It seems like there’s a tax statute that touches on nearly every aspect of our lives. But that’s not all. Tax laws also include the lives of our furry friends. That’s right, even your pets can show up in your tax return in surprising ways.
Your Pet Can Be... Medicine
You can actually deduct the cost of your pet as a medical expense in the tax code. Dogs in particular are frequently used to provide medical services as guides for the blind, hearing impaired or otherwise physically disabled. The cost of buying, training and maintaining a service animal is deductible. This includes the cost of food, grooming and visits to the vet.
What’s not a deductible medical expense: therapy animals. Dogs and other furry creatures are commonly used in hospitals and other care facilities to lift the spirits of patients. But there’s no tax deduction yet for the service they provide.
Your Pet Can Be... Business
You can also deduct the cost of a dog or other pet if you use it in your business. This could be a dog used to guard a location, or even a cat if it is used to control pests like mice and rats. Farmers who use herding dogs can also deduct their animals, and so can animal breeders.
However, when you deduct animals as part of your business they are actually treated like capital equipment. That means you would depreciate the cost of the animal, generally over seven years, just as you would office furniture or other business equipment.
Your Pet Can Be... A Hobby
If you make any money on your pet as part of a hobby, you may be able to deduct the cost of buying, training and maintaining your pet. This could be the case if, for example, you win prize money in a dog show. Your pet costs could be a miscellaneous itemized deduction as long as your total miscellaneous costs add up to at least 2 percent of your adjusted gross income.
Unlike with a business, you can’t deduct losses from your hobby expenses. That means you can only deduct as much as you earn (from pet contests or other activities).
Your Pet Can Be... A Sign of Home
In a recent court ruling, the CEO of Match.com won his case against the New York tax agency in part because he proved his primary home was where he kept his dog. New York was trying to tax him as a resident because of his New York apartment. He was able to prove that he had moved to Texas because, among other reasons, that’s where his dog was. The move of items “near and dear tend to demonstrate a person’s intention,” the court ruled.
Renting an apartment or condo, leasing a piece of equipment, renting business property, or leasing a car all involve the common practice of borrowing something that is owned by someone else. This experience can easily become a nightmare with a bad landlord or if you don't understand your obligations. Here are some tips you can use to become a smarter renter.
The IRS is clear on their point of view. If you barter you must include the barter activity's fair market value as income on your tax return in the year the barter activity is performed. But is it really that simple? Here are some things to consider if you barter.
What is fair market value?
The classic definition of "fair value" is the price someone is willing to pay and someone else is willing to receive for the exchange of goods or services. But we all know this requires a level of judgment. What if an item is on sale when the barter activity is performed? Are prices always the same for a similar item or service? Prior to establishing the value of a barter item, shop around and take the lowest defendable value possible for your bartered item.
Example: You barter dog grooming for accounting work. If you offer a range of prices from $20 to $60 for your grooming service and a dog owner can readily get the same service done for $15 somewhere else... what is the fair market value? If you can reasonably substantiate the $15, this lower amount could become your fair market value.
What about your costs?
The IRS barter documentation is so focused on capturing and taxing your barter income, it under informs taxpayers on the reasonable reporting of costs associated with that income.
Example: If two retailers exchange wholesale goods of equal value for resale, the cost of goods could logically eliminate much of the fair market value of the barter income. What if the fair market value of the goods received is worth less because you discover it is distressed? Then you could actually have a barter based loss on your books.
Is the barter fair?
If you are bartering with another firm, look at the “tax value” of the barter. This is because a part of a barter of services may include your time. In the example below, one can expect there to be more hard costs for a painter (paint, brushes and other supplies) versus a lawyer. This can change the true tax value of a barter for two sole proprietors.
Example: A painter exchanges $3,000 house painting with a law firm for legal services.
If both firms are sole proprietors, the salary of the owners is reflected in their net income. Self-employment taxes, sales taxes, and other taxes would also need to be applied to the net income number of each barter participant. In this case, the barter does not appear equal.
Caution with Barter Exchanges
With barter exchanges you receive credits (vouchers) for your provided services prior to using those credits on another service. Since you are required to report income when your service is provided, you could potentially have barter income without receiving the benefits for your barter activity until later years.
If you use bartering in your business, you generally report the activity on 1099-B's each year, separate from other informational reporting.
When it comes to choosing where to live during retirement, weather isn't the only consideration. State and local tax laws have a significant impact on your nest egg.
The charts below show the highest and lowest state tax rates and costs of living, from data provided by nonprofit think tanks the Tax Foundation and the Council for Community and Economic Research.
State Income Tax Rates
State and Local Sales Taxes
(state and average local tax rates combined)
(Rankings based on the statewide average of local rates.)
If taxes were the only consideration in our retirement destinations, everyone would move to Alaska, which has no state income or sales taxes. However, the "last frontier" state also has one of the highest costs of living in the U.S. Therefore, you may also wish to consider which states have high and low costs of living.
Don't Forget: Cost of Living
IRS scams are constantly changing, so you have to stay knowledgeable of the scammer's latest methods. Pretending to be an IRS agent is one of the favorite tactics of scam artists, according to the Better Business Bureau. The con artists impersonate the IRS to either intimidate people into making payments over the phone, or to send misleading emails tricking people into sharing personal information digitally.
You can defend yourself against these scammers by knowing these simple rules:
Rule #1: Expect a Letter First
In almost every case, the IRS will send you a letter via standard mail if they need to get in touch with you. This will alert you to expect future communication from the agency and instruct you on the best ways to get in touch with them.
What to do: If you get a letter from the IRS that is unexpected or suspicious, it should have a form or notice number searchable on the IRS website. If something doesn't look right, you can call the IRS help desk at 1-800-829-1040 to question it.
