Q: We’re about to rent out my place and wanted to know how we would go about claiming the income for taxes? Do I have to ?
Along with Lyft and Uber driver’s, landlord’s are popping up all over the place. Short term, long term, vacation spots, single bedrooms, whole house, and yes, I have seen tents in people’s backyards being rented out to earn some extra cash or simply to utilize dead space. This is all grand until folks start thinking about the tax implications of the these endeavors or “how exactly does this all work on my taxes?”
Tax planning for 3-5 years into the future is imperative for everyone’s situation and that’s no different for people looking to convert a personal or primary residence into a rental property, or if purchasing a property outright for that purpose in general. It is key to maintain “the books” every year ( and on a monthly basis) for personal expenditures and for business expenditures. This means adding all income together, adding all expenses (separated by account) together, and subtracting expenses from income. The difference is the “taxable” portion.
To be real though, its often beneficial to report rental income and expenses because any loss may lower other taxable income, subsequently lowering tax liability.
Rental income: This could be reported on a 1099MISC or by keeping track of any payments (income) yourself.
Cleaning and Maintenance:
Mortgage Interest/Property tax : Always provide/have/use the form 1098 that provides this info.
Repairs and Supplies: (Home Depot+Lowes+Ace hardware)
Here is a template for an income statement and its concept . Download it to your computer and use the Save As feature to save the document in a safe place that you can use in the future.
This information is reported on the Schedule E and must be added to your 1040 at the time of preparation. Tax is paid on net income (Gross income – expenses = net income). A silent expense that is often overlooked is depreciation and is added at the time of preparation so it will most likely not be on your monthly summaries but is significant.
It’s almost halfway through the year (2019) and it’s time to review some data that surrounds your life. If you’re an “employee” and receive a W2 at the end of the year, this means reviewing your latest paycheck stub(s) to ensure that you are withholding enough to cover the annual tax due; even if your paycheck is direct deposited you should be able to review the voided stub.
What’s your ‘year to date’ income so far?
How much have you withheld for federal and state taxes ‘year to date’ so far?
How much have you paid into social security and medicaid thus far? Keep in mind, your employer pays the same amounts on your behalf, theses are considered payroll and employment taxes, not part of income taxes.
Below is an example of what page 2 of the 1040 looks like, feel free to locate your actual tax return and follow along. Line 11 of your 1040 page 2 is the tax you owe for the year based on “taxable income”, and line 15 is the actual tax due for the year based on any credits subtracted plus additional tax due.
line 16 is what was actually withheld from your paychecks (or other forms like 1099’s) combined.
Your tax due (which I often refer to as tax liability), can change from year to year. For example, kids under 16 qualify for the child tax credit which lowers the tax liability due for the year. Your tax liability will increase when your kid turns 17 and no longer qualifies for that credit. This can easily be determined ahead of time so you shouldn’t be shocked that 17th year and should plan accordingly.
Below is some information from the IRS on the topic.
Doing a ‘Paycheck Checkup’ is a good idea for workers with multiple jobs
WASHINGTON — The Internal Revenue Service urges taxpayers who work multiple
jobs or who may be adding summer employment to complete a Paycheck Checkup.
Doing so will help them check if they are having the right amount of tax
withheld from their paychecks.
Checking and adjusting tax withholding as early as possible in 2019 is the
best way to head off a tax-time surprise next year.
The Tax Cuts and Jobs Act (TCJA) made changes to the tax law. Among other
things, the new law increased the standard deduction, eliminated personal
exemptions, increased the child tax credit, limited or discontinued certain
deductions and changed the tax rates and brackets. As a result, many taxpayers
ended up receiving refunds that were larger or smaller than expected, while
others unexpectedly owed additional tax when they filed their 2018 tax returns.
Two-income families and people with multiple jobs may be more vulnerable to
being under-withheld or over-withheld following these major law changes. For
2019, a Paycheck Checkup is especially important for taxpayers who adjusted
their withholding in 2018, specifcally in the middle or later parts of the
year. Doing a Paycheck Checkup can help determine the correct amount of tax for
each of their employers to withhold.
The IRS urges everyone to do a Paycheck Checkup as early in the year as
possible so that if an adjustment is needed, there is more time for withholding
to happen evenly during the rest of the year. Waiting means there are fewer pay
periods to withhold the necessary federal tax.
The easiest way to do a Paycheck Checkup is to use the Withholding Calculator on IRS.gov. The Withholding
Calculator can help taxpayers estimate their income, credits, adjustments and
deductions more accurately and check if they have the right amount of tax
withheld for their financial situation. When using the calculator, it’s helpful
to have a completed 2018 tax return and a recent pay stub available.
Based on the Withholding Calculator’s recommendations, the taxpayer can then
fill out and submit a new Form W-4 to their employer. In many instances, this means
claiming fewer withholding allowances or having an extra flat-dollar amount
withheld from their pay.
Some workers are considered self-employed and are responsible for paying taxes
directly to the IRS. Often, this includes people involved in the sharing economy. One way to pay taxes directly to the IRS
is by making estimated tax payments during the year.
TCJA changed the way tax is calculated for most taxpayers, including those
with substantial income not subject to withholding. As a result, many taxpayers
may need to raise or lower the amount of tax they pay each quarter through the
estimated tax system.
The revised estimated tax package, Form 1040-ES, on IRS.gov is designed to help taxpayers
figure these payments correctly. The package includes a quick rundown of key
tax changes, income tax rate schedules for 2019 and a useful worksheet for
figuring the right amount to pay.
Anyone who had a life change, such as getting married or divorced, buying a
home or having a baby should also consider a Paycheck Checkup.
