. If you have not requested an exemption or have not been granted an exemption from self-employment taxes then your wages, the offerings or fees you receive for performing marriages, baptismal, funerals and/or parsonage (housing allowance) are considered income subject to self-employment taxes.

Yes, parsonage (housing allowance) is subject to self-employment tax even though it is not subject to Federal income tax. Wages are reported to you on Form W-2, for you to report on Form 1040, and the other income I mentioned above that you receive must be reported on Form 1040 Schedule C with your related business expenses, if any.

Tax returns of clergy members are usually more complex than those of regular taxpayers and thus it is not recommended that you prepare your return without the assistance of a qualified tax professional.

Tammy writes: I’ve been renting out the lower section of my house. It has a separate entrance from the rest of the house and also its own sink. My renter has full kitchen privileges. I have been collecting 1/2 of my utility costs (TV/Internet, water, electricity), in a separate check, from the renter as well. I have been treating her monthly rent as taxable income and the utility money as a reimbursement and not reporting it. I was wondering if I can depreciate the portion of the house that she lives in? I was also wondering if I could deduct my expenses (installing window treatments, adding a closet, etc.) that I have incurred in order to rent this section of my house? Thank you.

My reply: I hate to be the bearer of bad news, but it doesn’t sound to me like you’ve been reporting this business correctly.  Although it may seem easy to prepare your own tax return, it would be in your best interest if you hired a qualified tax professional to assist you since you have this rental property.

You should be reporting the entire amount of money that you receive from your renter as rental income on Schedule E of Form 1040. Then, you are allowed to deduct her portion of the utilities as an expense on Schedule E.

Yes, you can depreciate the portion of the house that she lives in, but not the land. You need to determine the value of the house, on the date that you converted it to business property, and separate out the land value from the building value and then depreciate the building value.

You are also allowed to deduct any expenses that you incur, such as the utilities mentioned above, advertising, insurance and repairs and maintenance, which directly relate to the rental income you are receiving.

As for the items you mentioned - installing window treatments and adding a closet - these are considered capital improvements, because they have a useful life of more than one year; thus they must be depreciated.

Best wishes, Gina

www.GLGcpa.com

Tony asks:I pay for my own health insurance and that alone allows me to meet the 7.5% threshold for deducting medical expenses on my tax return. Now I find out that I’m pre-diabetic, so I’ve been testing my blood glucose a few times a week. I don’t have a doctor’s order or prescription. Insurance does not pay and I wouldn’t meet the deductible even if it did. Cost of the monitor was minor but the test strips and lancets will cost $150 to $200 per year. Is that deductible as a medical expense?

My reply: Yes they are deductible.

Diabetics can deduct blood glucose meters, test strips, oral medications, insulin, insulin pumps, and other supplies related to the costs of diagnosis, cure, mitigation, treatment, or prevention of their diabetes.

Best wishes, Gina

www.GLGcpa.com

Bill writes:I’ve had to pay AMT for the last two years. This year, I have an unusually large income. It seems to me that if I take this income all at once this year, I’ll avoid AMT. I believe I’m calculating this correctly because while the deductions disallowed by the AMT have stayed the same in size, my taxable income has gone up. Therefore, the additional income is being taxed at the top tax rate instead of the lower AMT tax rate. Does this make sense? I need to stop paying this dreaded AMT and if taking all this income in one year will let me get out of this mess I’m ready to do it.

My reply: Hello Bill!

Actually, your email of the situation is mathematically correct, but if you can actually control the income you take this year, I don’t understand why you would want to pay more tax than you have to. My only clue in your post are your words “dreaded AMT”.

AMT stands for Alternative MINIMUM tax. This is the MINIMUM amount of tax that you must pay. Yes, putting yourself into a higher tax bracket will get you out of it because you’ll be paying at a higher tax rate.

It seems to me that you’re saying you’d prefer to increase your income, and be taxed at, say, 33% or 35%, and have no number showing on the AMT line on your return as opposed to paying some AMT and being subject to a marginal rate of 28%.

The calculations you should be doing, with your CPA, is what combination of income over the next few years will allow you to legally pay the least amount of tax required by law. Stop worrying about whether the tax is computed based on the “regular” system or the “AMT” system and just look at the numbers and see what combination of income will allow you to keep more of your money.

As it appears to turns out in your situation, AMT is not necessarily a “bad” thing to be avoided at all costs. AMT can actually help you pay less in taxes.

Best wishes, Gina

www.GLGcpa.com

Mark writes:My son is no longer a full time student. He lives at home, and the deal is he pays us rent until he either moves out or goes back to school full time. My question is: how is this handled, tax-wise. I assume I declare the rental income, but are there other issues I have to be aware of? Never been a landlord before. Thanks for your help.

My reply: Hello Mark!

If I were your advisor I’d sit down with you and discuss this situation. It seems to me that your son is assisting you and sharing in the home expenses of maintenance (insurance, utilities, etc.) and food. If this is the case then the money you are receiving from his is actually a contribution, not rent, hence no tax consequences.

By the way, I think it’s a great idea that you are charging him rent in this situation, my parents had the same rule for us.  We were required to pay rent if we lived with them after we turned 18 (regardless of whether or not we were still in school). This gave us a safe place to live and study and the opportunity to learn that we were now an adult and adults need to be responsible for paying their own way in the world.

Assuming that you don’t really need the money that your son will be paying you, you may want to consider putting it into a separate account somewhere, or otherwise keep track of how much he gives you. Then when he finally does move out or returns to school, you could consider returning the money to him (as a gift assuming it’s less than or equal to the annual gift tax exclusion that year then there’ll be no tax consequences of this gift either) to use for furniture, a deposit on an apartment or whatever.

Best wishes, Gina

www.GLGcpa.com