Rule 2: Never over Email
The IRS will never initiate contact with you using email. A common scammer trick is to send emails to taxpayers using accounts and graphics that imitate the agency's. They may threaten imprisonment or fines if you don't pay up, or promise an extra refund if you send money to "prepay" your taxes. Often the emails contain links to an official-looking fake website to collect payments. Clicking on them may also trigger the installation of virus programs on your computer.
What to do: Don't respond to any email communications supposedly from the IRS. Don't click on any links. Delete the email or forward it to firstname.lastname@example.org to help catch the scammers.
Rule 3: Proper Phone Call Etiquette
After notification via the USPS, the real IRS may call you to discuss options to handle delinquent taxes or an audit. A real IRS agent or a debt collector won't demand immediate payment without giving you an opportunity to question or appeal the bill. Nor will they threaten lawsuits, arrest or deportation. Their tone should not be hostile or insulting. Finally, if they ask for payment, they should be asking you to make it out only to the United States Treasury.
What to do: If you get a call from the IRS or an IRS debt collector, politely ask for the employee's name, badge number and phone number. They shouldn't hesitate to provide this information. You should then end the call and dial the IRS at 1-800-366-4484 to confirm the person's identity.
Rule 4: Check In-Person Visits
Ask the person for their credentials. Every IRS agent should be able to produce two forms of credentials: a pocket commission card and a personal identity verification card issued by the Department of Homeland Security, also called an HSPD-12.
What to do: Never provide sensitive information nor confirm information they may have without first independently verifying they are legitimate representatives of the IRS. If you have concerns you can call the IRS at 1-800-366-4484 to confirm the person's identity.
You do not need to navigate this problem on your own. Call Ellsworth & Associates for assistance. It is good to have a knowledgeable expert on your side.
You’ve loved dogs all your life so you decide to start a dog breeding and training business. Turning your hobby into a business can provide tax benefits if you do it right. But it can create a big tax headache if you do it wrong.
One of the main benefits of turning your hobby into a business is that you can deduct all your qualified business expenses, even if it results in a loss. However, if you don’t properly transition your hobby into a business in the eyes of the IRS, you could be waving a red flag that reads, “Audit Me!” The agency uses several criteria to distinguish whether an activity is a hobby or a business. Check the chart below to see how your activity measures up.
The Business-Versus-Hobby Test
If your dog breeding business (or any other activity) falls under any of the “hobby” categories on the right side of the chart, consider what you can do to meet the business-like criteria on the left side. The more your activity resembles the left side, the less likely you are to be challenged by the IRS.
On the other hand, if you determine that you’re really engaged in a hobby, there are still some tax benefits to be had. You can treat hobby expenses as a miscellaneous itemized deduction on a tax return, but generally not more than hobby income. They can be used to reduce taxable income if they and other miscellaneous expenses surpass two percent of your adjusted gross income.
If you need help to ensure you meet the IRS’s criteria for business-like activity, reach out to schedule an appointment.
It is said with every major purchase there's some kind of remorse either on the part of the buyer or the seller. This can be especially true when buying or selling a business. No matter which side of the negotiating table you sit on, there are some critical areas that could leave you with feelings of regret. Avoid these mistakes and you'll feel better about your deals after they're done.
Most Americans simply don't save enough for retirement. Nearly half of working-age households don't have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and above) nearly two-thirds have less than one year's worth of their annual salary in retirement savings.
The Goal: A Comfortable Retirement
So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment returns. Mutual fund broker Fidelity estimates you need enough savings to replace roughly 85 percent of your annual pre-retirement income. Many experts estimate you will have to save between eight and 12 times your pre-retirement annual income to reach this goal.
But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, their savings estimate lowers to eight times your annual income.
This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority of workers (51 percent) surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan to continue working during retirement.
Some Ideas to Consider Now
There are steps you can take right now to put you in a better position during your golden years:
There are a lot of positive things about getting married, but the IRS' marriage penalty isn't one of them.
The marriage penalty occurs when you pay more tax as a married couple than you would as two single filers making the same amount of money. It pops up again and again in the federal tax code.
The Tax Rate Problem
After two people are joined in matrimony, you may think the income levels for their tax brackets would simply be double what they were when they were single. But that's not the case: instead, the thresholds to move into a higher tax bracket are lower for married couples.
Example: As a single filer, Mr. Smith's $90,000 income has a top tax rate of 25 percent, the same as his bride-to-be's tax rate on her $75,000 income. Once they're married, their combined income of $165,000 moves their top income tax rate to 28 percent. In this case, being married exposes some of their income to an extra 3 percent tax versus staying single.
Married couples also see personal exemptions and itemized deductions phase out faster than for single filers. These deductions begin to phase out when adjusted gross income is greater than $261,500 for single filers, but only $313,800 (versus an expected amount of $523,000) if you’re married filing a joint return.
These tax benefit phase-outs don't just affect upper-income taxpayers. Even the earned income tax credit (EITC) phase-outs favor single over married taxpayers. A single mother of three can qualify for the EITC with income less than $48,340, while a married couple loses the EITC with combined income over $53,930. In this way, a married couple with $27,000 in income each are severely penalized when using the EITC when compared with staying single.
ACA Piles onto the Marriage Penalty
The Affordable Care Act (also known as "Obamacare") also penalizes married couples with lower thresholds on its 0.9 percent wage surtax and 3.8 percent investment income tax. The income thresholds for these surtaxes are $200,000 for single filers and $250,000 for married couples filing jointly. As a result, singles who each earn $125,000 to $200,000 can get hit with the extra tax after they marry.
Unfortunately, there are some couples who simply decide not to marry to avoid the marriage penalty. If you are planning to marry in the near future, don't be caught by surprise with a larger than expected tax bill.