Before you start shopping for the best rate on auto insurance, you should be aware of the factors that may influence the overall cost of your policy. Previous accidents, traffic violations and coverage level are only part of the equation.

Good Credit Matters

Many insurance companies will examine your credit score as a partial determinant of your auto insurance rate. Statistics demonstrate that drivers with proper credit are also safer drivers. You should find out your credit score. If your score is below average (usually lower than a 650), look for companies that will not check your credit. If your credit score is 700 or higher, seek out an insurance company that includes creditworthiness in its rate criteria.

Good Grades Often Matter

While working as an insurance adjuster, I often examined automobiles that had an honour student bumper sticker on them. More often than not, the corresponding insurance policy did not include a “good student” discount. Usually, this is because people forget to ask about these types of cuts when they are shopping for insurance. It is especially true when people buy for coverage online (since many online quote forms do not ask about student performance). If you have a good student in the family, then make sure that you ask about performance-based discounts.

Previous Gaps in your Insurance Coverage Matter

Even if you have never been in an accident, you will pay more for car insurance if you have previously driven without having insurance. It is the case even if you live in one of the many states that do not require drivers to carry liability insurance. With this in mind, you should do everything possible to maintain your auto insurance at all times. With the number of high deductibles, liability only policies available, a minimum level of coverage is often more affordable than you think.

Other Factors that can have an Impact on your Insurance Rate

Where you live

Auto insurance is usually more expensive in urban areas than in other areas. There are exceptions, especially if you live in a rural area where there are lots of automobile/animal accidents (Think deer in Wisconsin). What you drive

Almost everyone knows that more expensive vehicles cost more to insure. However, replacement part costs are also a factor. Some foreign cars are more costly to protect as a result of this factor (though most major international brands have high part availability).

What else you insure

If you own a home, you will get a discount if you insure your vehicle with the same company that carries your homeowner’s insurance. What many people don’t know is that renter’s insurance often works the same way. You should have renters insurance anyway, so why not ask about discounts before you purchase an auto insurance policy.

How you protect your car

Car owners with secure garages usually get lower rates. Anti-theft systems will often result in a discount as well. It is especially the case if your anti-theft system is “active” (i.e. shuts the car down if a thief attempts to drive it away). Passive systems (the ones that make loud noises) will usually not result in lower rates.

The post Factors that Help Determine How Much you will pay for Auto Insurance appeared first on GoogoBits.

Pensions, annuities, qualified plans, unqualified plans, periodic payments, lump sum distributions, rollovers – all have their own special treatment for tax purposes. Find out which rules apply in your case.

There are three groups of retirement plans, pensions, and annuities for U.S. federal income tax purposes:

• Pensions or annuities you receive from a qualified pension plan that your employer maintains to provide benefits to employees
• Benefits you receive when you retire on disability
• A commercial annuity plan that you purchase yourself.

Pensions and Annuities

Pensions and annuities are different types of arrangements but have similar tax treatment.

• For tax purposes, a pension is an “a series of definitely determinable payments made to you after you retire from work”.  So pensions are generally associated with benefits you receive from an employer-provided plan based on your years of service and your compensation while you were working.
• An annuity is “a series of payments under a contract made at regular intervals over a period of more than one full year”.  Payments can be fixed or variable, and you can take out an annuity contract on your own, or with the help of your employer.

Types of Pensions and Annuities

There are different types of pensions and annuities, regarding the period over which you get the benefits, who receives the benefits, and whether the benefits are fixed or variable.

• Fixed-period annuities:  You receive fixed amounts at regular intervals over a specified period.
• Annuities for a single life:  You, as the beneficiary, receive fixed amounts at regular intervals for life. The payments cease upon your death.
• Joint and survivor annuities:  You, as the first annuitant or beneficiary, receive fixed amounts at regular intervals for life.  After your death, the second annuitant (your spouse, dependent, or other designated beneficiary) then receives benefits for the rest of his or her life.  The amounts paid to the second annuitant may or may not be the same as for you as the first annuitant.
• Variable annuities:  You receive payments that may vary in amount, either over a specified period or for life.  The amount of the annuity payments may depend on the profits earned by the pension or annuity fund or a mutual fund, and cost-of-living indexes.

Employee Pensions and Annuities

To be considered a “qualified plan” for tax purposes, the plan must meet satisfied Internal Revenue Service (IRS) requirements.  Three different types of plans that generally meet this conditions are qualified employee plans, qualified employee annuities, and tax-sheltered annuity plans.  Whether a policy is qualified or unqualified will determine which method is used to determine the tax-free and taxable parts of the payments you receive from the plan.

Qualified Employee Plan

It is a stock bonus, pension, or profit-sharing plan set up by an employer by IRS requirements to receive unique tax benefits.  Contributions made to the plan are generally tax-deductible expenses for the employer and are tax-deferred for the employees.  The proceeds or benefit payments from these plans can also qualify for capital gain treatment or a particular 10-year tax option on lump-sum distributions if the participant qualifies.

Qualified Annuity Plan

It is a retirement annuity that an employer purchases for an employee, that meets specific IRS requirements.

Tax-Sheltered Annuity Plan

It is a type of retirement plan that is usually for employees of public schools and certain tax-exempt organisations.  Benefits are generally provided by purchasing annuities for the employees.  These plans are also known as 403(b) plans or tax-deferred annuity plans.

Section 457 Plans

These are deferred compensation plans for employees of a state or local government or a tax-exempt organisation.  You don’t need to pay the tax on employee compensation that is deferred under the plan or on earnings from the plan investments.  Pay the tax when you make withdrawals or distributions from the plan.

Qualified Plans for Self-Employed Persons

People often refer to these plans as H.R. 10 or Keogh plans.  They can be set up by sole proprietorships, partnerships, and corporations.  They can cover the self-employed individual as well as employees.

Taxation of Periodic Payments

The periodic payments you receive under a pension plan or annuity contract may be fully taxable or partially taxable, depending on your cost in the plan or agreement.  And, if you have more than one type of plan, such as a pension plan and a profit-sharing plan, you may need to make separate calculations to determine the tax-free and taxable portions of the payments you receive under each plan.  For example, the amounts you receive from one plan may be wholly payable, while payments from another plan may be only partially taxable.

Fully Taxable Payments

Generally, if you receive pension benefits from a plan your employer maintained, and you did not contribute to the cost of the pension plan, your benefits are fully taxable.  You have no value in the contract if:

• You did not make any payments, or are not considered to have made any payments toward the deal,
• Your employer did not withhold any contributions from your pay, or
• You got back all your contributions tax-free in prior years.

If you made voluntary employee contributions to the plan and you were able to deduct these contributions from your taxable income when you made them, any distributions you receive based on these voluntary contributions will be fully taxable when you receive them.  It includes any earnings on those contributions.

Partially Taxable Payments

If you paid part of the cost of the plan, you do not have to pay income tax on the part of your pension or annuity that represents a return of your value.  Any amount of the benefit that exceeds your cost would be taxable.

There are two methods for determining the tax-free and the taxable parts of your annuity payments.  These are the:

• Simplified Method, and
• General Rule

You will use the Simplified Method if you are receiving benefits under a qualified plan, including a qualified employee plan, an eligible employee annuity, or a tax-sheltered annuity plan or contract.  We cannot use This method for unqualified plans.

We use the General Method for unqualified plans, and generally cannot be used for qualified plans.

The method you use determines when you first start receiving annuity payments, and you continue to use this method every year that you are recovering your cost.

Once you determine the amount of each payment that represents a return of your cost, this amount stays the same throughout the period you receive benefits, even if the amount of your benefit payment changes, such as under a variable annuity contract.

Starting Date of Annuity Plan

Your cost in a pension or annuity plan is referred to as your net investment in the contract as of the annuity starting date.  It is the first day of the first period for which you receive a benefit payment or the time on which the obligations under the plan become fixed, whichever date is later.  For example, once you have completed all the payments, you are required to make to an annuity contract. And the plan benefits are scheduled to begin on February 1st of the year, for the period beginning January 1st, your annuity starting date is January 1st since this is the first period for which you make the annuity payments, even though you do not receive the benefits until February 1st.  For tax purposes, you would need to determine your cost as of January 1st in this example.

Your annuity starting date will also determine which method you must use, as follows:

• Annuity starting date after July 1, 1986, but before November 19, 1996, under a qualified plan:  You could have chosen to use either the Simplified Method or General Rule.
• Annuity starting date on July 1, 1986, or before: You would use General Rule unless you chose to use the Three-Year Rule.  That rule was repealed for annuities starting after July 1, 1986, so if you used the Three-Year Rule, your annuity payments would now be fully taxable.
• Annuity starting date on November 19, 1996, or later:  You must use the Simplified Method if you meet both the following conditions:
  • You receive your payments from a qualified employee plan, an eligible employee annuity, or a tax-sheltered annuity plan (403(b) plan), and
  • On the annuity starting date, you are under 75 years of age, or you are entitled to less than five years of guaranteed payments.  Otherwise, you must use General Rule.

Exclusion from Income

In these cases, the amount you can exclude from income is limited to your cost in the plan or contract.  Once you have recovered your total cost, the payments you receive after that are fully taxable.  If you have retrieved the total cost at the time of your death or the death of the beneficiary receiving the annuity (the last annuitant), the unrecovered cost can be taken as a miscellaneous itemized deduction on Schedule A.  In this case, the deduction is not subject to the 2% of adjusted gross income limit.

