Deducting Long Term Care Insurance Premiums on my Federal Income Tax Return

You may deduct long-term care policy premiums on your federal income tax return because it is considered health insurance. Premiums paid for qualified policies are treated as medical costs for federal itemized medical expense deduction purposes. However, the maximum amount that can be treated as a medical expense for 2013 is the lower of the actual premium amount paid or the age-based limit shown in the following table. These age-based limits are adjusted annually for inflation. As such, they can help you exceed the applicable adjusted gross income (AGI) hurdle. Beginning in 2013 if you are under 65 years old, your medical expenses have to exceed 10% of your adjusted gross income to be deducted.

Age at 12/31/13   |    Max Amount Treated as Medical Expense

40 and under                             $360
41 to 50                                      $680
51 to 60                                      $1,360
61 to 70                                      $3,640
Over 70                                      $4,550

If you need help preparing your federal or state income taxes please contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, located in Ridley Park, Pennsylvania.

The IRS Recognizes Same Sex Marriage

IRS Recognizes Same Sex Marriage
The Internal Revenue Service have ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage. The ruling implements the federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act and had been long-awaited by tax professionals who wanted more clarity from the IRS. Under the ruling, same sex couples will be treated as married for all federal tax purposes including income, gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits like deducting health insurance, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships or civil unions recognized under state law. Legally married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

In addition, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

Individuals who were in same-sex marriages may file amended income tax returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the three year statute of limitations. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some individuals may have signed an agreement with the IRS to extend the statute of limitations and permit them to file refund claims for tax years 2009 and earlier.

If you need assistance in filing an amended federal income tax return please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604. Spadea & Associates, LLC provide estate and tax planning and file income tax returns year round.

What is the Pennsylvania Capital Stock Tax?

Philadelphia skyline
The Pennsylvania Capital Stock Tax is a property tax applicable to all Pennsylvania corporations, S-Corporations and limited liability companies. The tax is reported on the Pennsylvania RCT-101 tax return and is also known as the Franchise tax. Pennsylvania replaced the 7 digit box number with a 10 digit business partner number in the fall of 2013, and will begin using the business partner number on 2013 RCT 101 Returns

This tax is computed by multiplying the Capital Stock Value of the entity times the Capital Stock Tax Rate.

The Capital Stock Value is determined according to the following statutory formula: the product of 1/2 the sum of (1) the five year average net income capitalized at the rate of 9.5% plus (2) 75% of net worth*, from which you subtract $160,000.

The Capital Stock Rate is subject to the following gradual reduction: 2.89 mills (.00289) for tax years beginning during 2008 through 2011; 1.89 mills (.00189) for tax years beginning during 2012; and 0.89 mills (.00089) for tax years beginning in 2013. The rate is reduced to .67 mills (00067) in 2014 and .45 mills (.00045) in 2015. The tax is supposed to phase out completely on December 31, 2015.

*Net worth for a corporation is calculated by adding capital stock, paid-in capital and retained earnings, and subtracting treasury stock. All values are determined as of the end of the tax year which is typically December 31, unless the corporation uses a fiscal year. If the corporation had losses in prior years or the current year the number can be negative.

The net worth for LLCs is the entity’s assets minus its liabilities.

If your Corporation does business or owns property in Pennsylvania but is incorporated in another State you need to file RCT-106 along with the RCT-101 to pay the Foreign Franchise Tax.

Please contact Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park if you need assistance in filing an RCT-101 or have any other corporate tax questions at 610-521-0604. Spadea & Associates, LLC prepares individual and business income tax returns year round.

New IRS Home Office Deduction Rules for 2013

Man crunching numbers on a calculator
If you run a business out of your home, it’s important to understand the federal income tax deductions that you might be entitled to. That’s especially true this year, with new rules that make it easier to claim the home office deduction. A home office is generally a room in your home, or a separate building next to your home such as a converted garage, barn or shed that you use to conduct business activities. In order to deduct associated expenses, though, you must meet the following requirements:

1. Your home office must be used regularly and exclusively as your principal place of business, or as a place where you meet or deal with clients, patients, or customers, in the normal course of your business. If you have a business outside your home, but conduct substantial administrative and management tasks for your business at home such as billing clients or keeping your books and records you may qualify, provided that you have no other fixed location where you could conduct these activities.

2. The portion of your home used for business purposes must be used exclusively for business purposes. You will not qualify for a deduction if the portion of your home is also used for personal purposes. However, there are two exceptions to this rule if:

  • you store inventory and product samples in your garage, or
  • you use of part of your home as a day-care facility.

