IRS 1031 Tax Exchange Rule

Section 1031 Exchange refers to "like-kind" exchanges of property. Normally, an owner is taxed on a gain from a sale, but in a "like-kind" exchange, the tax is deferred. This IRS 1031 tax exchange rule recognizes that while the form of property may have changed, the actual investment is the same. For instance, a parking lot may be exchanged for a piece of timber land.

The exchange is tax deferred, not tax free. When the property is sold outright, any gain from the earlier exchange plus the gain on the later sale is taxed.

Property must be exchanged for property, you cannot sell for cash and then reinvest in another property. Any property must have a productive use and can include real property or personal property (although you cannot exchange your primary residence).

You also must have a qualified intermediary handle the exchange. This person cannot be the taxpayer or anyone with a close relationship to the taxpayer. The IRS Section 1031 Exchange rules also have time limits to complete the exchange if you want to take advantage of the tax deferment.

Not all properties qualify for the IRS Section 1031 Exchange rule.

Gift Tax

You can give gifts totaling $13,000 or less to any one person per year without paying the gift tax. If you give over $13,000, the gift tax owed will be figured on the amount over $13,000 only. Your spouse can also give $13,000 or less to the same person during the same year without incurring a tax liability.

The gift tax is paid by the gift giver, not the receiver. The person receiving the gift does not need to claim the gift as income.

Gifts can include money and property, and are considered gifts if nothing is received in return. You may also be giving a gift if you sell something below its value or even if you make a loan.

Generally gifts of tuition, medical expenses, gifts to your spouse, political organizations or to charities are not counted in the gift tax annual limits.

If you are giving a substantial amount of money or property to one person, you should contact a lawyer to get advice about the best way to handle the transfer.

Eligible Dependents for Tax Purposes

Liberty Tax professionals are available for your tax needs. Please call your local Liberty Tax office for further information. You are allowed one dependency exemption for each person you can claim as a dependent. The term dependent means:

* A qualifying child, or
* A qualifying relative.

An exemption for a qualifying child or qualifying relative can be claimed only if the three following tests are met.

* Dependent taxpayer test. You cannot claim an exemption for a person, if that person is claiming a        dependent or their own exemption.
* Joint return test. You generally cannot claim a married person as a dependent, if they file a joint return.
* Citizen or resident test. The person must be a U.S. citizen, U.S. national, U.S. resident, or a resident of Canada or Mexico, for some part of the year.

To claim an exemption for a qualifying child, the child must meet the following five tests.

* Relationship test. Be the son, daughter, stepchild, eligible foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
* Age test. Must be under age 19, or under age 24, if a full-time student. If permanently and totally disabled, there is no age limit.
* Residency test. Must have lived with you for more than half of the year. Support test. Cannot have provided more than half their own support.
* Qualifying child of more than one person test. You must be able to claim the child using the tie breaker rules, if the child is a qualifying child for more than one person.

An adopted child is always treated as your own child. An eligible foster child is an individual placed with you by an authorized placement agency or by judgment, decree or other order of any court of competent jurisdiction.

There are four tests that must be met for a person to be a qualifying relative.

* Not a qualifying child test. A child cannot be your qualifying relative if the child is your qualifying child or the qualifying child of anyone else.
* Member of household or relationship test. Must live with you all year as a member of your household or be related to you in one of the ways for relatives who do not have to live with you. The relationship is not met if at any time during the year the relationship violates local law.
* Gross income test. Generally, you cannot claim an exemption for a person that has gross income of $3,650 (TY 2009) or more.
* Support test. Generally you must provide more than half of the person's total support during the tax year.

The above rules are basic and are defined in more detail in IRS Publication 501. A phase-out of exemptions occurs when your adjusted gross income goes above a certain amount.

Social Security Numbers for Dependents

A social security number (SSN) is required for any person for whom you claim an exemption. If your dependent does not have and cannot get an SSN, you must list the individual taxpayer identification number (ITIN), or adoption taxpayer identification number (ATIN).

Some other important notes for your dependents

Usually, the parent who has physical custody of a child for more than 6 months of the year is allowed to claim the exemption for that child. However, there are two instances when someone other than the custodial parent (guardian) can claim the child. The non-custodial parent can claim the exemption when the custodial parent signs a waiver, Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or when the non-custodial parent meets the requirements for divorce executed before 1985 and not modified after 1984.