But if your annuity starting date is before 1987, you can continue taking the monthly exclusion for the part of the payment that you calculated as your cost for as long as you receive the annuity.  And if it is a joint and survivor annuity, your survivor can continue to exclude the same monthly amount.  In this case, the total amount excluded can be more than your cost in the annuity.

Your Cost or Investment in the Contract

Your cost is the total of all the premiums, contributions, or other amounts you paid.  It also includes any amounts your employer paid to the plan that you include in your taxable income.  Your cost does not include amounts that were withheld from your pay and contributed to the pension or annuity plan on a tax-deferred basis.  And, your value does not contain any costs you paid for health and accident benefits.

You must reduce your cost by refunds of premiums, rebates, dividends, loans that you did not repay, or any other tax-free amounts you’re received under the contract or plan up until the later of your annuity starting date, or the date on which you received your first benefit payment.

In general, you recover your cost over the period for which you are entitled to receive payments.  Using either the Simplified Method or General Rule, whichever is applicable, you are in effect prorating your cost over the period you receive payments, and any excess of each amount you receive, over your prorated value, is taxable income.

Your employer or plan administrator should give you a Form 1099-R, that shows your cost in box 9b.

Simplified Method and General Rule

Whether you use the Simplified Method or General Rule depends on whether the plan is a qualified or unqualified plan.  And it will also depend on when you started receiving payments.

You could use the Simplified Method if you started received payments after November 18, 1996, under a qualified plan.  After that date, General Rule is used only for nonqualified plans.  If you began receiving payments between July 1, 1986, and November 18, 1996, you could use either General Rule or the Simplified Method.

Simplified Method

Under this method, you take your total cost or investment in the contract, as defined above, and divide by the total number of anticipated monthly payments to determine how much of each payment is a recovery of cost, and therefore tax-free.  For an annuity payable for life, you can take the expected number of monthly payments from a table, based on the annuitant’s age on the annuity starting date.

How To Use the Simplified Method

To calculate the tax-free and taxable portions of your annuity payments under the Simplified Method, you can use the worksheet in the back of IRS Publication 575, Pension and Annuity Income.  To complete the spreadsheet, you will need to know your total cost in the contract and the total number of expected monthly payments.

Number of Expected Payments

• Fixed-period annuity:  The number of payments does not depend on anyone’s life expectancy, and is the total monthly payments for the contractual period.
• Single-life annuity:  The annuity is payable for your life, and the number of expected payments that you take from the table that is on the worksheet, based on your age at the annuity starting date.
• Multiple-lives annuity:  The annuity is payable for the lives of more than one person.  You can take the number of expected payments from Table 2 of the worksheet, based on the combined ages of the annuitants as of the annuity starting date.
  • If the annuity is payable to you and more than one survivor annuitant, you combine your age and the age of the youngest survivor annuitant.
  • If there is no primary annuitant and the annuity is payable to you and others as survivor annuitants, you combine the ages of the oldest and youngest annuitants.

General Rule

You must use General Rule if you receive pension or annuity payments from a nonqualified plan, including a private annuity, an annuity you purchased commercially, or an employer plan that does not qualify under the tests for the Simplified Method.

Under General Rule, the tax-free and taxable portions of payments you receive are by the ratio of your cost in the contract to the total expected return, which is determined based on actuarial tables.

Instructions for using General Rule and the actuarial tables you need to determine the tax-free and taxable portions of your payments get included in IRS Publication 939, General Rule for Pensions and Annuities.

Survivors

If you receive payments as a survivor annuitant, when the first annuitant had reported the annuity under the Three-Year Rule, you include the total amount of the payment in your taxable income.  If the primary annuitant had been using General Rule, you would continue to apply the same exclusion percentage to the payments you receive, and the resulting tax-free portion on that amount of a payment will then remain fixed.  If there are subsequently any increases in the payments you receive as a survivor, the additional amount would be fully taxable.

If the first annuitant used the Simplified Method to determine the tax-free and taxable portions of the payment, you as the survivor annuitant continue to use the same tax-free amount for the payments you receive.

Lump Sum Distributions

A lump sum distribution is a distribution of the entire balance in a particular type of plan, all at once.  On Form 1099-R, you should check the “Total distribution” box in 2b.  Distribution of the entire balance from an unqualified account, such as a commercial annuity you purchase yourself, or a Section 457 deferred compensation plan, does not qualify for the special tax treatment of lump sum distributions.

There would be optional methods of calculating the tax on lump-sum distributions from a qualified employee plan or a qualified employee annuity, if the participant were born before January 2, 1936.

1.      The part of the distribution that corresponds to participation before 1974, they consider it as a capital gain subject to a 20% tax.  The role of the distribution of involvement from 1974 on, would be taxed as ordinary income.

2.      You can report the part of the distribution for participation before 1974 as capital gain and use the 10-year tax option to figure the tax on the role of the involvement from 1974 on.

3.      You can use the 10-year option to determine the charge on the entire amount of the distribution.

4.      You can roll over part or all of the distribution.  You would not be subject to tax this year on the part you roll over.

5.      Or you can report the entire distribution as ordinary income.

To use these optional methods, you will need to file Form 4972, Tax on Lump-Sum Distributions.  If you choose the capital gain treatment, you will complete Part II of Form 4972.  If you want the 10-year tax option, you will complete Part III.

The 10-year tax option is a unique formula used to calculate the tax on the ordinary income portion of the lump sum distribution.  The tax resulting from this calculation is paid in the current year and not over ten years.  The ten years refer to the nature of the count and not to the payment of the tax.

Rollovers

You can roll over all or part of the distribution you receive from a qualified employee plan or a qualified employee annuity into another qualified plan or your IRA.  No tax would be currently due on the amount you roll over.  The not rolled over part of the distribution that they would consider it as ordinary income.

A rollover generally needs to be made within 60 days from the date you receive the distribution.  You can do a direct rollover from one qualified plan to another, or to your IRA.  Or you can receive the distribution and then roll it over to a qualified plan or IRA within 60 days.  In this case, the administrator of the plan from which you make the distribution will withhold a 20% income tax from the amount distributed.  If you decide to roll over the amount of the distribution before withholding, you will have to put in withheld money to replace the 20% tax.  Otherwise, 20% will be subject to tax in the current year.

If you are a surviving spouse you can roll over a distribution you receive from a qualified plan in which your deceased spouse participated.  But a beneficiary other than the participant’s spouse cannot roll over an allotment.

Disability Pensions

Disability benefits are generally taxable if your employer provides them.  They are reported as wages for tax purposes until you reach minimum retirement age.  Once you reach minimum retirement age, your disability benefits get reported as a pension or annuity.

You might be entitled to a tax credit if you were permanently and disabled when you retired.  You can see IRS Publication 524, Credit for the Elderly or Disabled, to see if you qualify.  This credit is claimed on Schedule 3 if you file Form 1040A, or on Schedule R if you submit Form 1040.

Purchased Annuity Contracts

If you buy a commercial annuity on your own, with life insurance proceeds, for example,  the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan.  You would generally have to use General Rule to determine the taxable portion of the annuity payments you receive.

How To Report

You should receive Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc..  You can report the total amount of the payments and distributions you received during the year in box 1, and you can show the amount taxable as ordinary income in box 2a.  These amounts are reported on lines 16a and 16b on Form 1040, or on lines 12a and 12b if you use Form 1040A.

If your Form 1099-R does not show the taxable amount, (you should check the box) you will have to use General Rule explained in IRS Publication 939 to figure the taxable part you need to enter on line 16b for Form 1040, or 12b for Form 1040A.

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Article will provide brief overview of creative financing mortgage alternatives, highlighting how to assume a mortgage loan, how to receive seller financing, how to buy a home with no money down, and lease options.

Low-interest rates are encouraging many people to take the first step toward homeownership. Those who have never purchased a home may be unaware of how extensive the home buying process may become. Lenders request a variety of documents to verify employment, income, credit, and so forth.

Sadly, many individuals with hopes of purchasing their first home are unable to do so because they do not meet bank qualifications. Reasons for a mortgage denial may include poor credit, recent bankruptcy, foreclosure, and self-employment. Individuals who deny a mortgage may become discouraged. However, there are several alternatives to a conventional bank mortgage. Many lending institutions require a 3% down payment, acceptable credit history, and low debt to income ratio. Fortunately, some private investors and lenders are willing to offer non-conventional mortgages to those who are not ideal candidates for banks.

Creative financing a home mortgage includes a variety of options such as assuming a mortgage, buying a home with no money down, seller financing, and lease-options. Anyone can purchase a home using one of these methods regardless of credit or income. These methods make financing a home quick and easy. In some cases, the new home buyer may even save money.

Assumable Home Mortgages

Finding a home with an assumable mortgage is tricky and will require in-depth research. However, once you have located an assumable property, the benefits are endless. Those interested in assuming a home loan should work with a real estate agent or private investors. Real estate investors are ideal because they are in the business of buying cheap homes and selling them for a profit.

Thus, they are likely to have information on finding an assumable mortgage. Of course, if you are also in the market of assuming a mortgage for investment purposes, a real estate investor may not be as willing to offer assistance. On occasion, a real estate agent may receive property with an assumable mortgage. Those interested in purchasing a property should inform their agent of their interest in assuming a home. Only two types of mortgages that are assumable – adjustable rate and FHA loans.

