Fox Accounting & Tax Services Inc.                                    (503)246-6994   Income Tax Preparation, Payroll & Bookkeeping Services

The answer to that is, it depends.  Long-term disability benefits can be a little tricky.   Sometimes it's taxable and sometimes not.  Generally, if you paid the premiums for the long term disability insurance then the benefits are not taxable.  If the company paid the premiums, or you paid them through a pre-tax plan, then the benefits will be taxable.  The IRS provides the following guidance:

• If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employer’s payments is reported as income.
• If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return.
• If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you, the premiums are considered paid by your employer, and the disability benefits are fully taxable.
• If the amounts are taxable, you can submit a Form W-4S (PDF), Request for Federal Income Tax Withholding From Sick Pay, to the insurance company, or
• Make estimated tax payments by filing Form 1040-ES (PDF), Estimated Tax for Individuals

In the event that your long term-disability payments are taxable they will be reported to you on a W-2.  You will report these payments as wages on line 7 of your tax return.  

You may be wondering if you have to report the value of your employer-sponsored health insurance coverage, which may appear on your W-2, Wage and Tax Statement when you file your 2013 federal income tax return.

Here is what you need to know about the value shown on your W-2.

• The health care law requires certain employers to report the cost of coverage under an employer-sponsored group health plan.
• The amount of employer-sponsored health insurance coverage appears in Box 12 of the W-2, and has the code letters “DD” next to it.
• Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable or that it needs to be reported on your tax return.
• The amount is only for information, and shows the payments made by you and your employer and is not included in the amount shown in Box 1, which is the amount of taxable earnings.

See this W-2 page on the IRS Website for more information.

Requirements to Claim the Home Office Deduction

There are two basic requirements for your home to qualify for a deduction:

1. Regular and Exclusive Use. You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.

2. Principal Place of Your Business.  You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may still qualify for a home office deduction. For example, if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business. You can deduct expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. The structure does not have to be your principal place of business or the only place where you meet patients, clients, or customers.

Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:

• Your business use must be for the convenience of your employer, and
• You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.

If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

Computing The Home Office Deduction

There are Two methods for determining the amount of the home office deduction.  Under the regular method (the only method available for tax years 2012 and prior) taxpayers (you) must determine the actual expenses of the home office. These expenses may include rent, mortgage interest, insurance, utilities, repairs, and depreciation.  The amount of these expenses that are deductible as home office expenses are generally based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.  If you have a 100 square foot office in a 1,000 square foot house you may be able to claim 10% of these expenses a business deduction.  


New for this year (2013 tax returns) the IRS has authorized a simplified method for computing the business use of your home (IRS Revenue Procedure 2013-13, January 15, 2013). This new simplified option can significantly reduce the record keeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.  For 2013 this rate is $5.00 per square foot with a maximum of 300 square feet.  Additionally, under the simplified method mortgage interest and property taxes do not need to be allocated between itemized deductions and the home office deduction.  These otherwise allowable deductions are deductible in full on schedule A.  Depreciation is not claimed under this method.  This can be a plus as there are no issues of depreciation recapture when you sell your home.  Under the regular method you may be required to include prior depreciation deductions in your income for the year you sell your home.

The home office deduction is subject to certain limitations and complexities which are beyond the scope of this discussion.

Some tax practitioners feel that it is better not to claim a deduction for an office in the home. There are several reasons for this thinking.  A home office deduction, under certain circumstances, can invite more scrutiny to your tax return.  This is especially true if you are an employee claiming the expense on form 2106 Employee Business Expenses. 
 
The home office deduction also generally involves depreciation of a portion of your home. This depreciation will have to be recaptured when you sell your home. Normally the entire gain from the sale of your home will be excluded from tax if you have met the time requirements.  However, if you have claimed any depreciation in prior years you will have to report it as income in the year of sale and pay tax on it.

Another reason that tax preparers may overlook the home office deduction is that much of the expense is already deductible on schedule A under the mortgage interest and property tax headings.  Because of this, there may be a feeling that the only thing gained is a small percentage of the utilities and of course that depreciation that you will eventually recapture.