You may also qualify even if your home office is in a separate unattached structure next to your home, like a shed, barn or garage even though it is not your principal place of business, or a place where you regularly meet with clients. To qualify for the deduction, you must use that office (shed, barn or garage) regularly and exclusively in connection with your trade or business.

There are two methods to calculate your home office deduction. The regular method and the new simplified option. Under the regular method, you determine your actual expenses relating to your home office. Deductible expenses can include both direct expenses and indirect expenses. Direct expenses are costs that apply only to your home office, like the cost of a second telephone line. Indirect expenses are costs that benefit your entire home. Only the business portion of your indirect expenses is deductible as part of the home office deduction. Even if you don’t claim a home office deduction, some of these indirect expenses such as mortgage interest and real estate taxes may be deductible as itemized deductions on Schedule A of Form 1040. Some additional examples of indirect costs include rent, utilities and homeowners insurance. The business percentage of your home is determined by dividing the area exclusively used for business by the total area of the home. For example, if your home is 1,800 square feet and your home office is 270 square feet, your business percentage is 15% which is 270 divided by 1,800. In such a case, if you rent your home, you can deduct 15% of your rent as part of your home office deduction.

Beginning in 2013, a new simplified option is available for calculating the home office deduction. Under this method, instead of determining and allocating actual expenses, you calculate the home office deduction by simply multiplying the square footage of the home office by $5. There’s a cap of 300 square feet, so the maximum deduction available under this method is $1,500. You can’t use this method if you are an employee with a home office and receive allowances or reimbursements for expenses related to the business use of your home from with your employer. Each year, you can choose whether to use the regular or simplified method of calculating the deduction.

Additionally, you cannot deduct an unused home office deduction from a prior year using the simplified option so you will have to use the regular method to claim the unused carry forward home office deduction.

If you have any questions or need help in filing your income tax return please call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604. Spadea & Associates, LLC is located in Ridley Park, Pennsylvania and we prepare tax returns year round.

What is a Section 83(b) Tax Election?

Stop, pay your taxes!

Stop, pay your taxes!

Founders typically purchase stock pursuant to restricted stock purchase agreements that allow the company to repurchase “unvested” stock upon termination of employment. Similarly, employees may want exercise options subject to the company’s ability to repurchase “unvested” shares upon termination of employment.

Internal Revenue Code Section 83(b) election Code allows employees to change the tax treatment of a restricted stock grant. Normally, employees pay regular income tax when the stock vests (the restrictions lapse) and no tax when the restricted stock is granted.

The Section 83(b) tax election allows employees to pay income tax on the initial grant instead of paying tax when the stock vests. More specifically, they pay tax on the difference between the amount they paid and the Fair Market Value (FMV) of the stock. Typically the purchase price of the stock and the Fair market value of the stock are the same.

If the employees file a Section 83(b) tax election, they end up paying no tax at the time of purchase because the purchase price for the stock and the fair market value are the same. They also pay no tax when the stock vests in the future. They will only pay capital gains tax when the stock is sold. Keep in mind Section 83(b) election only applies to restricted stock and it only deals with the recognition of income on stock that has restrictions that lapse.

Therefore the tax benefits of a Section 83(b) election include starting the one year long term capital gain holding period and freezing ordinary income (or alternative minimum tax) recognition back to the purchase date of the stock.

If the employee does not make the Section 83(b) election, then he or she may have income at the stock vesting date. The income will be substantial if the value of the shares increases substantially between the grant date and the vesting date.

Let’s use an example to illustrate the effect of making or not making the Section 83(b) election. We’ll consider an employee that is subject to a 4 year annual vesting schedule:

At formation, the company stock is determined to have a FMV of $0.001 per share and he is granted 100,000 shares. The firm grows and the FMV increases to $.10 in Year 1, $1.00 in Year 2, $10 in Year 3, $100 in Year 4. Assume a 40% regular income tax.

Initial Stock Purchase: $100
Value of stock that vests in Year 1: $2,500
Value of stock that vests in Year 2: $25,000
Value of stock that vests in Year 3: $250,000
Value of stock that vests in Year 4: $2,500,000

Section 83(b) election timely filed
Taxes Due at Purchase: $0
Taxes Due at Vesting Intervals: $0
At the end of the 4 years, the founder owns all of his stock outright and has paid no taxes on it. Should he sell the stock, he would be subject to long-term capital gains taxes.