Once you locate an assumable property, the buyer interested in the property should obtain and review loan papers. These papers will indicate the original loan amount, payment, and terms. The next step is to contact the lending institution and request an assumable loan package. The buyer will have to meet specific requirements before assuming a loan. Still, assumptions may be more comfortable than applying for a new mortgage. Some lending institutions require that those considering the home mortgage pay a minimum down payment. In most cases, the new mortgage holder will only need to prove income and have acceptable credit.

Assuming a mortgage is a more attractive feature when a buyer has a substantial amount of cash on hand. The new buyer will generally have to offer the seller the difference between the loan amount and the selling amount. For example, if a home is selling for $100,000 and the payoff for the loan is $80,000, the person assuming the loan will pay the seller $20,000 in equity, and continue to pay off the remaining balance of $80,000. There are instances when a person may assume a loan without paying capital to a seller. This situation is common when the original homeowner is a motivated seller or deceased.

Buying a Home with Zero Down

An additional reason why many people are unable to purchase their first home is that they do not have money for a down payment. Fortunately, there are several first time home buying programs and down payment assistance programs to help. Future homeowners should contact local lenders and ask for information about “no money down home loans.” In most cases, home buyers are required to attend a home buying workshop before they are eligible to receive assistance. Real estate agents and online mortgage brokers also offer helpful information on receiving home loans with zero down

The downside to home loans with zero down is that many have income restrictions. It is great for lower income individuals, but not good for everyday hard working individuals. Nonetheless, mortgage brokers are generally willing to diligently search for loans for individuals with little or no money for a down payment. Those interested in buying a home with no money down should be aware that these home loans may carry a higher interest rate. Many lenders consider “no money down” candidates risky. Thus, they increase the interest rate of a loan to compensate. To avoid a higher interest rate, future homeowners may consider adjusting their spending habits to save money. A down payment of as little as $2,000 can make a difference.

Seller Financing

Seller financing is the perfect alternative for individuals who are unable to receive traditional funding for a home loan. In this case, the seller acts as the lender for the property. Instead of making payments to the bank, the new owner will make payments directly to the seller. The buyer and seller will agree on financing terms which are typically shorter than a traditional mortgage.

At the end of the term, the buyer will likely owe a balloon payment for the property. Seller financing is excellent for individuals who are rebuilding their credit. They agree to seller financing for three or four years to allow time for credit improvement. Once their credit is acceptable, the buyer will finance the balloon payment with a traditional lending institution. They use the money to pay-off the original owner and begin making regular payments to the bank.

Lease Options

A lease option is a contractual agreement between a seller and buyer that allows the buyer to rent a property as they save money for a down payment or while improving their credit. The buyer locks into a future purchase price and agrees to buy the property within a reasonable amount of time. Buyers and sellers should obtain a lease option agreement and establish the following terms:

• Future Purchase Price

• Maximum Length of the Agreement

• Monthly Rental Price

Some sellers place a clause in the lease option agreement requiring buyers to pay a penalty fee if they decide at the end of the term not to purchase the property. Also, if a percentage of the buyer’s monthly rent was being held in an account to assist with their down payment, the seller has the right to refuse to refund this money. Lease options are ideal for both buyers and sellers. Before signing a lease option contract, both parties should have the forms reviewed by a real estate attorney.

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If you use your own vehicle for business purposes, you may be able to take a tax deduction. If you are an employee, you can deduct the expenses as an itemized deduction. If you are self-employed, your expenses can be deducted as a business expense.

If you use your vehicle for transportation related to your work as an employee, you can deduct your expenses for business use of your car, subject to the rules on deductible transportation expenses. You would need to file Form 2106, Employee Business Expenses, and take the deduction as a job-related itemized deduction on Schedule A. If you are self-employed and use your vehicle in your business, your expenses are business expenses, and you would generally report it on Schedule C, C-EZ, or F.

If you qualify, you can deduct your actual expenses or use the standard mileage rate. If you use actual costs, you will need to divide your expenses between deductible transportation expenses and personal expenses. You can allocate these from mileage for each purpose. And if you use the standard mileage rate, you will need to keep track of your mileage for work or business use of your vehicle.

Interest on a Car Loan and Property Taxes

Interest on a loan you take out to purchase a vehicle and property taxes on your vehicle is generally separate thing. These are not included in the standard mileage rate.

Interest

Interest you pay on a car loan is personal interest and is generally not deductible. But if you take out a home equity loan, that qualifies to deduct mortgage interest, you may be able to take an itemized deduction for the interest on Schedule A.

If you are self-employed and use the vehicle in your business, you can deduct a percentage of your interest, based on the business use of the car, as a business expense, on Schedule C, C-EZ, or F, for example.

Property Taxes

Personal property taxes are by the value of your vehicle can be taken as an itemized deduction, even if you did not use the car for business. If you are self-employed, you can take the business percentage of personal property taxes as a business expense, and the balance as an itemized deduction.

Standard Mileage Rate

The standard mileage rate changes periodically and the Internal Revenue Service (IRS) publishes it. If you elect to use the standard mileage rate for a vehicle that you own, you must use it the first year the car is available for use. After that year, you can use either actual expenses or the standard mileage rate. If you elect to use the standard mileage rate for a vehicle that you lease, you have to use it for the entire lease term.

Depreciation

The standard mileage rate includes an allowance for depreciation, so if you decide to use it, you cannot take depreciation or the special depreciation allowance.

Exceptions to Using Standard Mileage Rate

There are some cases in which you cannot use the standard mileage rate. You cannot use it for cars for hire, such as taxis, or when you employ five or more vehicles at the same time in your business. You are not considered to be using them at the same time if you alternate between vehicles. A rural mail carrier who receives a qualified reimbursement cannot use the standard mileage rate. And, if you are using a vehicle provided by your employer, you cannot use the standard mileage rate.

Expenses in Addition to the Standard Mileage Rate

You can deduct business-related parking fees and tolls in addition to the standard mileage rate, except for parking at your regular place of work, which is considered part of your nondeductible commuting expense.

Actual Expenses

If you use actual expenses for the use of your vehicle, you can include gas, oil, repairs, tires, insurance, licenses and registration fees, garage rent, parking and tolls, and lease payments or depreciation.

Depreciation

There are three ways to recover the cost of your vehicle for tax purposes when you use the vehicle for business purposes:

• Section 179 deduction
• Special depreciation allowance
• Depreciation deductions

Section 179 Deduction

You can take the section 179 deduction for part or all of the business portion of the cost of a vehicle, instead of taking depreciation over the years. This deduction can be made only in the first year the vehicle of service. You cannot claim a section 179 deduction you started using for personal purposes one year and then starting using for business purposes in a later year.

50% Business Use Test

To qualify for the section 179 deduction, you must use the vehicle more than 50% for business. You then take your business percentage and multiply it by the cost of the vehicle to determine the amount eligible for the section 179 deduction.

Limits

Three limits apply to the section 179 deduction:

1. There is an overall limit on the amount you can claim as a section 179 deduction for the year. It is a fixed dollar amount that may change periodically. This amount can be found in the instructions and publications the IRS updates each year. And, the total section 179 deduction after limitations cannot be more than your taxable income from the active conduct of a trade or business – the section 179 deduction cannot generate a loss.
2. Sports utility and certain other vehicles are subject to a fixed dollar limit on the amount of the vehicle’s cost that you can take into account in calculating the section 179 deduction.
3. The total amount of your section 179 deduction and your depreciation deduction for a qualified vehicle you place in service during the year is limited to a certain fixed dollar amount.

Effect on Basis

The section 179 deduction reduces your basis in the vehicle for purposes of calculating depreciation and for calculating an eventual gain or loss on the sale or disposal of the vehicle. Also, if you meet the 50% business use test the first year, and in a subsequent year your business use drops below 50%, you may have to recapture, or include in your income, any excess depreciation in that following year.

How To Claim the Section 179 Deduction

You must claim the section 179 deduction in the year you purchase the vehicle and start using it for business or work. If you are an employee, you need to file Form 2106, Employee Business Expenses. If you are self-employed, you will use Form 4562, Depreciation and Amortization, to claim the deduction.

Special Depreciation Allowance

In the year you buy a vehicle and place it in service, you can deduct 50% of the business portion of the cost as a special depreciation allowance, provided you use the vehicle more than 50% for business or work. You figure the special depreciation allowance after the section 179 deduction, if you choose to claim it, and before calculating depreciation. Both the section 179 deduction and the special depreciation allowance reduce the basis of your vehicle.

Statement of Election Not to Claim Allowance or to Claim 30%

You can choose not to claim this special allowance, or you can request a 30% allowance instead of 50%. If so, you must attach a statement to your tax return, indicating the class of property (5-year property in this case) and that you are electing to claim 30% instead of 50%, or that you are choosing not to claim the special depreciation allowance. The election you make will apply to any other 5-year property you placed in service during the year – the election is made based on a class of property.

Basis Reduction

If you choose not to claim the special allowance, you need to attach the statement to your return because if you do not, the basis in your vehicle will be reduced by the amount of the allowance, even if you do not claim it.

Depreciation Deductions

To calculate depreciation on your vehicle, you need to know the basis, when you placed the vehicle in service, and the depreciation method to use.

