TaxHawk.com's Tax Tips

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Tip #26
Medical Expenses for Ex-Spouse
If you are legally required to pay any medical expenses for your ex-spouse, you can deduct the expenses as alimony instead of on Schedule A as an itemized deduction. The benefit of deducting the medical expenses as alimony is that most medical expenses on Schedule A are disallowed because of the 7.5% of AGI limit.

Tip #27
Home Sold Before Two Years
Generally, any gain on the sale of your home is excluded from taxable income if you have lived in the home for two out of the past five years. If you sell your home before you have lived in it for two years, you may still qualify for the home sale exclusion and not have to report any gain on your tax return. If you didn't meet the two year test because of a job-related move, health or other unforeseen circumstances, you may still qualify for a modified exclusion. The modified exclusion is calculated by taking the fraction of the two years that you lived in the home and multiplying that fraction by $250,000 (single) or $500,000 (married filing jointly). EXAMPLE: You are a single taxpayer who purchased a $300,000 home on July 1, 2005. On January 1, 2006, you move to another state as part of a job transfer. Your old home finally sells on March 15, 2007 for $350,000. You lived in your home for 6 months, so your modified exclusion is $62,500 (6 months/ 24 months X $250,000). Since the modified exclusion of $62,500 is greater than your actual gain of $50,000, your home sale is tax-free and there are no forms that you need to fill out on your tax return.

Tip #28
Prior-Year Passive Losses
If you are a passive investor in a partnership or S corporation, or if you have passive rental losses, remember to deduct suspended prior-year passive losses in the year that you sell or dispose your partnership, S corporation investment, or rental home. EXAMPLE: Bob Smith is a passive investor in Goldstar LLC. Bob's 2004 K-1 from Goldstar shows a $10,000 loss and the 2005 K-1 shows a $5,000 loss. Bob did not have any passive income in 2004 or 2005 to offset the passive losses so the losses are suspended and carried forward to 2006. Bob sells his investment in Goldstar LLC in 2006. The $10,000 and $5,000 losses from 2004 and 2005 will be deducted in 2006, the year his investment is sold.

Tip #29
Head of Household
Don't file as "Single" on your tax return if you qualify to file as "Head of Household". You will get a bigger refund if you file as Head of Household. If your ex-spouse claims your child as a dependent on his or her tax return, but the child lives with you, then you probably can still file as Head of Household. Also, if you can claim a parent, grandparent, nephew, niece, brother or sister as a dependent on your tax return, you can probably file as Head of Household.

Tip #30
Renting your Home for a Few Days
If you rent your home or vacation home for 14 days or less, you don't need to report your rental income or expenses on your tax return. However, if the home is an investment property that you do not live in during the year, then you would report rental income and expenses even if it is rented for 14 days or less.

Tip #31
Roth IRA
In most cases the Roth IRA is a better deal than the traditional IRA. Contributions to Roth IRAs are not deductible on your tax return, but there will be no taxes on the money you take out of your account after age 59 1/2. A Roth IRA is advantageous if your tax bracket will be the same or higher when you retire than what it currently is or if you don't want to take mandatory distributions from your account when you turn 70 1/2. With a Roth IRA you can keep your money in a nest egg for future use past age 70 1/2 or pass it on to your beneficiaries as an income tax-free inheritance. The younger you are the more advantageous the Roth IRA is since your investments grow tax free for a longer period.

Tip #32
Inheritances
Inheritances you receive are not taxable income. You don't report them on your tax return unless you meet one of the following exceptions. If you inherited a traditional IRA or a retirement account such as a 401K account, then any distributions received from those retirement accounts are reported as income on your tax return. You should receive a Form 1099-R showing the amounts of retirement income to report. If you receive property such as stocks or a home, your cost basis in the property is usually the fair market value of the property on the date of death. The sale of inherited property is usually reported on your tax return on Schedule D. If the property is sold soon after the date of death, there will usually be little or no gain to report on your tax return since you are only taxed on the appreciation of the property from the date of death. The sale of inherited property is automatically a long-term gain or loss even if you held the property for less than a year.

Tip #33
Foreign Exchange Students
If you host an elementary or high school student (foreign exchange student, etc.) through a qualified organization, you may deduct up to $50 per month in your unreimbursed expenses as a cash charitable contribution.

Tip #34
Bad Debts
Nonbusiness bad debts are deductible as a short-term capital loss on Schedule D. Take a tax deduction in the year the loan is totally worthless. You don't need to wait until the due date of the loan to claim a bad debt deduction if circumstances cause it to be worthless before the year it is due.

Tip #35
Divorce Property Settlement
If one spouse is in a lower tax bracket, it saves overall taxes to transfer appreciated property such as stocks that have gone up in value to the lower tax bracket spouse when doing the property settlement. However, gains from the sale of a home are usually not taxable, so even if your home has appreciated, it usually won't save taxes by transferring the home to the lower tax bracket spouse.

Tip #36
Rental Property Gain Exclusion
Gain on the sale of your principal residence is excluded from taxable income if you have lived in the home for two out of the past five years. If you have a rental property (or vacation home) that has significantly appreciated since you purchased it, you could move into the rental home and use it as your principal residence for two years, then sell it and have the gain on sale of home exclusion apply. However, you would still have to recognize gain on any depreciation taken on your tax returns after May 6, 1997.

Tip #37
Mutual Fund Records
Don't throw away your mutual fund's annual statements. The annual statements will show the purchase history and dividends reinvested in purchasing more mutual fund shares. This information will be needed to calculate your cost basis in the mutual fund shares when you eventually sell part or all of the shares.