No Section 83(b) election made
Taxes Due at Purchase: $0
Taxes Due at Vesting Intervals: Y1: $1000, Y2: $10,000, Y3: $100,000, Y4: $1,000,000
Total taxes paid: $1,111,000

And these taxes had to be paid before the company ever had a liquidating event since the employee never received cash for his stock. Even worse, if the company collapses in Year 5, the employee will have paid over $1.1 million in taxes and never received any cash for his stock.

In order for a Section 83(b) election to be effective, the individual must file the election with the IRS prior to the date of the stock purchase or within 30 days after the purchase date. There are no exceptions to this timely filing rule. The last possible day for filing is calculated by counting every day (including Saturdays, Sundays and holidays) starting with the next day after the date on which the stock is purchased. The official postmark date of mailing is deemed to be the date of filing.

If you have any questions about filing a Section 83(b) tax election please contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, located in Ridley Park, Pennsylvania.

What Should I Do If I Am Missing My W-2?

Form W-2 Wage and Tax Statement closup
In order to prepare your 2012 tax return, you will need your W-2, Wage and Tax Statement, which your employer should send to you by mail by the end of January. If you have not received your W-2, follow these three steps:

1. Contact your employer first. Ask your employer to mail your W-2 and make sure your employer has your correct address.

2. Contact the IRS. After February 14, you may call the IRS at 800-829-1040 if you have not yet received your W-2. Be prepared to provide your name, address, social security number and phone number. You should also have the following information when you call:

  • Your employer’s name, address and phone number;
  • Your dates of employment; and
  • An estimate of your wages and federal income tax withheld, based upon your final pay stub or any records you have available.

3. File your return on time. You should still file your tax return on or before April 15, 2013, even if you have not yet received your W-2. File Form 4852, Substitute for Form W-2, Wage and Tax Statement, in place of your W-2. Use the form to estimate your income and withholding taxes. However, the IRS may delay processing your return while it verifies your information.

If you need more time to file you can get a six-month extension of time by filing Form 4868, on or before April 15.

If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, then you must amend your tax return by filing Form 1040X.

If you have any questions or need help filing your taxes please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

Am I An Employee Or An Independent Contractor?

Woman interviewing for a job
It is important to determine if someone is an employee or an independent contractor because independent contractors have to pay for their own health insurance and the full share of the Social Security (FICA) tax. However, an employee only pays half of the FICA tax and gets benefits such as health insurance, paid time off etc.

For federal tax purposes, The IRS used to apply 20 common law rules per Revenue Ruling 87-41 to determine whether a worker is an independent contractor or an employee. However, today the IRS examines the relationship between the worker and the business. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: Behavioral Control, Financial Control, and the Relationship of the Parties.

Behavioral Control covers facts that show whether the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Instructions that the business gives to the worker. An employee is generally subject to the employer’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.

  1. When and where to do the work.
  2. What tools or equipment to use.
  3. What workers to hire or to assist with the work.
  4. Where to purchase supplies and services.
  5. What work must be performed by a specified individual.
  6. What order or sequence to follow.

The amount of instruction needed varies among different jobs. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.

Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

  • The extent to which the worker has unreimbursed business expenses;
  • The extent of the worker’s investment in the facilities or tools used in performing services;
  • The extent to which the worker makes his or her services available to the relevant market;
  • How the business pays the worker; and
  • The extent to which the worker can realize a profit or incur a loss.
  • The extent to which the worker has unreimbursed business expenses.

Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreim-bursed expenses in connection with the services that they perform for their employer.

The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.

The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities and often advertise, maintains a visible business location, and is available to work in the relevant market.

How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss but an employee cannot.

Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:

  • Written contracts describing the relationship the parties intended to create;
  • The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship; and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

If you are an employee and think your employer incorrectly treated you as an independent contractor you can file form SS-8 and the IRS will determine your correct status. If you have any questions feel free to contact Gregory J. Spadea at Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

How Can I Qualify For The IRS First Time Penalty Abatement Policy?

Tax inspector is pointing to you
Recently the Internal Revenue Service (IRS) has introduced a new first time abatement (FTA) policy of penalty removal that is available for first-time penalty charges and is based on your compliance history. However FTA relief only applies to a single tax period. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods. In addition to qualify for the FTA policy, you must have filed all required tax returns and paid, or arranged to pay, all tax currently due.