Beginning with 2009 tax returns, a noncustodial parent claiming an exemption for a child can no longer attach certain pages from a divorce decree or separation agreement instead of Form 8332 if the decree or agreement was made after 2008. This noncustodial parent will have to attach Form 8332 or a similar statement signed by the custodial parent and whose only purpose is to release a claim to exemption.

Income Tax Filing Status  

Your filing status determines filing requirements, standard deduction, and correct tax. It also determines whether you can or cannot claim certain other deductions and credits.

There are five filing statuses:

1. Single
Your filing status is single if, on the last day of the year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree, and you do not qualify for another filing status.

2. Married Filing Jointly
You can choose married filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return.

3. Married Filing Separately
You can choose married filing separately as your filing status if you are married. This method may be beneficial if you want to be responsible only for your own tax or if this method results in less tax than a joint return. If you choose married filing separately, special rules apply. Because of these rules, you will usually pay more tax on a married filing separate return than if another filing status for which you qualify is used.

4. Head of Household
You may be able to file as head of household if the following requirements are met:

• You are unmarried or considered unmarried on the last day of the year.
• You paid more than half the cost of keeping up a home.
• A qualifying person lived with you in the home for more than half the year, except for temporary absences. However, if the qualifying person is your dependent parent, he or she does not have to live with you, but you must have paid more than half the cost of keeping up a home that was the main home of the parent for the entire year.

But, you cannot file head of household using a person as your dependent only because:

• They lived with you the entire year, or
• You are entitled to claim them under a multiple support agreement.

You are considered unmarried on the last day of the tax year if you meet all of the following tests:

• You file a separate return.
• You paid more than half the cost of keeping up your home for the tax year.
• Your spouse did NOT live in your home during the last 6 months of the tax year. Your spouse is considered to live in your home even if he/or she is temporarily absent due to special circumstances, such as being on a business trip, in the hospital or being deployed with the military.
• Your home was the main home of your child, stepchild, or eligible foster child for more than half the year.
• You must be able to claim an exemption for the child. You can still meet this test if you cannot claim the exemption only because the non custodial parent is allowed to claim the exemption for the child

5. Qualifying widow(er) with Dependent Child
To be eligible to file as a qualifying widow(er) with dependent child, you must meet the following tests:

• You were entitled to file jointly with your spouse for the year your spouse died.
• Your spouse died in either of the two preceding years and you did not remarry before the end of the current tax year.
• You have a child or stepchild for whom you can claim an exemption.
• You paid more than half the cost of keeping up a main home for you and that child for the entire year except for temporary absences.

If your spouse died in the current tax year, you can use married filing jointly as your filing status, if you otherwise qualify to use that status. You may be eligible to use qualifying widow(er) with dependent child as your filing status for 2 years following the year in which the spouse died. This gives you the benefit of using the joint filing rates and the highest standard deduction amount.

Mileage Allowance and Rates

Keeping track of your mileage can add up to big savings on your tax return. The most important thing to remember is that you must keep accurate records in order for the deductions to be allowed. Listed below are the most common deductions for mileage and how you can take advantage of them.

Medical Expenses
Generally, you can claim a medical expense deduction for yourself (and your spouse if married filing jointly) or your dependent driven primarily for, and essential to, medical care. The standard rate for 2009 is 24 cents per mile. You can also deduct parking fees and tolls.

Charitable Purposes
You can claim a charitable contribution deduction of 14 cents per mile for performing services for a charitable organization. You can also deduct parking fees and tolls.

Job Seeking Purposes
Mileage expenses incurred while seeking new employment in the same occupation are deductible. The standard mileage rate for 2009 is 55 cents per mile. Parking fees and tolls are also deductible.

Employee Business Expense 
Mileage expenses incurred while using your car for business purposes at the request of your employer are deductible. Also, mileage expenses going from one job to another job or from your job to school is deductible. The mileage rate for 2009 is 55 cents per mile. You may deduct expenses for local travel that is between your main job (your principal place of business) and a second job. You cannot deduct the cost of taking a bus, trolley, subway, taxi or of driving a car between your home and your main place of work (commuting expenses).

Educational Expense 
If you are regularly employed and go directly from home to school on a temporary basis for improving your job skills, you can deduct the round-trip costs of transportation between your home and school. If your education meets the requirements for qualifying education, you can deduct 55 cents per mile.