Tip #38
No Records for a Stock Sale
If you sell a stock and don't have any records for the purchase price, the first thing you should do is try really hard to find some records. If you inherited the stock, you won't need to dig for original records, your basis is the fair market value of the stock on the date of death. If the stock isn't inherited, then you need to try and find out when the stock was purchased and the value of the stock when it was purchased. If you absolutely can't find any records, the rule of thumb many tax preparers use is to make a conservative guess for what the cost basis of the stock is using historical stock prices and the client's best guess for when the stock was purchased. You can use a historical stock price web site such as www.bigcharts.com to find the value of a stock on a certain day.

Tip #39
Always File Your Tax Return
Many people who owe tax on April 15th make the big mistake of not filing their tax return because they don't have any money to send in with their tax return. By filing your tax return even without any payment, you avoid the large 5% a month late-filing penalty and only have to pay the much smaller late-payment penalty. If your tax return isn't ready to be filed, then file an extension in order to avoid the 5% a month late-filing penalty.

Tip #40
Disability Payments
Disability payments are not taxable income if you paid the premiums on the policy. If your employer paid the policy, then the disability payments are taxable. If you paid part of the policy, then part of the disability payments are non-taxable. If you paid for the disability insurance through a cafeteria plan with pre-tax dollars, then your disability payments are taxable.

Tip #41
Mandatory IRA Distributions
If you have a traditional IRA, you are required to receive a minimum distribution when you reach age 70 1/2. If your distribution is less than the minimum required distribution, a 50% excise tax may be imposed on the shortfall. Minimum distributions do not apply to Roth IRAs.

Tip #42
Vacant Rental Properties
You can deduct expenses for your rental home on your tax return even if you don't have tenants as long as you are actively seeking tenants. One way to document that you are actively seeking tenants is to clip out and save an ad in the newspaper showing that your rental home is available

Tip #43
Business Conventions
Travel expenses for attending a convention related to your trade or business are deductible. Any unreimbursed employee expenses go on Schedule A as a miscellaneous itemized deduction. If you have a sole proprietorship business, the expenses go on Schedule C. Travel expenses for conventions related to investments or financial planning are not deductible. Conventions held on cruise ships are subject to a limit of $2,000 per year that can be deductible. Foreign conventions have a variety of rules that must be met before the travel expenses are deductible, however, conventions held in North America (Canada, Mexico, etc.) are not considered foreign conventions.

Tip #44
IRA Contribution for Stay-at-home Spouse
You can make a Roth IRA or traditional IRA contribution for your stay-at-home spouse even if he or she has no earned income. However, you must have earned income at least equal to the amount of the IRA contributions you make for yourself and spouse. So if you make a $4,000 IRA contribution for you and your spouse, you need to have at least $8,000 in earned income. If your spouse is older than age 70 ½ at the end of the year, an IRA contribution can't be made for the spouse.

Tip #45
First-Time Home Buyer
If you are a first-time home buyer, you can have a penalty-free distribution of up to $10,000 from your Roth IRA or traditional IRA to purchase your home. You can also take out $10,000 to help your child or grandchild buy their first home. The money needs to be used for acquiring, constructing, financing, or closing costs. Even though the 10% penalty does not apply, you still need to pay regular taxes on the IRA distribution. You are also limited to using $10,000 in your lifetime.

Tip #46
Capital Losses
If you have capital losses greater than $3,000, you may want to take advantage of the losses and sell an appreciated asset. Capital losses are limited to $3,000 on your Form 1040, with any loss greater than $3,000 being carried forward to future years. EXAMPLE: Your investment in Company B went south in 2006 and you end up selling the stock for a $60,000 capital loss. If you don't have any capital gains in 2006 to offset the loss, you can only deduct $3,000 on your tax return and the other $57,000 is carried forward to the next year. At $3,000 per year, it will take you 20 years to fully use the capital loss, unless you have capital gains in the future to use up the loss.

Tip #47
Home Construction Loan
When you are constructing your home, you can deduct the interest expense on the construction loan from the time that construction begins. If construction lasts longer than 24 months, any mortgage interest after 24 months is not deductible. The interest is deductible again once you complete the home.

Tip #48
Charitable Contributions
A contribution is deductible if it is made to a qualified organization. Contributions made directly to needy individuals or nonqualified organizations are not deductible. Also, the value of service that you perform for a charitable organization is nondeductible. However, any unreimbursed out-of-pocket expenses (office supplies, uniforms, long-distance phone calls, etc.) for volunteer work for a qualified organization are deductible. Any transportation expense is also deductible.

Tip #49
Identifying Shares Sold
If you have purchased shares in the same company at different times, sell the shares you bought at the highest price first. You will need to tell your broker that you want to sell the highest price shares. If you don't specifically identify the shares to be sold, the default method is to consider the shares that you purchased first as the shares that are sold first.

Tip #50
Avoid Early Distributions
If you are younger than age 59 1/2, think twice before you take an early distribution from your 401(k) or IRA account. A 10% early distribution penalty is charged along with federal and state tax on the distribution. A large distribution will bump a taxpayer up to a higher tax bracket, so you also end up paying a higher rate of taxes on your regular income. EXAMPLE: A Single taxpayer has $30,000 in taxable income which is taxed at an overall tax rate of 13.9%. If the taxpayer takes a $20,000 early 401(k) distribution that is subject to the 10% penalty, the $20,000 distribution is taxed at the 25% tax rate plus the 10% penalty, so 35% of the $20,000 distribution goes for federal taxes.