Basis

If you purchase a vehicle and place it in service the same year, your depreciable basis is the business percentage of the cost, less any section 179 deduction or special depreciation allowance you take. If you convert a vehicle from personal to business use, the basis for depreciation is the fair market value or your adjusted basis in the vehicle on the date of conversion. Your adjusted basis would depend on how you acquired the vehicle (purchased it, received it as a gift or inheritance), and would include any increases or decreases in the original basis, such as permanent improvements or additions to the vehicle, depreciation taken in prior years, or a casualty loss, for example.

Depreciation Method

Generally, you use the Modified Accelerated Cost Recovery System (MACRS) to depreciate vehicles. But if you used the standard mileage rate to deduct expenses the first year you used the vehicle, you will have to use the straight-line depreciation method if you decide to use actual costs in a later year. Also, to use MACRS, you must use the vehicle more than 50% for business. Otherwise, you must use straight-line.

Accelerated depreciation methods include the 200% declining balance method and the 150% declining balance method. When choosing a depreciation method, you may want to consider which way will give you the most tax advantage, based on your circumstances, financial projections, and tax planning. The 200% declining balance method provides the most significant deductions in the earlier years, followed by the 150% method. The straight-line method offers for regular depreciation deductions over the life of the vehicle.

Depreciation Chart

You can find a MACRS depreciation chart in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. Once you determine the basis of your vehicle, when you placed it in service, and the depreciation method you will use, you can use the chart to find your depreciation deduction for the year. There is a limit on the maximum depreciation deduction that can be taken each year, depending on the year in which you placed the vehicle in service. The referenced publication also includes a table with these limitations.

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If you receive tips, you should keep a daily record of them and report them to your employer in order to obtain your social security and Medicare coverage and to avoid a penalty. You must also report all your tip income on your income tax return.

The tips you receive from customers in your work as an employee are considered “employee compensation” and are subject to U.S. income tax.  It includes cash tips you receive directly from customers; it also consists of the tips on credit card payments that are paid to you by your employer, and your share of allocated tips.  If you receive any items of value other than cash, such as tickets or passes, these are also subject to income tax, but not to social security and Medicare tax.

Keeping Track of Your Tips

You should keep track of your tips on a daily basis, using a diary or other record of your own.  If you use your record, it should show your name, your employer’s name, and the name of the business, if it is not the same as your employer’s name.  Then for each date, you should record the cash tips you receive directly from customers or that you receive from other employees, tips from credit cards that your employer pays you, items of value other than cash that you receive as tips, and the amount of tips you pay other employees and their names.  Service charges that your employer adds to customers’ bills and then settles to you are not tips.  You need to report them as wages, and therefore you should not include it in your record of tips.

IRS Form 4070A

You can also use a form provided by the Internal Revenue Service (IRS) – Form 4070A, called “Employee’s Daily Record of Tips.”  Your employer may have this form, or you can obtain it from IRS Publication 1244 – “Employee’s Daily Record of Tips and Report to Employer.”  You can download this publication from the IRS website.  The release is also available in Spanish – 1244(PR).  The form is designed to record the information described above.

Reporting Your Tips to Your Employer

You need to inform your tips to your employer to ensure that all your employee compensation, including your tip income, is subject to social security and Medicare tax.  It will affect your income if you ever become disabled, and will also increase your social security benefits when you retire.  The tips you need to report, for this purpose, include cash, checks, and tips from debit and credit cards.  You do not need to report items of value you receive as tips, such as tickets, to your employer.  These types of tips are not subject to social security and Medicare tax.  But you should still include these items on your tip record since they are subject to income tax.

You should report tips to your employer whenever you receive over $20 in any given month.  If you earn less than that amount, you do not need to inform them.  If you work for more than one employer, the $20 limit applies to each employer.

IRS Form 4070

Your employer may give you a specific form to use for reporting your tips.  Your employer may also ask you to state your tips more often than once a month and may ask you to report them electronically.  But you must report tips at least monthly (provided you have more than $20 to report).  If your employer does not give you a form to use for reporting tips, you can use IRS Form 4070 – “Employee’s Report of Tips to Employer.”  This form is also in IRS Publication 1244.  You should give this form to your employer by the 10th of the following month and should keep a copy for your records.

The penalty for Not Reporting Tips

If you do not report your tips to your employer, you could be subject to a sentence of 50% of the social security and Medicare tax that applies on the unreported tips.  This penalty is in addition to the taxes you would owe on the tips.

Giving Your Employer Money to Cover the Tax on Your Tips

It may turn out that the amount of tax your employer withholds from your pay is not sufficient to cover the social security and Medicare tax that applies on your regular payment plus the tips you report.  If this is the case, you can give your employer money to cover the difference.  If any social security and Medicare taxes remain unpaid at the end of the year, you will have to report them on your income tax return.  You will show these uncollected taxes in box 12 of your Form W-2 for the year.

Reporting Your Tips on Your Income Tax Return

Your employer reports your tips along with your salaries and wages on line 1 of Form 1040EZ, or on line 7 of either Form 1040A or 1040.  If you kept a tip record and reported your tips to your employer, the amount that you would have to add to the amount shown in box 1 of your W-2 are the tips of less than $20 in a month, and the amount for items of value that were not cash, since you did not have to report either of these.  But they still must be included on your income tax return.

Tips You Did Not Report to Your Employer

If you have tips that you should have reported to your employer, but you did not report them, you will have to report the social security and Medicare tax on those unreported tips on your income tax return.  In this case, you will have to complete Form 4137, Social Security and Medicare Tax on Unreported Tip Income.  Form 4137 must be attached to your income tax return, and the tax calculated on that form is reported on the separate line for those taxes in the “Other Taxes” section of Form 1040.

Uncollected Social Security and Medicare Taxes

If your employer was not able to withhold all your social security and Medicare taxes from your regular pay and the taxes you reported, and you did not give your employer money to make up the difference, then you need to state these uncollected taxes on your income tax return.  In this case, you must file Form 1040, and not Form 1040EZ or 1040A.  You should include the taxes in the line for total taxes (line 62 of Form 1040), and you would write “UT” and the amount of the uncollected taxes on the dotted line beside the total taxes amount.

Allocated Tips

Allocated tips are tips that your employer assigned to you, in addition to the tips you reported.  It may occur if you work in a restaurant, cocktail lounge, or similar establishment that must allocate tips to employees, and when the tips you reported to your employer are less than your share of 8% of food and drink sales.

These allocated tips are shown separately in box 8 of your Form W-2, and in the total, in box one, it doesn’t include.  You can calculate allocated tips by subtracting the total tips reported by all employees from 8% of complete food and drink sales.  Your proportionate share of that amount is estimated based on an agreement between the employer and the employees, or according to an IRS method, based on the employees’ sales or hours worked.

Do You Have to Report Allocated Tips?

You must report allocated tips on your tax return unless one of two exceptions applies.

1. You kept a daily tip record or other evidence that is as credible and reliable as a regular tip record.
2. Your tip record is incomplete, but it still shows that your actual tips were more than the tips you reported plus the allocated tips.

If one of the two exceptions applies, you should report your actual tips and exclude the allocated tips from box 8 of your W-2.

How To Report Allocated Tips

If you have to report allocated tips, add the amounts in boxes 1 and 8 of your Form W-2 and report the total on the wages, salaries, tips, etc. line (line 7) of Form 1040.  You cannot use Form 1040EZ or 1040A in this case.

Since social security and Medicare taxes are not with the allocated tips, you will have to calculate these taxes on Form 4137.

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This article will give you some techniques for what to say and also how to track your progress. Once you begin to see how many calls it takes to get a sale, cold-calling can at least become more predictable—and a little less intimidating.

Before You Begin

Before you begin to make cold-calls, set-up appointments, and make the big sales, you need the correct materials to do the job.

One of the materials that you need is a telephone headset. Using a headset when you cold-call—or even return phone calls—allows you to sit up straight, walk around, and sound alive. Holding a phone to your ear, on the other hand, makes you sound tired, lowers your voice, and takes control away from you.

When you cold-call, you should stand-up and even walk around your desk. It will increase your energy and give you the desire to continue cold-calling.

Remember: sales are not a spectator sport!

What Is the Purpose

Cold-calling is probably the one task that salespeople hate to do. The main reason that cold-calling is a chore for so many salespeople is that they do not have a plan. Like so many other things, cold-calling can become easy if you have the right strategy.

In this case, the right plan is a script that not only will easily allow you to introduce yourself and the company but to also overcome the objection.

When you call upon a potential client, your script should do five things:

–Get the person’s attention

–Identify yourself and the company

–Give a reason for the call

–Allow the potential client to respond

–Set an appointment.

When you call upon a potential client, you want to be the person in charge of the situation. You want to speak in a clear tone. You also want to talk to the potential client—not at him or her.

Also, do not be afraid to ask the potential client to visit with you at a particular time. If you ask the person when would be convenient for him or her to meet with you, they will say never. Instead, ask the individual if Tuesday at 1:00 p.m. is a good time. Then, you have given a specific option and make it harder to say no.

Finally, remember that the point of a cold-call is to set an appointment—nothing more. If you are spending more than a couple of minutes on any particular call, then you need to set the date. The person, on the phone is interested enough to talk to you.

