We get questions at USTaxAid.com related to all kinds of tax situations. Here are the most recent questions which cover everything from the consequences of dumping bad real estate to pensions to real estate professional status.
#1: What type of pension is the best?
Q: We are thinking of getting either a traditional IRA or Roth.
I am 59 and my Husband is 60 and well being we lost every thing a few years back we have no retirement and would like to start one now and finish filing our 2014 returns. We have no assets left and I know we are way behind the 8 ball and will not have it easy when and if we are able to retire but it will be something to fall back on. My question is: Do you recommend a traditional IRA or ROTH?
A: The main reason why you will choose one pension over the other is that a regular IRA (or 401(k), SEP-IRA, etc) is tax-deferred. You get a tax deduction now in exchange for having to pay tax later when you take distributions. This is a good strategy if your income is higher now and you need a tax deduction.
A Roth is a tax-free. There is no deduction.
The key is figuring out first whether it’s more important to have a tax deduction now or to know you’ll never pay tax when you take a distribution.
#2: What is the definition of real estate activities if you’re taking the Real Estate Professional loophole?
A: A qualified real estate activity occurs when you “develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease, or sell” real estate.
#3: I got a Form 1099A. Now what?
Q: I got a 1099A for my foreclosed investment property in 2013 with a FMV of $86k. I filed my tax return and based my capital gains or loss based on that FMV.
In 2014, I got my 1099C for the same foreclosed investment property. The FMV is now showing $35k.
A: The 2013 return was filed incorrectly. The debt wasn’t forgiven until 2014. I recommend that you amend your 2013 return and then you need to look at the gain or loss for the disposal of property in 2014. In most cases of real estate investment that I’ve seen, there is a loss on the disposal of the property that goes to partially or fully offset the cancellation of debt income.
If there is income even after a loss, you may have tax due. The IRS has a guide on how to handle gains due to foreclosures, etc. http://www.irs.gov/pub/irs-pdf/p4681.pdf
#4: What are real estate agent tax deductions?
Q: My wife became a real estate agent in 2014, she has not earned an income rather we had lots of expenses in schooling, licensing and maintaining her license. We are filling jointly can we deduct any of these expenses on top of the married standard deduction?
A: As soon as you start any business, including a real estate agency, you have legal deductions. The money you spend getting ready for a profession is not a deduction, but once you have your business, expenses to maintain your education, etc are deductible.
Even though she hasn’t received any income yet, she could have a legitimate business if you can prove she was working in the business and was ‘open for business.’
#5: I got a Form 1099-C. Now what?
Q: I have been issued form 1099C for my three family home (I reside in the house for more than 10+ yrs) I have been insolvent. the amount reported on form line 2 is $192,480, before the cancellation of debt I owe more than $555,000, I know I need to file form 982, I dont know exactly what option to take in part I as well in part II, the house was rented.
A: The answer to this one is quick. Form 982 is a very complicated form, even for experienced tax preparers. If you get it wrong, you’ll likely lose the COD exception and have to pay a lot of taxes. I strongly recommend that you do not attempt to file this form yourself. It’s definitely worth the money to have an experienced CPA prepare it for you.
#6: Foreign National Tax Issues When Selling in the US
Q: I am about to start selling pet products on Amazon.com. I am UK based. I have a UK registered company. I initially anticipate monthly revenues of $5000 rising to $100,000+ after 12 months. I will initially be sourcing product in America but increasingly from China. I would appreciate your thoughts on how I should structure my US affairs from a US tax and liability protection
A: If you are fulfilling the sales from the US, you will have US nexus. The fact that you’re selling to US residents and sourcing from the US could also create nexus, but certainly the fact that you are using Amazon.com’s US warehouses means you’ve got a US tax issue.
Amazon will likely ask you for your social security number (SSN), employer ID number (EIN) or individual taxpayer identification number (ITIN). If you don’t have a US business or a SSN, I recommend that you apply for an ITIN as soon as possible. Otherwise, there will be a mandatory 30% withholding on GROSS (before expenses) revenue.
A quick way to get an ITIN is to set up an LLC, which requires you to have an ITIN. Otherwise, it can take a year or more to get one.
Another issue to consider is sales tax. FBA (fulfilled by Amazon) sellers are discovering that Amazon strongly recommends that they set up for sales tax collection in each of the states in which their product is warehoused. Applying for the sales tax certificates is not hard, but you’ll need to have your ITIN and an EIN to get that step done. So start with getting your ITIN as soon as possible if you don’t have a SSN.
#7: Independent Contractor Tax Deductions
Q: I am an economist and do consulting as an independent contractor. My contract says I may hire assistants as needed. In my current project, I have an assistant and need to pay him from the fee I’m paid. How do I do this in a way that the IRS knows I’ve paid $X and I’ve paid my assistant $Y and my taxable amount is $X-$Y?
A: If you’re an independent contractor, that means you have a business. As a business owner, you have expenses, including the cost to hire sub-contractors or other workers. If they are employees, you’ll need to withhold payroll and income taxes, pay payroll taxes and make tax deposits to federal and state agencies. You’ll also need to file quarterly and annual state and federal payroll tax forms. If they are independent contractors for you, you need to get their tax reporting number with Form W-9 and prepare a Form 1099-MISC showing the income you paid them throughout the year.
You can take a deduction for the amounts you pay others. However, if you don’t properly report the income to them through payroll reports or Form 1099-MISC, you could face penalties and lost deductions.
There are three ways to get your tax questions answered by me.
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