Tax-Free Rental Income
Did you know you can rent out your home or vacation property for up to 14 days and not need to claim the income? Here are some tax tips to take advantage of this opportunity.
Most income you receive is taxable income that is reported to you and to the Federal/State tax authorities. However, there are a few income-producing events that the IRS has said are not taxable. One of them is renting out your home or vacation property.
The rule: If you receive rental income for less than 15 days per year, that income is generally not taxable income.
Added benefit: In addition to tax-free rental income, you may still deduct your mortgage interest expense and property taxes as itemized deductions. Neither of these tax benefits is reduced with the income from up to two weeks of rental activity.
Would someone want to rent your property?
Sure it sounds good, but why would someone want to rent your property? Here are some ideas:
A sporting event. If a big sporting event is in town, consider renting out your home for participants and fans. Common examples include;
- Football games
- Golf tournaments
- State high school tournaments
- College football and other college events
- Host foreign students/teachers
Rent out your vacation home. If you have a cabin or cottage, consider renting out your place for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.
Vacationer alternative to hotels. Often times travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets these travelers have a real “local” experience versus staying in a hotel.
Know the risks
The hassle factor needs to be considered prior to taking advantage of this free income opportunity. You should also understand the risks involved. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember to only rent out your property for up to 14 days. Rent received beyond this is taxable and rental income rules apply.
Thankfully there are a number of internet sites that can help you navigate through your options. Here are a couple popular sites to find out more information.
Vrbo.com (vacation rentals by owner)
Tripadvisor.com (includes personal rentals with user feedback)
Using Losers to Make Winners
Effectively using your investment losses can make a big impact in your taxable income. Why? These losses could offset income that is barely taxed, or it could offset income taxed at 39.6% or higher! Here are some ideas to make those losers into winners on your tax return.
Understanding the rules surrounding investment losses can really help minimize your tax obligation each year. This is because investment gains and income can be subject to a variety of federal tax rates as high as 39.6%. This and a newly minted tax law in 2013 that could add a 3.8% Medicare investment tax surcharge make planning around when to take investment losses an important tax planning subject.
Know the meaningful rules
What makes investment losses such an important tax planning subject? Here are the relevant tax ramifications surrounding investment losses.
- Offsetting gains. Investment losses can be used to offset investment gains every year.
- Short-term versus long-term. Short-term investment gains (from assets owned by you for less than one year) can be subject to ordinary income tax rates up to 39.6% while long-term gains have a maximum tax rate of 20% (0% if your income is in the 15% income tax bracket or lower).
- Netting rules. You first net investment losses against investment gains prior to applying losses against your ordinary income. Where possible you must net short-term losses against short-term gains and long-term losses against long-term gains.
- Excess losses. Up to $3,000 of excess investment losses can be used to offset your ordinary income in any one year.
- Unused losses. Unused losses can be carried forward to offset income in future tax years.
So given these rules, here are some tips.
Maximizing the impact of investment losses
- Net losses against short-term gains whenever possible. If you are in a high income tax bracket, try to sell stocks with a loss to offset any investments you wish to sell that you have owned less than one year.
- Defer taking losses if they will be used to offset lower taxed gains.
- Time taking an investment loss to take advantage of the annual $3,000 reduction of income it provides.
- Transfer stock from a low tax rate family member to a higher taxed individual.
- Take full advantage of the loss carry-forward rules. If you sold an investment that had a huge loss in a prior year, you can only take $3,000 against your regular income each year. If this applies to you, conduct an annual review of your portfolio and consider selling investments with a gain to offset more of this loss carry-forward.
Remember, investment losses can be used to offset investment gains and a limited amount of your ordinary income. Since the tax rates vary so greatly, proper planning to match losses against higher taxed items can make these losers a real winner on your tax return.
Certainty in Federal Student Loan Rates
Congress recently passed legislation that will lower federal student loan rates. This legislation provides a level of certainty for all taxpayers. While more details will be forthcoming, here is what is known.
In a recent announcement, Congress has passed a bill that will take much of the politics out of establishing student loan rates….at least for now.
Background
With over $1 trillion in student loan debt, the cost of student borrowing is quickly becoming a major economic issue in the United States. The rates for many popular government sponsored loan programs doubled on July 1st from 3.4% to 6.8%. Since some 18 million loans could be affected, Congress determined it was necessary to address the scheduled change.
New Rate Program
Under the recently passed legislation, the rates for these loans will now be set against a market rate formula with a cap on the highest possible rate. The hope is that by making the rate a formula, it removes politics from the process and allows families and students to better plan their costs. Specifically,
- Interest rates will be set annually with the rate linked to the 10-year Treasury note rate.
