Tax tips fom Missouri CPAs

February 16, 2014 by  
Filed under Solar Energy Tips

The Missouri Society of CPAs (www.mocpa.org) is the largest professional association dedicated to advancing CPAs in Missouri. Established in 1909, the organization provides members with continuing education and governmental advocacy, while working to further the future of the accounting profession through student-focused initiatives. Members of the Missouri Society of CPAs provided the answers to the following tax questions.

Dave Finklang

Anders CPAs + Advisors

I do a majority of my shopping online; my neighbor told me that I have to pay something called use tax on those purchases? Is he correct? Is this tax something I pay with my income tax return?

As many consumers purchase more goods online, tax on these purchases has become a very prevalent topic. Most online purchases are not subject to sales tax as are purchases made in stores. For example, if you buy cat toys at the local pet store, you pay sales tax on the toys as part of that purchase. However, if you purchased those same cat toys from Amazon.com, you may not have had to pay any sales tax. For those online purchases that consumers do not pay sales tax on, use tax may be required.

Some states, such as Illinois, allow you to pay your use tax for the year on your state income tax return if the total use tax is less than a certain amount. Missouri, however, requires a separate use tax return.

Some states, such as Missouri, do not require use tax on online purchases if the total purchases subject to use tax are less than a certain amount. Missouri, for example, does not require use tax if your qualifying purchases are less than $2,000 for the year.

I am a self-employed painter, is there anything I can do to reduce my taxes for 2013 even though the year is already over?

For the most part, now that 2013 is over, there are not many tax reduction options. However, for self-employed individuals, there is a potentially powerful tax reduction tool still available through self-employed retirement plans.

For example, a self-employed individual without employees can establish a SEP-IRA (there are several other self-employed retirement plan options as well) up to the deadline of their tax return, including extensions. For 2013, the individual tax return deadline is April 15, 2014, and the extended due date is Oct. 15, 2014 (if an extension of time to file is submitted to the IRS by the April 15 deadline). Therefore, a self-employed individual potentially has until Oct. 15, 2014, to determine if cash flow and investing goals allow for a SEP-IRA contribution that would reduce their income taxes for 2013. For the 2013 tax year, a self-employed person without employees can contribute up to 25 percent of their self-employment income, up to a maximum contribution of $51,000.

Steven B. Gorin

Thompson Coburn LLP

Who is subject to the 3.8 percent tax on net investment income?

Married couples or head of household filers with MAGI over $250,000, single people with MAGI over $200,000, or married individuals filing separately with MAGI over $125,000 may be subject to this new tax. “MAGI” means modified adjusted gross income, which is adjusted gross income (usually the number at the bottom of the first page of your return) plus certain foreign income. Trusts are taxed if their undistributed income exceeds approximately $12,000.

What income is subject to the 3.8 percent tax on net investment income?

Taxable investments and passive business income are the largest categories. Generally, this includes income from interest, dividends, annuities, royalties, rents, passive business income, and gains from the sale of investments (except for most business assets). Tax-exempt income doesn’t count. Most active business income and earned income (such as wages and self-employment income) are protected from this tax.

How does the 3.8 percent tax on net investment income (NII) work?

You are taxed on the lesser of (a) the excess of your MAGI over the $250,000/$200,000/$125,000/$12,000 thresholds described above, or (b) your NII. Retirement plan income is not subject to this tax, but it can push your income over the threshold that makes your investment income subject to this tax. Income and deductions are calculated for regular income tax purposes, and then the NII rules tax only the NII components of your taxable income.

Joe Marchbein

Jack P. Fitter, CPA, APC

May a taxpayer deduct state and local sales taxes as an itemized deduction?

Taxpayers may elect to deduct such sales taxes in lieu of state and local income taxes. The deduction, which currently expires for tax years beginning after 2013, can be computed by keeping receipts showing the actual amounts of taxes paid, or using the amounts from tables provided by the IRS. If the amounts from the tables are used, sales taxes paid on major purchases, such as an automobile, can be added.

Has there been a change in the computation of the itemized deduction for medical expenses?

Starting with 2013, for regular tax purposes, taxpayers who are under the age of 65 can deduct medical expenses to the extent they exceed 10 percent of adjusted gross income. Taxpayers 65 and older may continue to deduct such expenses to the extent they are greater than 7.5 percent of adjusted gross income. On joint returns, the 7.5 percent rule will apply provided at least one of the spouses is 65 or older.

What are the requirements for deducting a rental real estate loss?

