This past tax season we noticed an uptick in the number of clients who rented out their homes through websites such as?airbnb?and?VRBO.? Moreover, we saw a number of clients ask us how they would be taxed if they were to rent out their home on a short-term basis through one of these websites.
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.
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.
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.
Are you aware that if you rent your home for 14 days or less in a calendar year, 100% of the rent received is tax-free to you?
Let’s say you can rent out your home for $5k per week, and you rent the home out for only 2 weeks each year. In this example, you would put $10k of rental income into your pocket each year without owing a dime in federal income taxes.??Now that’s great tax planning!
We’ve recorded an informative 3-minute presentation on how to generate tax-free income from your home each year available at: https://youtu.be/mErYBKqXYUg
Please view it, like it, and share it.
By?Axial Financial Group: Brad McMillan (Originally appeared on?http://blog.axialco.com/afg/worriedabouttheelection)?
Recently, several people have asked me what investors should do in their portfolios to prepare for the presidential election. One went so far as to contemplate going to cash around August, just in case.
I understand the concern, and in many respects, I share it. As I?ve written before, this election has more policy uncertainty baked into it than any other in my lifetime. With Bernie Sanders still out there pulling Hillary Clinton to the left, and with Donald Trump embracing ideas well outside the normal political spectrum, we really don?t know what the next president, whomever it might be, is going to do.
It really is different this election, and investors have reason to pause and evaluate the situation.
That said, it’s much too early to panic. The primary season isn?t even finished, and it?s quite likely that much of what has been said and done will be quickly forgotten as candidates, particularly Clinton, pivot toward the general election. Putting it in movie terms, the introductory cartoons are just about over, and the main feature is about to start.
That?s not to say the general campaign won?t be an action thriller, full of twists and cliffhangers. It probably will. Even though Clinton is widely favored to win, there are many reasons to suspect the race will be closer?and that Trump might even have an advantage. The final outcome, in my opinion, is very much up in the air.
So what should investors be doing to prepare? In short, nothing. Here?s why.
First, were Clinton to be elected, the policies she’d likely introduce are pretty well understood and already priced into the market. In any case, she would probably be facing a Republican-controlled Congress, constraining what she could do. There are no immediate or unknown problems with that scenario, from an investor perspective.
If Trump were elected, the situation is not so simple. He has already announced that he would make significant changes in the realms of both economics and foreign affairs, which could very well affect our portfolios. His positions on trade, for example, could end up damaging U.S. exports, affecting the markets in much the same way as the recent strong dollar. Regardless of specifics, he plans?and this is both his point and his appeal?to do things differently. Markets hate that.
At the same time, he would run into the same institutional constraints that Clinton would face, and possibly even more. Although he is running as a Republican, Trump is facing substantial resistance from large elements in the party. House Speaker Paul Ryan, for example, has so far refused to endorse him over concern about his policies. Many of his ideas are, by design, outside the current political consensus. With Democrats likely to be hostile and Republicans mixed, Trump?s chances of enacting significant changes, particularly in the short term, aren?t high.
Put simply, quite a bit would have to happen to bring about the kind of changes that might affect the market. We can certainly expect more turbulence as the race evolves, but that would happen anyway. Bottom line: there?s no political reason to modify your portfolio in the near future.
by?Andrew D. Schwartz, CPA, Founder of The MDTAXES Network
At some point during each tax season, there is a moment when I notice a recurring trend or theme that is unique and fascinating to that specific tax season. So what is this year’s most interesting trend?
For the 2016 tax season, what I found most fascinating is the number of clients who instructed me to allocate $3 of their tax liability to the Presidential Election Campaign Fund.? With all the election craziness going on this year, more of my clients checked the Yes box in our Tax Organizer to the question about contributing to the Presidential Election Campaign Fund than have done so during all of my prior 25+ years of practice combined.
While most taxpayers aren’t even aware that this option exists, there is a box to check on the top right of the first page of the?Form 1040?to designate $3 of your federal tax liability to be earmarked for this fund. For joint filers, there is a second box for your spouse to check as well.
Please note that checking this box does not increase your tax liability by $3.? Instead, the federal government simply allocates $3 from your total tax liability to the Presidential Election Campaign Fund.
While your specific vote will probably never be the one vote to determine the outcome of an election, taking time to actually vote is critical to our democracy.? Same goes for the $3 you allocate to this fund that won’t be enough on its own to make or break anyone’s campaign.? However, having these campaign funds available might make a difference to a candidate who is neither a billionaire nor entrenched as part of the political establishment.? Who knows, maybe one day someone as far removed from the political scene as a former surgeon can go on to become president of the United States thanks in part to these public campaign funds.
According to the instructions to the Form 1040:
Presidential Election Campaign Fund
This fund helps pay for Presidential election campaigns. The fund reduces candidates’ dependence on large contributions from individuals and groups and places candidates on an equal financial footing in the general election. The fund also helps pay for pediatric medical research. If you want $3 to go to this fund, check the box. If you are filing a joint return, your spouse can also have $3 go to the fund. If you check a box, your tax or refund won’t change.
Prior Year Trends:
More clients had energy efficient tax credits for purchasing solar panels, electric cars and even re-charging stations for those electric cars
A variety of tax hikes took hold causing higher taxes on lower income for high-income taxpayers
Uptick in the number of individuals taking advantage of Health Savings Accounts (HSA)
Record low interest rates meant many homeowners refinanced their home mortgages
The Department of Labor has a new overtime rule that takes?effect Dec 1, 2016.? To summarize, if an employee is being classified as an exempt employee (and not currently being paid for any overtime), then their salary must be at least?$913 per week, which equates to $47,476 for a full-year worker. Anyone on salary for less than $47,476 must be paid time and a half for hours worked in excess of 40 hours per week.
Employers that have staff who are affected by these rules as of Dec. 1, 2016 have the following three options:
- Increase the worker?s annual salary to at least $47,476,
- Switch the affected employees to an hourly rate and pay them overtime after 40 hours per week,
- Or, limit the work hours to no more than 40 per week.
The US Department of Labor projects?that this change will increase the wages for more than 4.2 million US workers (including 84,000 MA workers) by either a salary raise or overtime when they work more than 40 hours.
Here are a few links from the DOL pertaining to these new rules:
Want to make sure you?re taking steps to reduce your tax burden for 2016?
Do you have self-employment income, multiple sources of income, or a job change in 2016?
If so, our Mid-Year Tax Projection Service will help!
We?ll calculate a mid-year tax projection, adjust your estimated tax payments if beneficial, and give you advice on what you can do for the rest of 2016 to reduce your tax burden on April 15. A fee does apply for this service.
Call us at 781.938.0045 to learn more or to schedule an appointment.