Daily Goals

Every day, you should have a goal for the number of phone contacts, appointments set, clients seen, follow-ups, and, more importantly, SALES. Following these mundane steps, every day may seem like a waste of time. However, if you follow and track your performance, you will soon know how much work you must do to make a sale. Even more, you will almost be able to predict when the deal is coming.

Each day, you should be able to log the following actions. Beside each step (if applicable) is the minimum daily Performance.

Phone Contacts (you get a “yes” or “no” response) 10

Follow-up (returning a call to a prospect) 5

Number of Messages Left N/A

Appointments Set 5

Appointments Kept 2

Sales Made 1

Remember the formula: 10 contacts = 5 appointments = 2 kept appointments = 1 SALE

Scripts

Listed below are basic scripts to use when cold-calling a potential client and when calling on a referral. In addition, below the scripts are responses that you can use when potential clients give you objections to making an appointment.

Referral Script

Hello, (name of client), I’m (your name) with the name of the company. The reason I am calling is that (name of referral) met with me and said that you might be interested in our services. I wanted to call to set-up an appointment so that we can review (product, service, etc.). How about (appointment time)?

Basic Script

Hello, (name of client), I’m (your name) with the name of the company. We have helped hundreds of people with (problem). The reason that I am calling is to schedule a time when we can meet to discuss our product. How about (appointment time)?

Overcoming Objections

No thanks, I’m happy with what I have.

It’s great that you have (current service). Many of our clients started out with (current service) and were able to expand by working with us. How about (appointment time)?

I’m not interested.

Well (name of person), a lot of people had the same reaction before they had a chance to see how we could help them. We should get together. How about (appointment time)?

I’m too busy.

(Name of person) The only reason I am calling is to schedule an appointment. How about (appointment time)?

Getting Voicemail

So often, salespeople who are new to cold-calling view an answering machine as an insurmountable device to reaching a potential client. They figure that people will see here the message and immediately assume that it is a sales call. However, with the right word, you can get a callback, and possibly a new client.

You want to tell the potential client who you are and where they can contact you. However, you don’t want to give any additional information. It will peak at least some of the people enough that they will call to see what you wanted.

This is (your name) from (name of company). Please call me as soon as possible at (phone number).

The post Cold-Calling Scripts and Techniques appeared first on GoogoBits.

Many people believe that improving a credit report with negative items literally takes years. In reality, with a little knowledge of the law, almost anything on a credit report can be disputed. Even better, the burden of proof in regards to determining if a negative item belongs on a person’s credit report lies with the credit bureaus.

Of all the records in a person’s life—from bank records to driving records—a credit report seems to be the one accurate permanent record. For a person with past credit problems, a credit report is probably the one record that is feared the most. In fact, many people with credit problems try to avoid looking at their credit report simply because it brings back memories that they would much rather forget.

Even worse, once lousy payment histories have been placed on a credit report, it seems almost impossible to remove the negative marks. If you listen to many of the financial gurus, they will tell you that it takes years to remove late payments histories and charged-off accounts from a credit report.

In reality, however, the opposite can be true. Most people do not realize that when it comes to removing items from their credit reports, the law is actually on their side. With a little knowledge and the proper tools, eliminating negative things from your credit report can take mere months—not years.

The information contained within this article is not theory or pie-in-the-sky ideas. They are tried and true methods that have been used by others to quickly and easily repair a negative credit report. The real secret to using this information successfully is using the techniques diligently—and not getting frustrated by the process. The financial gurus may be wrong that you cannot remove negative marks from a credit report, but they are correct in saying that a negative credit report was not created overnight—so it will not be repaired overnight, either.

Credit Reports: A Quick Lesson

For those people who have ever been turned down for a credit card or loan, they have probably had to get educated about a credit report quickly. Credit reports are records of payment histories. When a credit card or loan is taken out, the lender typically reports how a person pays on that loan to the three major credit bureaus—Experian, TransUnion, and Equifax.

If a person always pays the credit cards and other loans on time, the lenders report this to the credit bureaus. However, if you are a month late—or worse, two months late—this is also indicated. The more records that show late payments, and the longer the duration of the late fees, the lower your credit score becomes. Lower credit scores usually resort more difficulty acquiring credit cards and loans, and higher interest rates when you do.

Besides late payments, other things can lower a person’s credit score. Of course, the biggest hit that a credit report can take is a bankruptcy. However, many people do not realize that applying for a lot of credit also lowers their credit score. Every time that a lender obtains a copy of your credit score, a record of that—called an inquiry—is noted on your report. Having several queries in a three month period results in a lower score.

Also, opening several new lines of credit at the same time can lower your credit score. It is viewed as a problem because other lenders see having access to too much new credit as a potential risk. People who experience financial hardships rely on their credit cards often, regardless of whether they can make the payments at the end of the month.

Finally, it is important to realize that payment histories of past credit cards, loans, and bankruptcies remain on a credit report for 7-10 years. The past two years of payment histories are usually the most important, but the record of a charged-off credit card can remain for a decade.

The credit bureaus make their money by storing your information and then selling it to companies who want to check up on your credit history before extending a loan. Many people are under the assumption that these companies are doing a public service, and by that public service have some obligation to make sure that their information is 100% accurate.

In reality, while these companies do make every attempt to keep accurate records, they are in the business of making money. They make that money by selling their records, not by being fact-checkers and researchers for the masses. The fact that many people have inaccurate information on their reports is what helps the person who wants to clear negative information that is correct from their report.

What the Law Says

Federal credit laws state that you can dispute any item on a credit report to the credit bureaus. The beauty of this is that the rules also state that you must invest any dispute, and the burden of proof lies with the bureaus—not the individual.

Also, the credit bureaus have 30 days from the time they receive the dispute to investigate it. After 30 days, if they cannot confirm the disagreement with the lending company, then they must remove the record from the credit report. All of this is much to the advantage to the consumer.

When the credit bureaus investigate a disputed item, they typically contact the lender either by phone or with some message. Well, let’s consider that lenders are continually sending data to the bureaus, as well as getting asked for information concerning disputes. It is easy to see that not all arguments receive a reply. In fact, some lending companies are pretty good and not answering disputes. It is another plus for a person trying to erase negative information

Finally, and perhaps most importantly, the law says that anything you can dispute — even if it is accurate. So, if you have negative marks that are true, they can still be challenged and must be investigated by the bureaus. It includes open lines of credit, inquiries, and even bankruptcies.

How to Write a Dispute

The best and most effective way to dispute items on a credit report is in a letter. Many companies offering access to credit reports now give online methods to dispute items. Also, the credit bureaus themselves have their forms and techniques. The bottom line is simple: DO NOT USE THEM!

The reason for this is that it makes the job of the credit bureaus easier. If you use their forms, they typically do not take the dispute as seriously. A written letter from the consumer shows that you have made the time to investigate your credit report, and you believe something is incorrect and needs investigation.

When writing to the bureaus, it is important to include certain things and to leave out others. First, you want to state that you have reviewed your credit report and have found mistakes. Then, you want to list each error. Next to each item you are disputing, merely list that the record is not yours. Do not give any further details. The more information you provide, the less work the credit bureaus have to do—and the more likely they are to confirm the item and leave it on your report.

After you have listed each item that you wish to dispute, the final paragraph of the letter should read something similar to that listed below:

“Please investigate these inaccuracies and remove them from my report. Under the Fair Credit Reporting Act, 30 days constitutes a reasonable time to remove the mistakes. Also, if you confirm any of these items, you must supply the names and addresses of the people contacted.”

It tells the credit bureaus that you understand your rights under the law, and that you are serious about wanting to correct your credit report!

When to Dispute

There are certain times of the year when disputing items with the credit bureaus can be more fruitful. The best time to send disputes to the credit bureaus is December. The time between Thanksgiving and New Year’s have lots of holidays. It gives the bureaus less time and fewer people to investigate disputes. Also, the companies to whom they are sending disputes have less time and fewer people to respond.

Another critical piece of information is that you can send dispute letters every month. Just because your dispute letter in July did not bring favorable results does not mean that you should stop. Send another one in August. Every time that you send a dispute, an investigation get done. This is one area where persistence can truly pay off.

Addresses

ExperianP.O. Box 2002Allen, TX 75013TransUnionP.O. Box 1000Chester, PA 19022

EquifaxP.O. Box 740241Atlanta, GA 30374

The post Credit Reports: How to Dispute Any Negative Item appeared first on GoogoBits.

There are various job-related expenses that can be taken as itemized deductions on Schedule A of your U.S. federal income tax return. While most of these deductions can only be taken to the extent that they exceed 2% of your adjusted gross income, if you have sufficient medical expenses, taxes, mortgage interest, charitable contributions, and casualty or theft losses in order to itemize deductions, you should also take advantage of this tax benefit for certain miscellaneous job-related expenses.

As an employee, you can take an itemized deduction on Schedule A for certain out-of-pocket job-related expenses that are not reimbursed by your employer. Un-reimbursed employee expenses are one of the categories of miscellaneous deductions that are subject to the 2% of the adjusted gross income limit.

