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May 2016


by Andrew D. Schwartz, CPA

This past tax season we definitely noticed an uptick in the number of clients who rented out their homes through websites such as airbnb and VRBO.  Moreover, we saw a larger jump in the number of clients asking us how they would be taxed if they were to rent out their home on a short-term basis a few times each year through one of these websites.

Tax-Free Income!!!

Believe it or not, if you rent the home for 14 days or less during a calendar year, the IRS allows 100% of the rental income received to be tax-free. 

Here are the rules as spelled out in IRS Publication 527:

Used as a home but rented less than 15 days. If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). You are not required to report the rental income and rental expenses from this activity.

Let's say you can rent your home for $10k per week, and you rent the home out for only 2 weeks each year. In this example, you would put $20k of rental income into your pocket each year without owing a dime in federal income taxes.  Now that's great tax planning!

The Basics:

The IRS details the rules for homeowners who rent out their homes in Chapter 5 of IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes.)

The rules divide rental properties into three buckets based on the number of days rented versus the number of days used personally as follows:

  • Rented 14 days or less - Income is tax-free and not even reportable on your tax return. 
  • Used personally for no more than the greater of 14 days or 10% of the days rented - Property is considered a rental property only, and all the expenses incurred during the year associated with that home offset any rental income received on a Schedule E.  Losses may or may not be deductible based on your income.
  • Rented more than 14 days and used personally more than the greater of 14 days or 10% of days rented - Considered a "mixed use" property. Here the rules get confusing, but essentially you first deduct 100% of any direct expenses including advertising, commissions, supplies, and any other expense incurred specifically in connection with the rental.  All other expenses are prorated based on the days rented versus days used personally. Losses you can claim on this home are limited. IRS Publication 527 explains these rules in detail.

Reporting Tax-Free Income Reported to the IRS:

What should you do if you rent your home for 14 days or less during the calendar year and then receive a 1099-Misc during the following January reporting the rental income you received to the IRS?  Even though this income is not taxable to you, the IRS is now expecting you to report the rental income as reported in Box 1 of the 1099-Misc somewhere on your personal tax return.

To keep this income tax-free, simply complete a Schedule E as follows:

  • Write in the rental income reported to you on the Form 1099-Misc on line 3 of the Schedule E.
  • On line 19 of the Schedule E, write "Rented Less Than 15 days", and put the amount from line 3.

By following those two simple steps, the IRS will be happy since they will find the income reported to them on the 1099-Misc on your personal tax return.  And you'll be happy since you will not pay any federal income taxes on income that is not taxable to you.

In other words, the IRS won't send you a notice incorrectly assessing taxes on the tax-free rental income reported to them on the 1099-Misc.  And the rental income remains tax-free to you. You save the IRS a stamp while also saving yourself hundreds or thousands of dollars in federal income taxes.

Plan Ahead:

When renting out your home for just a few weeks a year, please plan ahead to not rent out that home for more than 14 days.  Once you hit 15 rental days, you'll need to report that income on your tax return and also prorate your mortgage interest and real estate taxes between your rental activity and your personal use days; causing you to lose out on a portion of these valuable tax breaks. 

Your tax return will also become much more complicated for the current year as well as future years due to how the mixed-use rental losses are carried over to subsequent years. 

Stopping at 14 days, therefore, is probably more valuable than getting that 15th day of rental income.



by Andrew D. Schwartz, CPA

The numbers are in.  President Obama recently released his 2015 Tax Return back in April. Initially I was going to critique his tax return. Instead, I am going to present my three-step solution to tax simplification.

1. Require All Politicians to Self-Prepare Their Tax Returns Each Year

For starters, let's require that all politicians, including the President of the United States, to manually self-prepare their tax returns each year - without the help of a tax professional and without using any tax prep software. 

Let's also not allow our country's legislators to prepare their tax returns during working hours,  Doing so will cause the President and each member of Congress to spend countless hours during their nights and weekends in February and March working on their taxes just as many American taxpayers do each year.

It wouldn't take more than a few years of manually preparing their own tax returns for the politicians to realize how overly complex the tax rules have become.

2. Have the IRS send The President and each Politician a notice questioning an item on their return that was reported correctly.

