The Schedule E Tax Loophole, Kindle Free Days: October 9-13,2013

One of the reasons major investors play in the industry of real estate is:

 

1.     The last time they looked, God wasn't making any new land. In fact with global warming, the globe is losing land.

 

      2.      The IRS provides a locked-in tax-write off  on Schedule E in the amount of $25,000

 

 

Let me make it clear. If you have investment real estate your tax write off can be up to $25,000 EACH year. This is $25,000 which is subtracted from your income, which utomatically lowers your tax liability.

Example:

You earn $80,000 a year. You purchase a four-plex and rent each unit out for $600 a month. (One-bedroom, one bath units) Your mortgage payments are $2,460 a month. Your mortgage interest for the year is $24,000. Your income from rentals is $12,800. (Not all the units were rented)

 

You have additional expenses, such as waste management, up-keep of the property, property taxes, gardening, painting, pluming, travel to and from the property, insurance,  ads for rentals, ten-percent for property management and a host of other small expenses that comes with providing shelter for four separate units.

 

You end up with rental income of $12,800, and total expenses of $32,000. You have a loss of $19,200. You place this lost on Line 17 of Form 1040 and your total income is reduced by $19,200. This means your Adjusted Gross Income will now be (if there are no more adjustments) $80,000 minus $19,200. So instead of paying taxes on $80,000 you will pay taxes on $60,800.

 

Plus you will still have ownership of the rental property and can carry over previous year’s losses and repeat the same process next year, if the tax laws remain the same.

 

This is called building wealth “with” the IRS. Small private real-estate investors do well with this major tax loophole each year.  The book The Schedule E Tax Loophole, by C. Ingraham, RTRP goes into details about this massive tax loophole and how to build wealth when using it.

 

There is one major drawback if you earn over $100,000 a year the passive activity loss limitation rules may apply and the amount you can forward over to Line 17 of the Form 1040 may be reduced.  For this reason, many investors create corporations, who manage not to pay them, so they can keep their annual income below $100K.

 

If your annual income is over $100,000, you may want to look for an experienced tax attorney to set up the best corporate structure.  If your income is less than $100,000 check out the book: The Schedule E Tax Loophole and see how several tax-payers saves thousands in taxes each year. (You don't have to have an e-Reader, you can download Amazon's free app and read on your desk-top or laptop)

 

Note of caution:  If you report your rental property on Schedule E, rather than a corporation, you may want to increase the liability insurance on the property to decrease your personal liability.

 

                                                     

Tax Planning in July, What to Do, What to Watch Out For

I know, you just filed your taxes, or worst you have applied for an extension and plan to file by October 15th of this year for 2012.

The truth is, savvy taxpayers are planning for their 2013 tax year now.  Here  is a list of task they complete in order to fine tune their taxes for the coming year:

1.  They have a copy of their last pay check stub in June of 2012.  They will visit either Forbes article and links to tax calculator, or the IRS tax calculator web site and put in the necessary information to determine if they will owe taxes or will receive a refund.

2.  They will input their 2013 tax information into their 2012 tax software to get a solid idea of what they will be up against in 2013.  They will remember that they are using the tax tables for 2012.  They ALSO will remember that Congress may make some last minute tax changes towards the end of the year.

3.  They will try to leave an opening to respond to last minute tax law changes.  (Like giving more to charity or paying a second or third mortgage payment in December, which will increase their mortgage interest for the year.

4.  If they are expecting a new baby in the family, they will check with the doctor to be sure the kid will arrive prior to December 31st!  If the doctor said twins, they will will want to make twice as sure of the delivery date!

5.  If they haven't purchased a home, and their tax planning show an amount owed, then they are making the necessary arrangements to purchase property ASAP

6.  If they have stock that hasn't moved in recent years, and they aren't even sure that the company is still in existence, they will want to prepare to take a lost on the stock.  If they are concerned about a stock that has no possibility of recovering, then they will sell the stock now, to be sure that they get at least a $3000 loss. 

7. They are eyeing certain furniture, clothing and household items that they can truck over to the Goodwill and get a written receipt for the donation.  Of course they are also shopping for the replacement of the furniture, clothing and household items.

8.  They are looking at qualified exempt organizations, which they can write a check (cash) and receive confirmation in writing. 

9.  They actually spend an evening doing "what ifs" to determine if it might be better to turn in the car and lease a car in the business name.  If they don't have a business, yet they have a large write-off in miles driven for work, they are reviewing all of the possibilities to get the largest tax write off.

10.  Most importantly, they are making sure that they don't trigger the AMT (Alternative Minimum Tax) on their 2013 tax-return.  You can learn more about the AMT tax by visiting the IRS web site; AMT Tax.  In summary the AMT  tax is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold.  It can get a little complicated.  If you trigger this tax, contact an experienced tax professional to help determine what you can do to try and avoid the tax.
(Line 45 Form 1040; 2012; Form 6251)

If you are set to earn over $250,000 in 2013, this article won't do you much good, it is highly recommended that you contact your CPA, immediately.

Doing Your Own Taxes; Five Ways to Lower Your 2012 Taxes

 

A tax credit is a good thing and helps to reduce your tax liability.  When preparing your own taxes, the single largest mistake is over looking tax credits which you may qualify for.

 

Below are five tax credits the IRS wants to remind you of. 

 

 

Five Tax Credits that Can Reduce Your Taxes

 

A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

 

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.

 

3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

 

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

 

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.

Secrect to $500,000 (Married Filing Joint) Exclusion of Gain When Selling Your Primary Home

OK, you are ready to retire and you fully realize that selling your home and moving to a smaller retirement community, or not, you want to sale.  The upkeep is too great, the utility bill is much more than you can afford to spend, during your retirement years, plus you want to travel the world, and a big house is NOT in the picture.

This short list of ten tax tips for individuals selling their home, will help you to stay out of hot water with the IRS and reduce your tax liability if done correctly.

What the IRS forgot to explain in this famous top ten list, is there are conditions for excluding up to $500,000 (a half million dollars) of the gain from the sale of your home.  The conditions basically say that you must have lived in the home for two years, during the five year period before the sell of the home.  And, of course, you must have owned the home.

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The Internal Revenue Service has some important information for those who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.

6. You cannot deduct a loss from the sale of your main home.

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. Most tax software can also help with
this calculation.

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.  www.irs.gov

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The IRS leaves NOTHING to chance.  And if someone uses a tax loophole which they don't have a tax code for, guest what?  It is only a matter of having Congress vote on a new tax law!

Note:  If you have a summer home and you would like to sell it as well, we suggest that you retire, and live in the summer home for two years in order to qualify for the exclusion.  These are decision that would best be made with the help of your tax professional.  Cautious tax payers do not buy or sell ANYTHING, without checking with their tax professional first, because once you sign your name on the bottom line, you are held accountable for the tax liabilities which the transaction can create. www.taxeswilltravel.com