Friday, March 23, 2012

Renting out a Room in your House

Q.  This past year I rented out two bedrooms in my house. I've been told I can write this off and possibly get a deduction on my income tax return. How can this be done?

A.  There are many considerations to take into count, and I cannot possibly address them all. I can tell you rules for renting out rooms in a house come under the Vacation Home Rules. Most of your expenses will need to be allocated, and you will not be able to take a loss to offset other income. I strongly suggest you download Publication 527 and faithfully follow the guidelines to stay out of trouble.

Thursday, March 22, 2012

K-1 Woes

Q.  I'm trying to help my dad who has a fist full of K-1 forms, all of which are checked as Publicly Traded Partnerships.  I am at a total loss as to where to enter some of the designations such as Box 13T* which is marked STMT, and Box 17A. What am I supposed to do with these amounts?

A.  Most people who invest in these securities own about a 0.00001020 interest in the partnership. Although these amounts represent your share, quite often they are insignificant. As to the Box 13T designation, you should have a supplementary report breaking down exactly what this amount is. Basically Box 13T is Domestic Production Activities Information, which may or may not even apply to your dad's return. As to Box 17A, that is an adjustment which belongs on Form 6251 for the Alternative Minimum Tax computation. Perhaps it's time to get a pro to prepare his tax if he indeed has many investments of this nature. K-1 Forms can be challenging, even with my 32 years of experience!

Wednesday, March 21, 2012


Several queries have been received regarding change of residence to a more tax friendly RV state. Before jumping the fence, I suggest you do your homework. As you know, almost every state is financially strapped and your state of residence isn't thrilled at the prospect of losing you, especially if you are a contributing member to their financial coffers! If any state has a lower income tax, or no income tax, than the state you're currently in, the state with the lower income tax rate has to make up the revenue source somehow. It is my experience, having prepared tax returns in multiple states, you will find either higher property taxes, higher sales taxes, and higher vehicle license fees. Also, just because you have moved out of your current state, don't think the state you left behind is finished with you! Believe it or not, here in California I've attended tax seminars where one of the topics is "How to Become a California Non Resident!"

Notice the link to all the states on the left. If you click on the link to each state, start with Filing Requirements for Non-Residents. Notice how many states want an income tax return even if you have only $1 of source income from that state. It will be a real eye opener. Remember, the technology now exists where you can (and will be) followed wherever you go. I could go on and on, but remember one thing: there is more to life than taxes, just be smart about any move you may be contemplating.

Tuesday, March 20, 2012

1099 Forms for Investments

Q.  I can't find a 1099 form for some investments that I know I had last year, as I'm holding the copy in my hand. I don't want to wait until next month to complete the filing of my taxes. Is there a way I can get this form?

A.  The obvious answer is to contact the institution that holds your investments and see if they mailed it. The deadline was March 15th, so it possibly could still be in the mail. Next, go to their website and see if you can download it. If you still can't find it, ask yourself if the investment was mostly cash. With interest rates at historic lows, it's quite possible your investment didn't generate enough income to require a 1099 filing. For interest and dividends, the filing threshold is $10. So, if the investment income generated was less than $10, you may not receive any 1099. Last but not least, could you have sold the investment last year? Look on your Schedule D to see if you divested yourself of the investments.

Monday, March 19, 2012

Foreign Tax Credit

Q.  Included with my 1099s for Interest & Dividends from my brokerage account, was Form 1116, Foreign Tax Credit. What am I supposed to do with this?

A.  Quite often, foreign taxes are paid on certain investments which are also taxed by the US. The purpose of the Foreign Tax Credit is to give you the opportunity to take this non-refundable credit on page two of your Form 1040, or to take a deduction for foreign taxes paid on Schedule A. You don't have to file this form if all the following apply:

1. The foreign taxes accrued or paid  during the year do not exceed $300 or $600 if filing jointly,

2.  The foreign income is of a "passive" nature, i.e. interest, dividends, annuities, rents & royalties,

3.  All foreign income is reported on Forms 1099-Int, 1099-Div, or substitute forms.

It can be a bear of a form to fill out, so hopefully you will meet the requirements above!