When the IRS has trouble agreeing information received from third parties to what taxpayer reports on their returns, their computers automatically generate a confusing 10-page notice to the taxpayer.  Instead of asking for clarification for the item in question, the notice instructs the taxpayer to either pay additional federal income taxes on that item or, if they don't agree wit the assessment, to send in documentation supporting the position claimed on their tax returns.  Sadly, with these intimidating and confusing notices, taxpayers are guilty until they prove their innocence.

I understand that the IRS needs to send notices demanding a balance due to get taxpayers to respond, but to be honest, it's quite unnerving for most people get a confusing 10-page notice form the IRS assessing additional taxes. 

As part of my three-step plan, I would like to see the IRS send the President and every politician one of these notices each year assessing additional taxes, even if their tax returns were completed correctly and they don't owe any additional taxes.

The politicians, without the help of a tax professional, can then try to get through to the IRS' "customer service" number, and after being on hold for an hour or more, try to reason with the IRS agent.  Or, they can compose and mail in a letter supporting their position, and hope that the person who ultimately processes the response does so correctly on the first try.  In my experience, it often takes more than one submission of documentation to resolve an issue with the IRS in the taxpayer's favor, even when the taxpayer's tax return is 100% correct.

3. Make Sure Each Politician Gets Audited Each Year

The third step of my three-step plan is frankly brilliant.  Every year, have the IRS audit the tax returns submitted by the President and each politician.  Let the politician defend his or her deductions in front of the IRS agent without any professional help. 

If you have ever gotten audited, it's really an uncomfortable process, even if you have nothing to hide and all of your documentation is available and in perfect order. I think it would be a great annual exercise for the people who actually draft and vote on the tax laws to sit through an IRS audit each year.

Three Steps to Success

How long do you think it would take for Congress to vote for tax simplification, and for the President sign the bill into law, if every politician, including the President, would be required to:

1. Independently prepare his or her own tax return without the help of a tax professional or any tax software,

2. Then, respond to a random IRS notice each year on an issue where they correctly reported that item on their tax returns,

3. And finally defend their tax deductions during an annual IRS Audit.

My guess is less than 2 years. Trust me, I know that there is no easy solution to tax simplification., But starting with the massive Tax Reform Act of 1986, the tax laws have gotten significantly more complicated during these past three decades. Drastic times require drastic measures, and I feel my three-step plan is the perfect drastic measure.



IR-2016-68, April 28, 2016

WASHINGTON — The Internal Revenue Service is marking National Small Business Week, May 1 to 7, by encouraging small business owners and self-employed individuals to check out several products to help them understand and meet their tax obligations.

The products include a series of educational webinars to help them not only be tax compliant, but also to help their businesses thrive. The webinars start at 2 p.m. Eastern (11 a.m., Pacific; noon, Mountain; 1 p.m., Central). Each webinar topic has a tax tip or fact sheet with more information:

Other Small Business Products

The IRS video portal contains video and audio presentations on a variety of topics of interest to small businesses.




Income Taxes

Saving and Investing



  • Good time to make semi-annual donation of clothing and household items to charitable organizations.
  • Before summer kicks in, take a look at your asset allocation of all your retirement and non-retirement accounts, and consider rebalancing your accounts.


2015 & 2016 TAX FACTS

  • For 2015, the standard deduction for a single individual is $6,300 and for a married couple is $12,600. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2015, the personal exemption is $4,000. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $118,500 for 2015 and 2016, up from $117,000 in 2014.
  • The standard mileage rate is $.54 per business mile as of January 1, 2016, down from $.575 for 2015.
  • The maximum annual salary deferral into a 401(k) plan or a 403(b) plan is $18,000 in 2015 and 2016, up from $17.5k in 2014.  And if you'll be 50 or older by December 31st, you can contribute an extra $6,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $5,500 for 2015 and 2016.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2016 to make your 2015 IRA contributions.


Need Help With Your Nanny Payroll?

This Month's Topics

AIRBNB and VRBO Spell Tax-Free Income If You Rent Your Home For 14 Days Or Less Each Year

Three Steps to Tax Simplification

For Small Business Week, IRS Features Series Of Webinars For Entrepreneurs

The FICA Refund for Medical Residents 

2015 & 2016 Tax Facts

Tax and Financial Planning Calendar for May 2016


Browse our index of previous months' newsletter topics

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In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.


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