Keep in mind even if you get the IRS penalty abated and have a valid installment agreement, if you owe more than $10,000 in taxes the IRS may file a Notice of Federal Tax Lien which may harm your credit score. However after you pay the tax in full, you can request to have the Federal Tax Lien released.

Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, U.S. Gift and Generation-Skipping Transfer Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. In those cases you can contact the taxpayer advocate, write a letter demonstrating reasonable cause or file a claim for refund using form 843.

If you have many questions or what help in dealing with the IRS please contact Gregory J. Spadea of Spadea & Associates, LLC located in Ridley Park, Pennsylvania at 610-521-0604.

How Much Can I Deduct For a Business Car or Truck in 2013 under IRC Section 179?

Woman with car key in hand
To encourage businesses to buy equipment as well as cars and trucks Congress passed Internal Revenue Code (IRC) Section 179. For passenger vehicles, trucks, and vans (with a gross weight of less than 6,000 pounds), that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction as well as 50% Bonus Depreciation is limited to $11,060 for cars and $11,160 for trucks and vans. If the automobile cost $20,000 and is used 100% for business the business would get an IRC Section 179 deduction of $11,060 and a regular depreciation deduction of $1,788 (20% of the $8,490.00 difference). If the vehicle is used less than 100% for business both the Section 179 deduction and regular depreciation deduction are reduced proportionately based on the actual business use percentage.

SUV’s, trucks and vans with a gross vehicle weight rating above 6,000 lbs. but no more than 14,000 lbs. qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to December 31. In addition the business can deduct 50% of the remaining cost over $25,000 as bonus depreciation. However, the 50% bonus depreciation break will expire on December 31, 2013 unless Congress extends it.

For example, a new heavy SUV used 100% for business that costs $52,000 and qualifies for Section 179 could be written-off in 2013 as follows:

First Year Section 179 Deduction: $ 25,000
Bonus Depreciation (50% of remaining balance): 13,500
Regular Depreciation (20% of remaining balance): 2,700
Total First-Year Write-Off: $ 41,200

However, businesses that experience net operating losses cannot claim an IRC Section 179 deduction that would create or increase an overall business tax loss. However they may take the 50% bonus depreciation deduction, and carry the remaining net operating loss forward were it can be used in future years.

If you have any questions or need help with your taxes or business deductions call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park at 610-521-0604. Spadea & Associates, LLC prepares business and individual tax returns year round.

Eight Tax Credits and Deductions for Parents in 2013

business man using sword to cut tax.
Learning Credit. Both credits may reduce the amount of tax you owe and are claimed by filing IRS Form 8863. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. However, your adjusted gross income had to be less than $90,000 if single and $180,000 if married filing jointly to qualify for the credits. Your children may help you qualify for valuable tax certain credits and deductions listed below when filing your 2013 taxes.

1. Dependency Exemption. In most cases, you can claim your child as a dependent who lives with you regardless of when the child was born as long as you provide more than 50 % of the child support.

2. Child Tax Credit. You may be able to claim the Child Tax Credit of $1,000 for each of your children that were under age 17 at the end of 2013 by filing form 8812. However your adjusted gross income must be less than $75,000 if single and $110,000 if married filing jointly to qualify for the credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work. The credit is claimed on IRS Form 2441. However, if you are married filing jointly both parents must work to be eligible for the credit.

4. Earned Income Tax Credit. If you worked but earned less than $51,000 in 2013, you may qualify for Earned Income Tax Credit. If you have qualifying children, you may get up to $5,900 dollars extra back when you file a 1040 tax return and claim the credit on Schedule EIC.

5. Adoption Credit. You may be able to take a tax credit of up to $12,700 for certain expenses you incurred to adopt a child. You must file IRS Form 8839 in the year the adoption is finalized and your modified adjusted gross income had to be less than $190,000 to qualify for the full credit.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions on IRS Form 1040, line 33. However, your adjusted gross income must be less than $75,000 if Single and $155,000 if married filing jointly to claim the deduction.

8. Self-employed health insurance deduction – If you were self-employed and pay for your own health insurance, you may be able to deduct premiums you paid not only for yourself but to cover your child. It applies to children under age 27 at the end of the 2013, even if they are not your dependent.

If you have any questions or need help in preparing your taxes please contact Gregory J. Spadea of Spadea & associates, LLC in Ridley Park, Pennsylvania at 610-521-0604. He prepares tax returns year round and can amend an earlier year return if you missed taking advantage of one of the credits listed above.

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