Summertime tax tips
The Internal Revenue Service regularly provides tax tips via email to provide timely reminders to taxpayers and preparers about tax breaks and requirements year-round, and its advice can be particularly helpful this summer.
Vacation Home Rentals
If your clients rent a home to others, they usually must report the rental income on their tax returns. However, they may not have to report the rent they get if the rental period is short and they use the property as their home. If the property is used as a home and they rent it out fewer than 15 days per year, they do not have to report the rental income. In this case they can deduct their qualified expenses on Schedule A. In most cases, they can deduct their rental expenses. If the property is used as a home, the rental expense deduction is limited; that is, it can’t be more than the rent they received. Rental income may also be subject to Net Investment Income Tax.
Clients preparing for summer nuptials should make sure to do some tax planning. A few steps taken now can make tax time easier next year. All names and Social Security numbers on the tax return must match their Social Security Administration records. If the wife or husband changes their name, they should report it to the SSA by filing Form SS-5, Application for a Social Security Card. When taxpayers get married, they should consider a change of income tax withholding. To do that, they should give their employer a new Form W-4, Employee’s Withholding Allowance Certificate. The withholding rate for married people is lower than for those who are single. Taxpayers should also let the IRS know if they move. To do that, file Form 8822, Change of Address, with the IRS. If they are married as of Dec. 31, that is their marital status for the entire year for tax purposes. Since spouses can choose to file their federal tax return jointly or separately each year, it’s a good idea to figure the tax both ways so they can choose the status that results in the least amount of tax.
Gambling Income on Vacation
If any of your clients bet on horses, play cards or pull the slots, their gambling winnings are taxable. They must report them on their tax returns. Income from gambling includes winnings from the lottery, horse racing and casinos. It also includes cash and non-cash prizes. Taxpayers must report the fair market value of non-cash prizes like cars and trips. If they win, the payer may give them a Form W-2G, Certain Gambling Winnings. The payer also sends a copy of the W-2G to the IRS. The payer must issue the form based on the type of gambling, the amount won and other factors. Winners will also get a form W-2G if the payer must withhold income tax from what is won. Taxpayers normally report their winnings for the year on their tax return as “Other Income.” They must report all gambling winnings as income. This is true even if they don’t receive a Form W-2G. They can deduct their gambling losses on Schedule A, Itemized Deductions. The amount they can deduct is limited to the amount of the gambling income reported on their return. They should keep track of wins and losses. This includes keeping items such as a gambling log or diary, receipts, statements or tickets.
Back-to-School Tax Credits
If a client, their spouse or a dependent is heading off to college, there are several important facts they should know about education tax credits. The American Opportunity Tax Credit can be up to $2,500 annually for an eligible student. This credit applies for the first four years of higher education. Forty percent of the AOTC is refundable. That means the taxpayer may be able to get up to $1,000 of the credit as a refund, even if they don’t owe any taxes. With the Lifetime Learning Credit, they may be able to claim a tax credit of up to $2,000 on their federal tax return. There is no limit on the number of years this credit can be claimed for an eligible student. They can claim only one type of education credit per student on their federal tax return each year. If more than one student in a family qualifies for a credit in the same year, taxpayers can claim a different credit for each student. For example, they can claim the AOTC for one student and claim the LLC for the other student. They may include qualified expenses to figure their credit. This may include amounts paid for tuition, fees and other related expenses for an eligible student. In most cases, taxpayers should receive Form 1098-T, Tuition Statement, from the school. This form reports qualified expenses to the IRS and to the taxpayer.
Click here to read the full article from Accounting Today.