Now that we have listed some of the seemingly negative side of the home office deduction it's time to take a look at the benefits.  Yes, its true that the mortgage interest and property taxes are already being deducted on Schedule A; however, if you can shift that deduction from an itemized deduction that only offsets your regular income tax to a business deduction that offsets both regular income taxes and self employment tax you will be ahead of the game by 15.3%.  That is the tax rate that self employed individuals pay for Social Security and Medicare taxes.

Renters really benefit from this deduction.  Through the home office deduction, qualified taxpayers are able to turn a percentage of an otherwise non deductible expense - rent and utilities- into a tax deduction!

One really important benefit arising from the home office deduction is the impact it has on business auto deductions.  If you have a qualified home office that first business trip away from the home in the morning is deductible business mileage.  Where no home office exists, that first trip is non deductible commuting!

As to that issue of recapturing the depreciation, the IRS has implemented a new simplified home office deduction method that eliminates the depreciation component of this deduction.  Under this method a qualified taxpayer can take a deduction of $5 per square foot not to exceed 300 square feet.  (You can read more about this in future posts).

Each individual must weigh the facts and the risks for themselves but on the whole, if you are entitled to a deduction and have positive business income to offset this can be a very valuable deduction and should not be overlooked.

A change in name can have an impact on your income tax filing.  The IRS matches names and social security numbers with the Social Security Administration's records.  If the name you report on your return does not match what SSA has on file it can cause your electronically filed return to reject. With a paper filed return you are likely to receive a letter from the IRS about the mismatch.  If you are expecting a refund this may delay when you receive it.

Report Name Change before You File Taxes

Did you change your name last year? Did your dependent have a name change? If the answer to either question is yes, be sure to notify the Social Security Administration before you file your tax return with the IRS.

Be sure to contact SSA if:

• You got married or divorced and you changed your name.
• A dependent you claim had a name change. For example, this would apply if you adopted a child and that child’s last name changed.

File Form SS-5, Application for a Social Security Card, with the SSA to let them know about a name change. You can get the form on SSA.gov by calling800-772-1213 or at an SSA office.

Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax preparer:

1. Check the preparer’s qualifications.  All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes. 

2. Check the preparer’s history.  Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.

3. Ask about service fees.  Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.

4. Ask to e-file your return.  Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.

5. Make sure the preparer is available.  Make sure you’ll be able to contact the tax preparer after you file your return - even after the April 15due date. This may be helpful in the event questions come up about your tax return.

6. Provide records and receipts.  Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.

7. Never sign a blank return.  Don’t use a tax preparer that asks you to sign a blank tax form.

8. Review your return before signing.  Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.

9. Ensure the preparer signs and includes their PTIN.  Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS.  You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

No federal deduction is allowed for contributions to a Qualified Tuition Program account; however, qualifying distributions from the account will be tax fee.  This means that all of the growth and earnings in the account are tax free provided that the proceeds are used for qualifying education expenses of the account beneficiary.

You can subtract contributions you made to an Oregon 529 College Savings Network account during the tax year up to $4,455 on a joint tax return or up to $2,225 for all other filing statuses (single, head of household, or married filing separate). Each state has a plan or plans that they specifically sponsor.   To qualify for the subtraction the contributions must be made to the Oregon plan and not one of the plans sponsored by another state.  

The overall limitation on contributions is the amount necessary to provide for the qualified expenses of the beneficiary.  There is no AGI limitation as there is with so many other provisions of the tax code.  Contributions are considered a gift so you are subject to the gift limitation rules. Currently the maximum gift exclusion is $14,000 per year.  You can elect to make a larger contribution in a given year and account for it ratably over the next 5 years.  For example, one could contribute $70,000 to their grandchild's 529 plan in 2013 and apply the the gift tax limit for the next 5 years (5 x $14,000 = $70,000).  No other gifts or contributions could be made to that grandchild during the 5 year period without triggering gift tax issues.

Because there is no deduction for this item on the federal return, the timing of the contribution is not particularly important for federal purposes.  However, to receive a subtraction on the Oregon return, the contribution must be made by the due date of your tax return including extensions.