Job-Related Expenses

Some of the types of un-reimbursed employee expenses you can deduct include the following (aside from travel, transportation, entertainment, and gift expenses; and business use of part of your home):

• Depreciation on a computer or cellular telephone your employer requires you to use in your work
• Tools needed for your job
• Work clothes and uniforms are necessary by your employer that are not suitable for ordinary wear
• Protective clothing required in your work, such as hard hats, safety shoes, and glasses
• Union Dues
• Dues to professional organizations and chambers of commerce
• Subscriptions to professional journals
• Work-related education expenses
• Expenses to look for a new job in your present occupation, even if you do not get a new job

Depreciation on a Computer or Cell Phone

You may be able to deduct depreciation on a computer or cell phone if the use is ”for the convenience of your employer” and is “required as a condition of your employment”. These conditions will depend on the facts and circumstances in each case, but in general terms, “for the convenience of your employer” means that there is a substantial business reason for requiring their use, and “required as a condition of your employment” means that you cannot adequately perform your duties without them.

If you use the computer or cell phone more than 50% in your work, you can claim depreciation under the General Depreciation System (GDS). You may also be able to take the section 179 deduction, and the 50% or 30% special depreciation allowance the year you start using them.

If you do not meet the 50% use test, you must use straight-line depreciation under the Alternative Depreciation System (ADS), and you will not be able to take the section 179 deduction or the individual first-year depreciation allowance.

Exception for Computer Used in a Home Office

If you use the computer in what qualifies for tax purposes as a home office, you do not have to meet the 50% use test. You can take depreciation under GDS, the section 179 deduction, and the special first-year depreciation allowance.

Use Form 4562, Depreciation and Amortization, to calculate your depreciation deduction. But if you file Form 2106 or 2106EZ, you would report the depreciation on that form, and not on Form 4562.

Tools

You can deduct the cost of tools that you use in your work either as an expense or as depreciation. If the tools generally wear out and are thrown away within one year, they are a deductible expense. If they last longer, you can take a depreciation deduction. You can calculate depreciation on Form 4562, and Internal Revenue Service (IRS) Publication 946, How To Depreciate Property, has specific instructions and tables to determine the amount of depreciation you can deduct.

Work Clothes and Uniforms

You can deduct the cost and upkeep (laundry, dry cleaning, mending and repairs) of work clothes and uniforms if they meet the following two conditions:

1. You must wear them as a condition of your employment, and
2. The clothes are not suitable for everyday wear.

Clothing that is distinctive will not necessarily meet the first test. And for purposes of the second test, the fact that you do not wear your work clothes off the job is not sufficient. The work clothes must not be suitable for normal everyday wear.

Some examples of employees who would typically meet these tests include healthcare workers, delivery persons, transportation workers, law enforcement officers, firefighters, and musicians and entertainers who use theatrical apparel.

Work clothing such as a business suit, bib overalls, regular shoes, or blue work clothes would not usually meet the requirements since these you could use outside your work.

Military Uniforms

If you are on full-time active duty, you usually cannot deduct the cost or upkeep of your uniforms. But if you are a reservist, and military regulations restrict you from wearing your dress except while on duty, you can claim a deduction for your expenses if you did not get reimbursement.

Protective Clothing

You can deduct the cost of required protective equipment such as safety shoes or boots, safety glasses, hard hats, and work gloves if you need them for your work. Examples of workers who would typically be able to deduct these expenses include carpenters, construction workers, welders, electricians, cement workers, machinists, equipment operators, pipe fitters, truck drivers, and fishing boat crew members.

Union Dues

Initiation fees and dues you pay for union membership are deductible. Assessments for benefit payments to unemployed union members are also deductible. But if part of an evaluation is to fund the amount of sick, accident, or death benefits, that part of the assessment is not deductible. Contributions to a union pension fund are not deductible, even if the union require them.

Dues to Professional Organizations and Chambers of Commerce

Dues you pay to professional organizations, chambers of commerce, business leagues, civic or public service organizations, trade associations, boards of trade, and real estate boards, and similar organizations are deductible if membership helps you carry out the duties of your job. In this case, the association does not have to be required by your employer. The test is whether membership contributes to effectively carrying out your duties, and therefore should be related to your line of work.

Any amounts you pay for lobbying or political activities are not deductible. And, you cannot deduct dues paid to an organization if its primary purpose is to conduct entertainment activities or to provide members with access to entertainment facilities. Out-of-pocket expenses you pay at such facilities may be deductible entertainment expenses, subject to the rules and limitations on these expenses.

Subscriptions to Professional Journals

Subscriptions to professional journals and trade magazines are deductible if they are related to your work.

Work-related Education Expenses

Work-related education expenses are deductible, even if they lead to a degree if they meet the following two tests:

1. The education must serve to maintain or improve skills required in your present work.
2. It must be required by your employer or by law to keep your salary, status, or job, and the requirement must serve a bona fide business purpose of your employer.

You cannot deduct education expenses, even if one or both of the preceding tests meet if the education:

1. is needed to meet the minimum requirements to qualify you in your work or business, or
2. will lead to qualifying you in a new trade or business.

If the education qualifies you for a new trade or business, the expenses are not deductible even if you do not go into that trade or business.

Minimum Requirements

Laws and regulations determine the minimum education requirements to qualify in your work or business, the standards of your trade, profession, or business, and by your employer. If the minimum requirements subsequently change, after you had met the requirements that were in effect when you get hired, and you have education expenses to meet these new requirements, your costs would be deductible.

Maintaining or Improving Skills

If you get more education than the law or your employer requires, you can deduct the expenses only if they continue or improve your skills. Keeping up-to-date on changes or the latest innovations in your trade or profession would qualify as deductible education expenses.

Qualifying Expenses

If you qualify based on these tests, deductible education expenses include tuition, fees, books, supplies, and certain transportation costs.

Leave of Absence

If you take a year or less off, to get an education to maintain or improve your skills, and you subsequently return to the same type of work, your absence is considered temporary, and your work-related education expenses are deductible, even if you do not respond to the same employer.

If you take more than a year off, your absence is indefinite and your education during that period is considered to qualify you for a new trade or business, for tax purposes. Your education expenses would not be deductible as work-related expenses. But you may be eligible for other tax benefits for education.

Other Tax Benefits for Education

Your work-related education expenses may also qualify for the tuition and fees deduction, which is an adjustment to gross income on Form 1040, or the education credits – Hope credit and lifetime learning credit, which would be direct reductions in your tax. You should see which benefits you qualify for, and determine which will give you the most tax advantage.

Job Hunting Expenses

You can deduct certain expenses of looking for a job in your present occupation. Deductible expenses include:

• Employment or outplacement agency fees that you pay
• Costs of producing and sending your resume to prospective employers
• Travel and transportation expenses if you go to an area primarily to look for a job. If the trip is not mainly to look for a job, you cannot deduct the cost of the trip, but if you look for a job while you are in the area, you can deduct the transportation and related expenses you incur while looking for a job in that area. If you use your vehicle, you can deduct actual costs, or use the standard mileage rate.

Your job hunting expenses are not deductible if:

• You are looking for your first job,
• You are looking for a job in a new occupation, or
• There was a substantial break between the ending date of your last post and the time you started looking for another job.

Non-Deductible Job-Related Expenses

Certain expenses related to your work as an employee are excluded explicitly from deductible costs. These include the following:

• Commuting expenses
• Lunches with co-workers
• Meals while working late
• Professional accreditation fees
• Lost wages or lost vacation time

Commuting

Commuting expenses between your home and your regular or principal place of business are not deductible. It includes parking at your workplace. But other transportation expenses may be deductible.

Lunches

Lunches with co-workers are only deductible while you are travelling away from home overnight, and are then subject to certain limits (50% rule, for example).

Overtime Meals

Meals while working late would also be deductible if you were travelling away from home. Or, you may be able to claim a deduction if the meal qualifies as a deductible entertainment expense.

Professional Accreditation

Fees to gain the first right to practice a profession are not deductible. These include accounting certificate fees, bar exam fees and expenses, and license fees to practice medicine or dentistry.

Lost Wages or Lost Vacation Time

These do not represent an out-of-pocket expense and are not deductible.

The post Taking an Itemized Deduction for Job Expenses appeared first on GoogoBits.

How your residential rental income is taxed depends on the type of property you rent out, your personal use of the property, whether the property is considered a dwelling unit used as a home, and your participation in the rental activity. You may be able to claim all your rental expenses, even if you end up with a loss, or your loss may be subject to certain limitations.

In general, all amounts you receive as rent are includible in your income subject to U.S. federal income tax.  You may be able to claim certain expenses you incur in connection with your rental income.

• If you rent out part of your property, such as a part of your home, you must divide your expenses between rental use and personal use.
• Likewise, if you rent out a vacation home part of the year, you must also divide up your total expenses related to the vacation home between rental use and personal use.
• And, if you change your property from personal use to rental use during the year, you will also need to divide yearly expenses, such as taxes and insurance, between personal use and rental use.

If you do not rent out your property to make a profit, you can deduct your expenses up to the amount of your rental income.

Rental Income

Rental income includes periodic (monthly) rental payments and also consists of any amounts your tenant pays you to cancel a lease, any expenses the tenant pays on your behalf and the fair market value of any property or services you receive as payment of the rent.  A security deposit that you intend to return to the tenant at the end of the lease term is not rental income.  But if you design the deposit as a final payment of rent, it is advance rent and must be included in income when you receive it.  Also, any part of a security deposit that you keep because the tenant does not live up to the terms of the lease you must include in your rental income.