Unless a person is a real estate professional, there are limits on claiming a loss. A person may deduct losses up to $25,000 against active and portfolio income if they actively participate in the activity and own at least 10 percent of the activity. The deduction phases out at a 50 percent rate for adjusted gross income in excess of $100,000. Any losses that may not be claimed due to the above are suspended and carried over to the next year subject to the $25,000 and $100,000 rules. Any suspended losses are allowable in a year of a taxable disposition of the activity or if a taxpayer has sufficient passive activity income.

Philip Hayes

CliftonLarsonAllen LLP

What is the simplified home office deduction?

Beginning in the 2013 tax year, the IRS is offering a simplified method for taxpayers to use in deducting expenses related to a home office. In lieu of calculating the exact expenditures, the IRS allows a deduction of $5 per square foot for a home used regularly and exclusively for business purposes either as a self-employed person or employee, up to a maximum of 300 square feet. Under the simplified method, a taxpayer who uses the office deducts the $5 per square foot amount, and is not required to reduce the amounts normally shown on Schedule A as itemized deductions.

The regular method, which is the only way to allocate expenses such as utilities, mortgage interest, real estate taxes, and depreciation based on the area of the home used solely for business purposes, is still available. For self-employed individuals, the regular method allocates a portion of home-related deductions including home mortgage interest and real estate taxes out of itemized deductions and instead claims those amounts as business expenses; for employees who use a portion of their home as their principal office, the regular method allows deduction for the business use of the home on Schedule A, though some expenses are subject to an income limitation.

What tax credits are available for energy efficiency for individuals?

The two most common energy tax credits for individuals are the Non-Business Energy Property Credit and the Residential Energy Efficient Property Credit, which are valid for improvements made to a taxpayer’s residence in the United States.

The Non-Business Energy Property Credit is a tax credit (dollar-for-dollar reduction in tax liability) for 10 percent of the cost of certain qualified energy efficient property including qualifying insulation, windows, doors, and roofs; the credit also covers qualified water heaters and qualified heating and air conditioning systems. The credit is limited to $500 over the taxpayer’s life, and only $200 of this limitation can be used for windows. Unless extended, this credit is not available for tax years after 2013.

The Residential Energy Efficient Property Credit is a tax credit for 30 percent of the cost of solar hot water heaters, solar electric equipment, and wind turbines, is available for tax years through 2016. The credit is limited to $500 for each one-half kilowatt of capacity of the property and any portion in excess of the amount of tax owed can be carried forward to the next year.

David Ruth

Experis Finance

What are the rules for claiming the Earned Income Credit (EIC), and how much can I receive?

The amount of the EIC depends on the taxpayers’ income and number of qualifying children. Taxpayers with no qualifying children can get a credit of up to $487. Taxpayers with three or more qualifying children can get a credit of up to $6,021. The EIC is a refundable credit. Taxpayers receive the full amount of the credit even when it exceeds the tax liability for the year.

To claim the EIC you must have earned income. Your adjusted gross income cannot exceed $14,340 for an unmarried person with no qualifying children and up to $51,567 if you are married filing jointly with three or more qualifying children. You cannot use the filing status of married filing separately; you cannot be the qualifying child of another person; you must have a valid Social Security Number that allows you to work in the United States; you must be a U.S. citizen or resident alien for the entire year; you cannot have investment income more than $3,200; and you cannot exclude foreign earned income. If you do not have qualifying children as of Dec. 31, 2013, you must be at least 25 years old but cannot be 65 or older.

How much is the child tax credit, and what are the rules for claiming it?

The child tax credit is up to $1,000 per child. The taxpayer must be able to claim the child as a dependent and claim the exemption on the return, and must have a valid Social Security number or Individual Taxpayer Identification Number (ITIN). The child must live with the taxpayer in the United States for more than half of the year, be under age 17 on Dec. 31, 2013, be a U.S. citizen or resident alien, and must have a valid Social Security number or ITIN. There are special rules that allow a noncustodial parent to claim the credit.

There is no limit to the number of children for which the credit can be claimed provided each child meets the test for the credit. However, the credit is reduced when income reaches certain levels. Depending on the taxpayer’s filing status, the reduction can begin when adjusted gross income exceed $55,000. The credit is not refundable and cannot exceed the tax liability for the year. There is an additional credit that is refundable for certain taxpayers with more than $3,000 of taxable earned income or who have three or more children regardless of income. The total child and additional child credit cannot exceed $1,000 per child.

Disclosure

Any tax advice contained in this text was not intended or written to be used, and cannot be used, by the reader for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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