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Renting Your Vacation Home

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Income that you receive for the rental of your vacation home must generally be reported on your federal income tax return.

However, if you rent the property for only a short time each year, you may not be required to report the rental income.

Below are tips on reporting rental income from a vacation home such as a house, apartment, condominium, mobile home or boat:

  • Rental Income and Expenses Rental income, as well as certain rental expenses that can be deducted, are normally reported on Schedule E, Supplemental Income and Loss.
  • Limitation on Vacation Home Rentals  When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.You are considered to use the property as a residence if your personal use is more than 14 days, or more than 10% of the total days it is rented to others if that figure is greater. For example, if you live in your vacation home for 17 days and rent it 160 days during the year, the property is considered used as a residence and your deductible rental expenses would be limited to the amount of rental income.
  • Special Rule for Limited Rental Use  If you use a vacation home as a residence and rent it for fewer than 15 days per year, you do not have to report any of the rental income. Schedule A, Itemized Deductions, may be used to report regularly deductible personal expenses, such as qualified mortgage interest, property taxes, and casualty losses.

FAQ: Education Credits

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Question:   Do tuition and related expenses paid to attend a private high school qualify for an education credit?
Answer:   No. Expenses paid to attend a private high school do not qualify for an education credit because a high school is not an eligible educational institution.In general, an eligible educational institution is an accredited college, university, vocational school, or other postsecondary educational institution.  In addition, in order to be an eligible educational institution, the school must be eligible to participate in a student aid program administered by the Department of Education.
Question:   What expenses qualify for an education credit?
Answer:   Expenses that qualify for an education credit are qualified tuition and related expenses paid by the taxpayer during the taxable year.  Qualified tuition and related expenses are tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependent at an eligible educational institution for courses of instruction.  An eligible educational institution means a college, university, vocational school or other postsecondary educational institution that is accredited and eligible to participate in the student aid programs administered by the Department of Education.Qualified tuition and related expenses do not include the following types of expenses:

  • Expenses related to any course of instruction or education involving sports, games or hobbies, or to any noncredit course (unless the course is part of the student’s degree program or, in the case of the Lifetime Learning Credit, the student takes the course to improve job skills),
  • Student activity fees (unless required for enrollment or attendance),
  • Athletic fees (unless required for enrollment or attendance),
  • Costs of room and board,
  • Insurance premiums or medical expenses (including student health fees),
  • Transportation expenses, and
  • Other personal, living or family expenses.

In general, qualified tuition and related expenses generally do not include the costs of books, supplies and equipment, because eligible educational institutions usually do not require payment of those costs to the institution as a condition of the student’s enrollment or attendance.  For taxable years 2009 through 2012, however, qualified tuition and related expenses include costs of course materials, as well as tuition and fees, required for the student’s enrollment or attendance at an eligible education institution.
Question:   Who can claim the Hope Credit or the American Opportunity Credit?
Answer:   Generally, you can claim the Hope Credit if all three of the following requirements are met:

  • You pay qualified tuition and related expenses for the first 2 years of postsecondary education.
  • The tuition and related expenses are for an eligible student.
  • The eligible student is you, your spouse, or a dependent for whom you claim an exemption on your tax return.

You cannot claim the Hope Credit if any of the following applies:

  • Your filing status is married filing separately.
  • You are listed as a dependent in the Exemptions section of another person’s tax return (such as your parents’).
  • Your modified adjusted gross income is above a certain dollar limitation.
  • You (or your spouse) were a nonresident alien for any part of the tax year, and the nonresident alien did not elect to be treated as a resident alien for tax purposes.
  • You claim the Lifetime Learning Credit for the same student in the same year.

In general, the Hope Credit is based on tuition and related expenses required for enrollment or attendance at an eligible educational institution.