If you grant the tenant a lease with the option to buy, the payments you receive are considered to be rental income until the tenant exercises the option.  Payments you receive for periods after the date of sale are considered to be part of the selling price.

If you rent a property that you also use as your home, and you rent it fewer than 15 days during the year, you do not have to include the rent in your income, and you cannot deduct any rental expenses.

When To Report

Rent is included in income when you receive it if you report on the cash basis, and in the period for which the rent corresponds, if you indicate on the accrual basis.  But rent paid in advance is included in the period when you receive it, regardless of the period it covers or the base of reporting you to use.

Rental Expenses

You can deduct ordinary and necessary expenses, including depreciation, related to your rental income.  As in the case of rental income, you may need to divide the costs between rental use and personal use of the property.

You can deduct expenses for managing, conserving, or maintaining rental property starting at the time you make it available for rent, and during periods when the rental property is vacant, but you cannot deduct any loss of rental income for the period the property is vacant.  If you sell a rental property, you can deduct rent-related expenses until you sell it.  You can start depreciating rental property when it is ready and available for rent.

Repairs and Improvements

You can deduct the cost of repairs, and you can recover the cost of improvements through depreciation.  Repairs keep your property in good operating condition, but do not add to the value of the property or substantially prolong its life. Increases, on the other hand, add to the property’s value, extend its life, or adapt it to new uses.  If you make repairs as part of an extensive remodelling or restoration project, the cost of the whole job should be capitalized and depreciated.

Other Expenses

Other expenses related to rental property that you may deduct, include advertising, commissions, cleaning and maintenance, utilities, property taxes, insurance, and mortgage interest.  If you pay rent on a property that you, in turn, rent out, or sublease, you can deduct your rental payments.  If you buy a leasehold, you can amortize the cost over the term of the lease.

Local benefit taxes that are for repairs or maintenance are deductible expenses.  But if the charges are for putting in streets, sidewalks, water and sewer systems, or other improvements that increase the value of your property, they are non-depreciable capital expenditures that you must add to the basis of your property.

You could deduct expenses for travelling away from home if the primary purpose of the trip was to collect rental income or manage, conserve, or maintain your property.  Any personal expenses while on the trip should be separated.  You can also deduct local transportation for the same purposes, either based on actual costs or the standard mileage rate.  To deduct car expenses under either method, you will need to keep the required records and complete Part V of Form 4562, Depreciation and Amortization. Section B, Information on Use of Vehicles.

Condominiums

If you own a home and rent it out, your rental expenses can also include the dues you pay to the management association or company.  Assessments for improvements to the condominium are not deductible as expenses, but you may be able to recover the cost through depreciation.

Cooperative Apartments

Rental expenses in the case of a cooperative apartment include all the maintenance fees you pay to the cooperative housing corporation.  But you cannot deduct amounts assessed for capital assets or improvements, or other amounts charged to the corporation’s capital account.  The amount you can deduct for interest and taxes is the amount the corporation allocated to you.  If this amount is not reflected, you can take your proportionate share of the total interest and taxes based on your percentage ownership of the total shares of stock.

Property Not Rented for Profit

If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income, with no loss carryover to the next year.

You report not-for-profit rental income as Other Income on Form 1040.  Related expenses such as mortgage interest and property taxes are itemized deductions.

Property Changed to Rental Use

As mentioned above, if you change your home (or part of it) or other properties from personal use to rental use during the year, you have to divide your expenses.  You can use any reasonable method to allocate the costs between personal use and rental use.  Two conventional methods are to assign based on the number of rooms in your home, or the square footage of the rental and personal portions.  Some expenses, such as water that depend on personal use may be divided based on the number of persons (tenants and owners) occupying the property.

You can deduct expenses related to rental use, including an allocable portion of home mortgage interest and property taxes, as rental expenses on Schedule E, Supplemental Income and Loss.  The personal part of mortgage interest and property taxes would be deductible as itemized deductions on Schedule A.  You can also deduct on Schedule E the allocable portion of expenses such as utilities and the cost of painting your house. Payments that are specifically for the rental part of the property, such as painting or repairs, can be taken as rent expenses on Schedule E.  You cannot deduct the cost of a first telephone line in your residence, but if you install a second line just for the tenant’s use, the price is a fully deductible rental expense.  You can start to claim depreciation on the rental property starting from the date you convert it to rental use.

Personal Use of a Dwelling Unit

A dwelling unit for these purposes can include a vacation home.  The importance of defining the personal use of a dwelling unit is that it will determine how much of your rental expenses you can deduct:

• If you used a dwelling unit for personal purposes as well as rental purposes, and the dwelling unit is considered to be a “dwelling unit used as a home” (defined below) you cannot deduct rental expenses that are more than your rental income.
• If the dwelling unit is not your home, you can deduct rental expenses that are more than your rental income, subject to certain limits.  These are the “Passive Activity Limits”, and it is described as below.

Dwelling units include houses, apartments, condominiums, mobile homes, vacation homes, boats, and similar property, provided they have necessary living accommodations.

Dwelling units do not include property used solely as a hotel, motel, inn, or similar establishment.  A space, such as a room in your home that is regularly available for occupancy by paying customers or tenants would not be considered a dwelling unit.

Dwelling Unit Used as a Home

Once you determine that a property is a dwelling unit, you must then decide whether you use it as your home.  It is considered a home during the tax year if you use it for personal purposes for the greater of 14 days, or 10% of the number of days it was rented out at a fair rental price.

You may not have to include as personal use the days before and after you rented the property or offered it for rent, if:

• You rented or tried to lease the property for 12 or more consecutive months, or
• The period you rented or decided to rent the property was less than 12 straight months because you sold or exchanged the property.

A day of personal use is any day or part of a day, that the unit was used by:

• You, for private purposes;
• Any other person for personal purposes, if that person owns part of the unit (unless rented to that person under a “shared equity” financing agreement);
• Anyone in your family (or in the family of someone else who owns part of the unit), unless the unit is rented at a fair rental price to that person as his or her main home;
• Anyone who pays less than a reasonable rental rate for the unit; or
• Anyone under an agreement that lets you use some other unit.

Days that you spend working substantially full-time in repairing or maintaining the property do not count as personal use days, even if other family members are using the property for recreational purposes (for example, days you spend working on your vacation home).

Personal Use and Rental Use

Determining the number of days of personal use and rental use is essential.  It is the basis on which you will determine whether you use the dwelling unit as a home, which will, in turn, decide whether or not you can deduct your rental expenses up to the amount of your rental income, or deduct all your rental expenses, subject to the passive activity limits.

Dividing Expenses

If you used a dwelling unit for both personal and rental purposes, you divide your expenses based on the number of days used for each purpose.  It is not necessarily the same way you consider days of personal use for determining whether the you use the dwelling unit as a home.  For dividing expenses, you use the following rules:

• Any day that the unit you rent at a fair rental price would be a day of rental use, even if you used it for personal purposes that day.
• Any day that the unit is available for rent but not rented is a day of rental use.

Depreciation

You can claim a deduction for depreciation on the rental part of your property, if you own the property, you use it as rental property, the property has a determinable useful life (more than one year), and it is not explicitly excluded as depreciable property for tax purposes (property placed in service and disposed of in the same year).

There are three methods for calculating depreciation.  The way you use for a rental property depends on when you place it in service.

• MACRS (Modified Accelerated Cost Recovery System) for property placed in service after 1986
• ACRS (Accelerated Cost Recovery System) for property set in service after 1980 but before 1987
• Straight-line, declining balance, or another method for property placed in service before 1981.

The MACRS system, in turn, consists of two separate systems – the General Depreciation System (GDS) and the Alternative Depreciation System (ADS).  Rental property gets generally depreciated under GDS.  Under this system, each item of property gets assigned to a property class.  Residential real property is in a class of its own.

You may need to use Form 4562 to figure your depreciation deduction.

Figuring Rental Income and Deductions

If you determine that you did not use the dwelling unit as a home, based on the criteria indicated above, you report all the rental income and deduct all the rental expenses.  You could have a loss, subject to certain limits.

If you determine that you did not use the dwelling unit as a home, you figure your rental income and expenses based on how many days you rent the unit at a fair rental price.

• If it was rented out for fewer than 15 days, you do not have to report any rental income, and you cannot deduct any rental expenses.
• If it was rented out for 15 days or more, you would report all your rental income.  If you have a net profit from the rental activity, you can deduct all your rental expenses.  But if you have a net loss, your deduction for rental costs may be limited.  There is a worksheet in the instructions for figuring the limit on rental deductions for a dwelling unit used as a home.

Limit on Deductions

In the second case above, where your expenses exceed your income, you cannot use the excess costs to offset other income reported on your tax return.  But you may be able to carry the excess expenses over and use them to offset rental income from the same property in the following year.

Limits on Rental Losses

Rental real estate activities are generally considered to be passive activities for tax purposes, and you can deduct real estate rental losses only to the extent you have other passive income.  But if you materially or actively participated in the rental activity, you may be able to deduct a loss.  And, in the case of a dwelling unit used as a home, the passive activity rules do not apply.

At-Risk Rules

If the passive activity rules apply, any losses are the first subject to the at-risk rules.  These rules are intended to limit losses from activities that are considered to be tax shelters.  The rules limit the damage to the amount that is at risk in the event; that is, the amount of cash and the adjusted basis of property contributed to the activity, and specific amounts borrowed for the activity.  If the at-risk rules apply, you will generally have to complete Form 6198 to figure your allowable loss if you have a loss from an event that you carry on as a trade or business or for the production of income, and you have amounts in the activity for which you are not at risk.