Moving Expense
If certain conditions are met, you can deduct you can deduct 24 cents per mile for 2009. Tolls and parking fees can be deducted as well. Talk to your tax preparer to see if you qualify.

Record Keeping Requirements
It is important to keep accurate mileage records for claiming a mileage deduction. The records to keep are:

• Total miles for the year
• Mileage for each business use
• Times and dates
• Place/address
• Business purposes
• Charitable purposes
• Educational purposes
• Medical purposes

Liberty Tax professionals are available for your tax needs. Please call your local Liberty Tax office for further information.

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Individual Retirement Accounts (IRA)

An IRA is a personal savings plan that offers you tax advantages to set aside money for your retirement. There are two types of IRAs: traditional and Roth. Contributions to traditional IRAs are fully or partially deductible depending on your income and whether or not you are covered by your employer’s retirement plan, such as a 401(k).

Generally, amounts in your traditional IRA, including earnings and gains, are not taxed until they are distributed. Contributions to a Roth IRA are not deductible and qualified withdrawals from a Roth IRA are not taxable.

For 2008, the contribution limit to a traditional IRA and/or a Roth IRA is the lesser of $5,000 or the amount of taxable compensation for each taxpayer. There is a special "catch up" provision for taxpayers age 50 or over who may contribute an additional $1,000.

TRADITIONAL IRAs

If covered by an employer retirement plan, the phase out amounts for deducting contributions to a traditional IRA have increased for 2008. The amounts are based on filing status and modified adjusted gross income. No deduction is allowed after exceeding the maximum modified adjusted gross income.

• $85,000 - $105,000 for married persons filing jointly and qualifying widow(er)s.
• $53,000 - $63,000 for persons filing single and head of household
• 0 - $10,000 for married persons filing separate.

The contribution limit for all IRAs is $5,000 per individual plus an additional $1,000 if you are age 50 or over on December 31, 2008.

If you are not covered by an employer plan, your IRA contribution is fully deductible with no income limitation. If either you or your spouse is covered by an employer retirement fund, you may be entitled to only a partial deduction or no deduction at all, depending on your income and your filing status.

ROTH IRAs

You are allowed to contribute up to $5,000 (plus an additional $1,000 if you are age 50 or over) to a Roth IRA, but no deduction from your income is allowed. Contributions to a Roth IRA are reduced when your modified adjusted gross income (MAGI) reaches $101,000 ($159,000 if married filing jointly) and are eliminated when reaching $116,000 ($169,000 if married filing jointly).

If married filling separately and lived with spouse at any time during the year, then the contributions are limited for the MAGI starting at $0 and eliminated when reaching $10,000.

Unlike a traditional IRA, contributions to a Roth IRA can be made after age 70.

RETIREMENT SAVINGS CONTRIBUTION CREDIT

You may be able to claim a tax credit for a percentage of your qualified retirement savings contributions, such as contributions to your traditional or Roth IRA. The credit is subject to phase out amounts depending on your filing status and adjusted gross income.

CONVERTING A TRADITIONAL IRA TO A ROTH IRA

If you are not married filing separately, and your modified adjusted gross income (MAGI) is $100,000 or less, you can convert a traditional IRA to a Roth IRA. You must pay taxes on all the distribution that you convert except for any nondeductible contributions you may have made to your traditional IRA.

WITHDRAWALS FROM TRADITIONAL IRAS

Generally, if you are under age 59 1/2, you must pay a 10% additional tax on money you withdraw from your traditional IRA. This tax is in addition to any regular income tax you are paying on the withdrawal that is included in your income.

There are several exceptions to the age 59 1/2 rule. You may not have to pay the 10% additional tax if, for example:

• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build or rebuild a first home.

If you are the owner of a traditional IRA, by April 1 of the year following the year you reach 70 1/2, you must either withdraw the entire balance in your IRA or start receiving periodic distributions.

WITHDRAWALS FROM ROTH IRAS

You are not required to take distributions from your Roth IRA at any age. Qualified distributions from your Roth IRA are not included in your income. A qualified distribution is one made after the Roth IRA has been established for 5 tax years and:

• Made on or after the date you reach 59 1/2
• Made because you are disabled
• Made to pay up to $10,000 (lifetime limit) of certain qualified first-time homebuyer amounts.