Oregon also has a carryforward provision.  If you make a contribution that is greater than the maximum deduction allowed for a particular year, you may carry forward the excess and and deduct it over the next 4 years.

Distributions from a qualified tuition program (529 plan) are excluded from income if the proceeds are used for qualified higher education expenses.  If the proceeds are not used for qualified education expenses the earnings portion of the distribution will be subject to tax and most likely a 10% penalty on top of that.  (Some exceptions apply to the application of this penalty such as the death or disability of the beneficiary.)

Qualified higher education expenses include:

• Tuition, fees, books, supplies and equipment required for attending an eligible school.
• Reasonable costs of room and board for those who are at least 1/2 time students in a degree program.
• expenses of a special needs beneficiary with a physical, mental or emotional condition that requires additional time to complete his/her education.

Yes. There are no tax consequences if the account balance is rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. So, for example, you can roll funds from the 529 plan of one of your children into a sibling's plan without penalty.  Nor is there any tax consequence to changing the designated beneficiary to a qualifying member of the beneficiaries family.   You may change the beneficiary or roll the account balance over to the following:

1.      Spouse of the beneficiary

2.      Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

3.      Brother, sister, stepbrother, or stepsister.

4.      Father or mother or ancestor of either.

5.      Stepfather or stepmother.

6.      Son or daughter of a brother or sister.

7.      Brother or sister of father or mother.

8.      Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

9.      The spouse of any individual listed above.

10.    First cousin.

A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plan offers great advantages for businesses that meet two basic criteria. First, your business must have 100 or fewer employees (who earned $5,000 or more during the preceding calendar year). In addition, you cannot currently have another retirement plan. 

A SIMPLE IRA plan provides you and your employees with a simplified way to contribute toward retirement. It reduces taxes and, at the same time, attracts and retains quality employees. Compared to other types of retirement plans, SIMPLE IRA plans offer lower start-up and annual costs.  

The most you will contribute as an employer is 3% of your employee's gross pay.  This is a significant cost saving over a SEP plan. With a SIMPLE plan you as the employer are able to contribute the maximum amount to your retirement account and you can offer your employees an attractive benefit without having to be the sole contributor to their retirement accounts.

SIMPLE IRA plans are easy to set up and run – your financial institution handles most of the details.  Employees contribute, on a tax-deferred basis, through payroll deductions. You can choose either to match the employee contributions of those who decide to participate or to contribute a fixed percentage of all eligible employees’ pay.  The most you will pay as an employer is 3% of your employee's gross pay.  This is a significant cost saving over a SEP plan. With a SIMPLE plan you as the employer are able to contribute the maximum amount to your retirement account.  You can offer your employees an attractive benefit without having to be the sole contributor to their retirement accounts.

Employee Contributions:

The maximum employee SIMPLE contribution amount for 2013 and 2014 is $12,000.  Participants who have attained the age of 50 can contribute an additional $2500 per year bringing their maximum annual contribution amount to $14500 for the years 2013 and 2014.   

Employer Contributions:

You have two choices in determining your contributions to the SIMPLE IRA plan:

• A 2% nonelective employer contribution, where all employees eligible to participate receive an employer contribution equal to 2% of their compensation (limited to $255,000 per year for 2013 and 2014 and subject to cost-of-living adjustments for later years), regardless of whether they make their own contributions.
• A dollar-for-dollar match up to 3% of compensation, where only the participating employees receive matching contributions.

Each year, you can choose which one you will use for the next year’s contributions.

Keeping good records after you file your taxes is more than just a good idea.  Maintaining adequate documentation will help you with substantiation if the IRS or the state selects your return for an audit. Here are five tips from the IRS about keeping good records:

1. Tax records should be kept for a minimum of three years. (I recommend five.)
2. Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property —     should be kept longer.  For example, records relating to the purchase of business assets must be kept for the full depreciable life of that asset plus three years.
3. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal or state tax return.
4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
5. For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56 cents per mile for business miles driven.
  
• 23.5 cents per mile driven for medical or moving purposes.
  
• 14 cents per mile driven in service of charitable organizations.