Passive Activity Rules

Losses that are deductible after considering the at-risk rules are then subject to the passive activity loss rules.  Under these rules, as indicated above, you can generally deduct losses only to the extent you have offsetting income from other passive activities.

Rental activities in which you actively participated as a real estate professional are not considered to be passive activities and are not subject to the passive activity limits.  You are a real estate professional if:

• More than half of the personal services you performed were in actual property trades or businesses in which you materially participated, and
• You played more than 750 hours of services in real property trades or transactions in which you substantially participated.

Material and Active Participation

If you are not a real estate professional, you will need to determine if you materially and actively participated in the rental activity, to see whether the passive activity limits apply.  Material participation means you were involved in rental operations on a regular, continuous and substantial basis.  Active participation means you (and your spouse) owned at least a 10% interest in the rental property and you made management decisions in a significant and bona fide sense.

How To Report

If your rental activity is not for profit, you would report your rental income as other income on Form 1040.  You can deduct your mortgage interest (for your primary home or second home), your real estate taxes, and any casualty losses on the appropriate lines of Schedule A, as itemized deductions.  You can deduct other rental expenses as other miscellaneous itemized deductions.

If you rent buildings, apartments, or rooms, and provide only the essential services, such as light, heat, and trash collection, you would usually report your rental income and expenses in the Part I of Schedule E, Supplemental Income and Loss.

If you provide significant services, such as regular cleaning or maid service, the activity would probably be considered a business, and you would report your rental income and expenses on Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business.

You will need to complete Form 4562, Depreciation and Amortization, if you are claiming depreciation on property placed in service during the year, or on any listed property, such as a vehicle, or if you are claiming expenses for the use of a car.

The post How Residential Rental Income is Taxed appeared first on GoogoBits.

Potential homebuyers can save time, money, and heartache by first having a qualified home inspector check the property.

Everyone knows that home ownership is the American Dream. That dream can quickly become a nightmare, however, for uninformed buyers. Even newly constructed homes can harbour costly mistakes—mistakes that may not be visible to the untrained eye.

Many home buyers assume that they do not need a home inspection. They merely rely on their eye and their intuition to check a property’s quality and safety. That can be a costly, and dangerous, mistake. An inspection by a qualified home inspector can save potential homebuyers time, money, and heartache. Checks generally cost a few hundred dollars—a relatively small price to pay to protect such a significant investment.

Before You Begin

When you put in an offer on the house, make sure to leave room for a home inspection. In some areas, this will be called an “option period.” Others will call it a contingency. Whatever name they use, there needs to be a clause in the real estate contract allowing the potential homebuyers to either back out or renegotiate in case of uncovered problems.

What Does an Inspection Cover?

A home inspector provides a visual, non-invasive inspection of various structures of a property. They do not drill into walls, move structures, or in any way damage the property to perform tests. The purpose of the inspection is to determine if the components are in working order at the time of the investigation. A typical home inspection includes a visual inspection and operational check of the following:

• Structural Systems—foundations, floors, walls, etc.
• Electrical Systems—wiring, main service panels, conductors, switches, receptacles, etc.
• Air Conditioning Systems—cooling and air handling equipment, controls, and ducting.
• Heating Systems—equipment, safety controls, distribution systems, chimneys, etc.
• Plumbing Systems—piping, fixtures, faucets, water heating, fuel storage system, etc.
• Ventilation and Insulation—attics, basements, walls, floors, foundations, kitchen, bathrooms, etc.
• Roofing—coverings, flashings, chimneys, etc.
• Exterior—siding, windows, decks, garage doors, drainage, retaining walls, etc.
• Interior—partitions, ceilings, floors, doors, windows, built-in appliances, etc.

They also check these optional structures, though sometimes at an additional charge:

• Hot Tubs
• Lawn Sprinklers
• Outdoor Cooking Equipment
• Security Systems
• Swimming Pools

After the inspection, the inspector will provide a comprehensive report explaining his findings. Sometimes he will suggest further evaluation by a specialist, such as a mould inspector or structural engineer.

What Doesn’t an Inspection Cover?

Value—A home inspector is not a home appraiser, and he can not appraise the value of the property.

Guarantees for the future— An inspector checks the function of the home at the time of the inspection only. Though he may try to report any potential problem areas, there are no guarantees either expressed or implied for future performance. A separate home warranty can be purchased to protect against some future malfunctions, but be sure to read the fine print. Consult with the real estate agent or broker for more information about home warranties.

I Have My Inspection Report—Now What?

The inspection report should be carefully analyzed. The information it contains is an essential tool for the homebuyer, as you can use it in a variety of ways:

Renegotiate—If the inspection uncovers needed repairs, the potential homebuyers can use it to renegotiate the contract terms. They can either ask the sellers or ask for money back at closing to make the needed repairs. Sometimes sellers will merely reduce the selling price to accommodate required repairs.

Retract—In the case of significant problems, such as mould or structural damage, a buyer may choose to terminate the contract. Under these circumstances, the homebuyer has avoided a potentially costly and dangerous situation.

Planning—Sometimes an inspection report will uncover minor issues that could eventually become significant problems. It enables a buyer to make informed decisions about the long-term investment.

Further Evaluation—At times, an inspector will find an issue beyond the scope of his expertise and will recommend additional evaluations. For example, if he sees signs of mould, he might suggest that a qualified mould inspector is called upon to assess the damage (Some home inspectors do additional conduct inspections, such as mould, radon, etc. They check it on an individual basis).

The Inspector Found a Problem—Is it a Deal-Breaker?

At first glance, many inspection reports can be a bit overwhelming. Some are so detailed that it may appear the property will soon be falling down! Fortunately, though, in most cases the issues uncovered by the inspector are minor. On the other hand, sometimes they discover significant problems. Here is a rundown of some common problems and some potential deal breakers:

Minor problems

Cosmetic Issues—Chipped or peeling vinyl flooring, chipped paint, paint splatters, small holes in sheetrock, etc. are cosmetic and are usually inexpensive to repair.

Foundation “settling”—Hairline cracks in the ceiling or concrete are usually a sign of normal settling or shrinkage and not a sign of structural damage. If desired, you can generally fix this with putty or paint.

Potential Red Flags

• Water damage—Improperly treated water damage can cause the growth of mould and mildew.
• Radon—This odourless gas, found mostly in rocky areas, can cause cancer.
• Mold—Toxic mould can cause serious health problems, or even death, especially to infants and those with weak immune systems.
• Termites and Carpenter Ants—These insects weaken the structure of a home over time.
• Defective Roofing—This can be a costly problem to repair.
• Aluminum Wiring—Found in some homes built in the mid-1960’s to the early 1970’s, this is a potential fire hazard.
• Major Foundation Problems
• Missing or Inoperable GFCI– The ground fault circuit interrupter (GFCI) switches off electric power to a circuit when it senses any loss of current. A missing or malfunctioning GFCI can lead to electrocution, electric shock, and electrical burns. Luckily, these can be installed by an electrician reasonably inexpensively.
• Mixed Plumbing
• Undersized electrical system—Found mainly in older homes, this can result in a shortage of household circuits and outlets.
• Lead-based paint—Houses built before 1978 should be checked for lead-based paint as this can cause lead poisoning, particularly in children and pregnant women.

Even these red flag items are not always deal-breakers. If you find these items in the property, contact the appropriate specialists. Find out if they can resolve the issues, and at what price. Weigh out the overall cost, in both time and money, to find out if it is a worthwhile investment.

How Do I Choose a Home Inspector?

As with most things, referrals from family and friends are invaluable in the search for a home inspector. In addition to recommendations, though, here are some things to look for in an inspector:

No conflict of interest—Under no circumstance should you use an inspector who stands to gain from the sale of the property. It would include an inspector who is also the real estate agent or a family member or friend of the real estate agent. It is also a good idea to be careful of taking recommendations from your real estate agent, whose commission relies on the purchase of the house. You should also be leery of an inspector who will gain from the suggested repairs.

Certification or Licensing—Requirements for home inspectors vary from state to state, but make sure the inspector chosen meets the criteria for his area. In Texas, for example, home inspectors are licensed through the Texas Real Estate Commission (TREC). Their license numbers should appear on websites, business cards, and other correspondence.

Professional organizations—Numerous professional organizations exist that dictate the proper conduct for home inspectors. Find out if the potential inspector belongs to any. Here is a partial list of national home inspector organizations:

• The National Association of Certified Home Inspectors (NACHI)
• Independent Home Inspectors of North America (IHINA)
• American Society of Home Inspectors (ASHI)
• National Association of Home Inspectors, Inc. (NAHI)

In addition to these national associations, there are also many state and local home inspector organizations. These groups usually have stringent guidelines for membership. Most also have directories of member home inspectors. In the absence of a trusted friend or family referrals, these associations are excellent sources for references.

Potential homebuyers can make their American Dream a reality with a bit of knowledge. An inspection from a reliable trusted home inspector can mean the difference between a real dream home and a nightmarish money pit– or worse.

The post Home Inspection 101: Things to do before Buying / Investing appeared first on GoogoBits.