For a taxpayer to claim the Hope Credit, the student for whom you pay tuition and related expenses must be an eligible student. To be an eligible student, generally, the student must:

  • Not have had expenses that were used to figure a Hope Credit in any 2 earlier tax years.
  • Not have completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before this tax year.
  • Must have been enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in the tax year.
  • Must have been free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

For tax years 2009, 2010, 2011, and 2012, the American Opportunity Tax Credit modifies the Hope Credit as follows:

  1. The maximum amount of the credit is increased to $2,500.00.
  2. The credit can now be claimed for the first 4 years, not 2, of postsecondary education.
  3. The modified adjusted gross income limitations are increased.
  4. Qualified expenses include course materials.
  5. Generally, 40% of the Hope Credit is now refundable (up to $1,000).

However, for a student who attended an educational institution located in a Midwest disaster area, you can choose instead to claim the credit under the previous rules, but then you must use the previous rules for all students for whom you claim the credit.

Health Insurance Tax Breaks for the Self-Employed

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If you’re self-employed and paying for medical, dental or long-term care insurance, the IRS wants to remind you about a special tax deduction for some insurance premiums paid for you, your spouse, and your dependents.

Starting in tax year 2011, this deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.

You must be one of the following to qualify:

  • A self-employed individual with a net profit reported on Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming.
  • A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., box 14, code A.
  • A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.

The insurance plan must be established under your business.

  • For self-employed individuals filing a Schedule C, C-EZ, or F, the policy can be either in the name of the business or in the name of the individual.
  • For partners, the policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
  • For more-than-2-percent shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.

 

FAQ: Refund Splits

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Question: What is a split refund?

Answer: A split refund lets you divide your refund, in any proportion you want, and direct deposit the funds in up to three different accounts with U.S. financial institutions.

 

Question: What are the benefits of splitting my refund?

Answer: By splitting your refund, you get the convenience of directing some of your refund to your checking account for immediate needs and sending some to savings for future use. Plus, you get the safety and speed of direct deposit, meaning you will have access to your refund faster than if you opt to receive a paper check.

Instead of choosing between depositing your refund into a checking or saving account and later moving part of your refund to another account, you can allocate your refund among up to three different accounts and send your money where you want it the first time.

 

Question: Does my refund have to exceed a certain amount to split it into different accounts?

Answer: Your deposit to each account must be at least $1.00.

 

Question: Must I file electronically to split my refund?

Answer: No, you can split your refund regardless of whether you file electronically or on paper.

Do I Need to File a Tax Return This Year?

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You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, some people should file even if they aren’t required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

Even if you don’t have to file for 2011, here are six reasons why you may want to:

  1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.
  2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.
  3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.
  4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.
  5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.
  6. Health Coverage Tax Credit  Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

For more information about filing requirements and your eligibility to receive tax credits, please contact us.

Small Business FAQs

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Question:   If I, a sole proprietor, pay personal expenses out of my business bank account, should I count the money used as part of my income? Can I write these expenses off?
Answer:   

  • You would include the money used to pay personal expenses in your business income when it was earned by your business.
  • You would not write off these expenses because they are not ordinary and necessary costs of carrying on your trade or business.
  • Personal, living, or family expenses which are not specifically provided by law are not deductible.
  • It is recommended that you not mix business and personal accounts as this makes it easier to keep records.
Question:   Must a partnership or corporation file a tax form even though it had no income for the year?
Answer:   A domestic partnership must file an income tax form unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.A domestic corporation must file an income tax form whether it has taxable income or not.

 

Question:   Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?
Answer:   Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a husband and wife is a partnership unless the spouses elect to be treated as a Qualified Joint Venture or, in a community property state,Rev. Proc. 2002-69 applies.
A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a “qualified joint venture.” Requirements for a qualified joint venture:
• The only members in the joint venture are a husband and wife who file a joint tax return,
• The trade or business is owned and operated by the spouses as co-owners (and not in the name of a state law entity such as an LLC or LLP),
• The husband and wife must each materially participate in the trade or business, and
• Both spouses must elect qualified joint venture status on Form 1040 by dividing the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture and each spouse filing with the Form 1040 a separate Schedule C, C-EZ, or For Form 4835 accordingly, and, if required, a separate Schedule SE to pay self-employment tax.