- The current rates are as follows:
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With the passage of this law, approximately 11 million loans will see an average interest savings of $1,500 per the White House.
Challenges
While the passing legislation provides some certainty in student loan rates, there are already rumblings that future legislation is forthcoming. Why?
- The rates noted are well above the interest rates the federal government is providing banks. There are many in the legislature that believe students should receive a similar benefit.
- Many believe the rate should be more closely tied to the cost of funds, not a market pegged rate.
- With the projected federal student loan debt at $1.4 trillion in the next decade, the interest cost paid by students could impact the economy as these interest payments could delay purchasing first homes, cars and other items.
Should you Reduce Your Charitable Giving? – New itemized deduction phase-out causing concern
With the re-introduction of itemized deduction phase-out, does it still make sense to contribute to charities? For most taxpayers, the answer is a resounding yes. Continue to make charitable contributions. Here is what you need to know.
In 2013 federal tax legislation reintroduces the phase-out of itemized deductions for certain taxpayers. Because of this, many who are subject to itemized deduction phase-outs wonder if the benefit of charitable giving is reduced. Here is what you need to know.
- Most taxpayers are not impacted. The phase-out of itemized deductions for 2013 is based on Adjusted Gross Income (AGI) in excess of $250,000 for single filers, $300,000 for joint filers ($150,000 for married filing single), and $275,000 for head of household. So if your income is below these amounts your itemized deductions will not be reduced because of the new phase-out rules.
- Alternative Minimum Tax (AMT) does not impact charitable giving.If you have been subject to the AMT in the past, please note that charitable giving generally does not impact this alternative tax calculation. Other things like state taxes and property taxes are a couple of items that do impact this alternative tax calculation.
- The phase-out calculation is based on income not deductions. This means that unless you are in a low or no tax state your charitable deductions will probably not be impacted by the deduction phase-out. Why? The itemized deduction phase-out amount is based upon your income. Say, for example, the phase-out calculation will reduce your itemized deductions by $8,000. Income required to produce this phase-out amount will also generate state taxes in most states in excess of this amount. Therefore the phase-out reduction will almost always be absorbed by your state income taxes.
“Are there cases when the phase-out will eat up a lot of your charitable giving? Yes, especially in no or low tax states. Because of this risk it is a good idea to review the phase-out impact on your situation as soon as possible. Otherwise, you might be foregoing an opportunity to reduce your tax liability this year with planned charitable giving.”
Five Big Tax Mistakes – Don’t let them happen to you
Every year thousands of taxpayers go through a ”gotcha” with the IRS. A large, unexpected tax bill. Here are five common causes of tax surprises from lost refunds to retirement plan mistakes.
Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five big ones that are easy to avoid with some simple planning.
Mistake #1. Withholding too little. This results in a tax surprise when filing your income tax. Don’t be too hard on yourself if this happens to you. Social Security withholdings have changed each year and new tax laws in 2013 make it very difficult to withhold the proper amount from each paycheck.
The plan: Check your withholdings after filing each year’s taxes. Make adjustments as necessary by filing a new W-4 with your employer.
Mistake #2. Inadvertently withdrawing funds from retirement plans. Amounts taken out of pre-tax retirement plans like 401(k)s and IRA’s can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly all the rollover could be deemed taxable income.
The plan: Do not touch your retirement accounts if at all possible (Exception: when you reach age 70 ½ you may be subject to Required Minimum Distribution rules). If you do withdraw funds, ensure you have the proper withholdings taken out at time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the plan administrator and then conducting the transfer yourself.
Mistake #3. Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to shelter income from tax through tax preferred retirement programs.
The plan: Review your retirement savings options and plan to contribute as much as possible to your plans. Pay special attention to plans that include an employee match component. This attention can reduce your taxable income each year.
Mistake #4. Direct deposit mix-ups. You may now have tax refunds directly deposited in up to three bank accounts. The problem: what if one of the account numbers is entered incorrectly? Unfortunately, unlike replacing a lost check, the IRS does not have a good means of correcting this type of error. There have been instances where taxpayers have lost their refund when this occurs.
The plan: Many taxpayers do not feel comfortable giving the IRS direct access to their bank account. If you are in this camp, the digital deposit problem is solved. If you use direct deposit, avoid depositing your refund into more than one account. Ideally have a second person double check the account number on your tax form prior to submitting the return.
Mistake #5. Not keeping correct documentation. You know you drove the miles, donated the items to charity, had the medical expense, and paid the daycare. How can the IRS be disallowing your valid deductions? Remember without correct documentation the IRS is quick to disallow them.
The plan: Set up good recordkeeping habits at the beginning of each year. Create both a digital and paper folder separated by income and expense type. Keep a mileage log and properly document your charitable contributions.