Self Employed Taxes

Tax Resources - Self-Employed Taxes

Working for yourself can be very rewarding. It can also be complicated when figuring your income taxes. Since you are personally responsible for making your own tax payments, you need to know the regulations involved. You must report all income you receive from your business unless it is excluded by law.

By definition, you are self-employed if you receive payments for products or services you provide and you are not an employee. You can have business income even if you are not involved in the activity on a regular full-time basis. You are a sole proprietor if you own an unincorporated business by yourself.

If you are married and both you and your spouse materially participate in the business, you and your spouse can elect to be considered a joint venture instead of a partnership. Both you and your spouse will file a separate Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, and separate Schedule SE, Self-Employment Tax.

You will file the business return at the same time you file your personal return.  The Schedule C will determine the net gain or loss of the business. If the loss is attributable to an activity “not engaged in for profit,” the loss is not allowed as a deduction against other income.

When the Schedule C or C-EZ shows a net profit of at least $400, Schedule SE should be filed. Depending on your type of business and where you conduct business, there may be other forms you will need. You may also need to make quarterly estimated payments by filing Form 1040-ES, Estimated Tax for Individuals.

BUSINESS INCOME INCLUDES:

  •  money paid to you for sales of products or for services you provide
  •  services or goods provided to you as payment
  •  income reported on Form 1099-Misc, box 7, as nonemployee compensation
  •  any other income received in the course of business

It is important to keep separate and accurate records for any business-related income or expense. With records, you can take deductions or credits for expenses related to your business income. If you own more than one business, you must file a separate Schedule C for each business.

BUSINESS EXPENSES

You can deduct the cost of running your business. To be deductible, a business expense must be ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your trade or business. If you use your car or truck in your business, you may be able to deduct the cost of operating your vehicle or you can take the standard mileage rate. You must keep written records of the miles driven for business. If property you acquire for use in your business is expected to last more than one year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You will deduct, through depreciation, some of the cost over a specific period of time on each year’s return. If you don’t take the depreciation, when you sell the property you must reduce your basis as if you had taken the depreciation each year. Some business purchases that qualify may be deducted in the year placed in service instead of depreciated. Business start-up costs must be amortized rather than depreciated. Costs that you have in setting up a business, franchise fees and goodwill, are examples of expenses that must be amortized.

BUSINESS USE OF YOUR HOME

If you use part of your home as your office, you may be able to deduct some expenses. However, that part of your home must be used regularly and exclusively:
 •  as the principal place of business for your trade or business,
 •  as the place where you meet and deal with your patients, clients or  customers in the normal course of      your trade or business, or
 •  you can use a separate structure on your property which is not attached to  your home, if it is used in connection with your trade or business.

SELF-EMPLOYMENT TAX

Self-employment tax is the social security and Medicare amount due on your net earnings which is separate from any income tax due on your income. This totals 15.3% of the net earning and is equal to an employee’s amount withheld plus the employer’s matching amount. The maximum net earnings subject to the social security part of self-employment tax for 2008 is $102,000.

SELF-EMPLOYED HEALTH INSURANCE

Your self-employed health insurance for medical and qualified long-term care is 100% deductible if paid to a plan established under your business and your business profit equaled or exceeded the insurance amount.

Liberty Tax professionals are available for your tax needs. Please call your local Liberty Tax office for further information.

Back Taxes & Delinquent Taxes

If you haven’t filed a tax return in a while, you may owe back taxes. It’s in your best interest to file returns for those missing years as soon as possible. The longer you wait, the higher your possible tax liability.

The first step is to gather all of your information for each year you failed to file a tax return. Research thoroughly any missing information to be sure the return you file is correct.

Next, prepare your returns. You may need help at this point. Contact your nearest Liberty Tax office to set up an appointment with one of our professionals.

You cannot e-file back taxes, so you must mail or hand deliver them (file each separately). If you mail them, send them via certified mail so you receive proof of IRS receipt.

If you owe money to the IRS, chances are you will also have to pay interest and penalties. The IRS can help you set up a payment plan if necessary.

The IRS will allow you basic living expenses in the event that your delinquent tax debt is substantial. The amount of living expenses you receive will depend on the size of your family and national and local standards. Basic living expenses include housing, utilities, transportation, food, clothing and out of pocket health care.

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