Pay electronically anytime Taxpayers can pay their 2019 estimated tax payments electronically anytime before the final due date for the tax year. Most taxpayers make estimated tax payments in equal amounts by the four established due dates. The three remaining due dates for tax year 2019 estimated taxes are June 17, Sept. 16, and the final payment is due Jan. 15, 2020. Direct Pay and EFTPS are both free payments options, and taxpayers can schedule their payments in advance as well as receive email notifications about the payment. Visit IRS.gov/payments to schedule electronic payments online, by phone or the IRS2go mobile app.
In prior years, a taxpayer generally could deduct expenses for activities considered to be
entertainment, amusement, or recreation if the expenses were directly related or associated with the active conduct of the taxpayer’s trade or business. For amounts incurred or paid after December 31, 2017, deductions for entertainment expenses are disallowed.
The TCJA deemed entertainment expenses as nondeductible regardless of the relationship of the expenses to the business activity, including meals purchased during entertainment activities. There are a few exceptions outlined in Code Sec. 274(e) including:
Expenses for goods, services, and facilities that are treated as compensation to an
Expenses paid or incurred by the taxpayer in connection with the performance of
services for another person, under a reimbursement or other expenses allowance
Expenses for recreational, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees
Businesses can still deduct 50% of amounts paid for meals associated with the active conduct of the taxpayer’s trade or business.
For example, employee travel meals are still 50% deductible.
A client of mine recently had a baby. Yay, Baby!! With that bundle of joy comes additional tax responsibilities and implications… and sometimes credits and deductions.
She had two questions. What is the nanny tax? And Is it simple to do it yourself or should you pay a professional payroll company? (Ultimately, my client decided to try it out herself before she hires a payroll service. As with any business there are initial startup costs and then monthly bookkeeping and filings. Sometimes certain forms can be filed on a quarterly or annual basis. Record keeping and organization is imperative for “keeping the books” long term.)
Many years ago, nanny’s and day care providers were simply considered self employed and filed their income and expenses on the Schedule C (attached to the 1040). The family would pay cash or check and the nanny or sitter would account for it on their own returns. However, now, the tax law states that if nanny’s are paid more than $2,000 a year they are considered employees and are subject to all of the regular employment taxes, unemployment insurance and workman’s comp. Thus creating additional paperwork and costs.
What is the nanny tax? And is it easy to DIY
This weird sounding tax is actually just basic employment and payroll taxes. All employees and/or employers are required to pay social security taxes, Medicare taxes, and sometimes unemployment insurance. The “employers” may or may not withhold and pay federal /state too. You’ll save quite a bit of money doing it yourself and its not that difficult. Although, it is work in a sense and it takes a bit of time.
Be able to read and follow directions. Have some patience.
Be organized: calculate hours worked, gross income and net income.
Be tech savvy. Most of this stuff can be done online. It’s also handy to have a scanner/copier/ printer handy but it’s not required necessarily.
Be able to follow due dates and pay on time (or you’ll be subject to fees and penalties). Ex: for unemployment insurance, you usually calculate January thru March and the money is due in April.
Go to irs.gov and search for form SS-4 (fss4), Employers federal ID number. Fill it in and apply online, or download the pdf to a computer and fill it out by hand then mail it in. Im sure the agencies hate it, but I still do alot by hand and use my stamps.com account to mail it in.
Go to Colorado.gov/revenueonline and apply for a state wage withholding license (only if withholding state tax for your employee).
IRS’s publication 926 instructs household employers of their duties. I’m going to use a combination of that publication and my own insight and experience to describe the process to do your own bookkeeping and payroll when you have certain employees.
The social security tax rate is 6.2% each for the employee and employer, unchanged from 2016. The social security wage base limit is $127,200. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2016. There is no wage base limit for Medicare tax. Social security and Medicare taxes apply to the wages of household employees you pay $2,000 or more in cash in 2017.
The process *not including responsibilities for withholding federal and state taxes for the employee*
Example. On February 13, 2017, Mary Brown hired Jane A. Oak (who is an unrelated individual over age 18) to care for her child and agreed to pay cash wages of $50 every Friday. Jane worked for the remainder of the year (a total of 46 weeks). Jane didn’t give Mary a Form W-4 to request income tax withholding. The following is the information Mary will need to complete Schedule H, Form W-2, and Form W-3. See the completed examples of Form W-2 and Form W-3 for 2017 at the end of this publication
Total cash wages paid to Jane $2,300.00
($50 x 46 weeks)
Jane’s share of: Social security tax is $142.60 EE share
($2,300 x 6.2% (0.062))
Medicare tax is $33.35 EE share
($2,300 x 1.45% (0.0145))
Mary’s share of:Social security tax is $142.60 ER share
($2,300 x 6.2% (0.062))
Medicare tax $33.35 ER share
($2,300 x 1.45% (0.0145))
Amounts reported on Form W-2 and Form W-3:Annual reconciliation at tax time. Additionally, the schedule K will be added to the individual 1040 and reconciled that way. You may or may not be required to pay estimated quarterly tax payments to ensure you don’t owe more than $1000 at the end of the year. Talk to your tax professional.
Over the last 2 or 3 years I have worked tirelessly to ensure the best possible service for this type of duty and for my clients, many of whom I inherited more than 11 years ago from my grandma, Pauline Parris. This work was important to her, and it is to me too. With that being said, there will most likely be many changes over the next 2 years as I’m trying to reconstruct and reorganize my business plan. Expansion is in our future.
In-office appointments are going to be limited. The office address is going to remain the same for mail in’s, drop off’s, pick up’s and meeting’s. The conference room will be available for those tough situations, but this means that some additional time & planning might be in order. Documents can be submitted via mail, drop off, e-mail, fax, or uploaded to the client portal. Limited in-office appointments will be available for 2018. Thanks in advance for any inconvenience.
*Before you would like your returns started – make sure you have all of your documents AND other information included before you send it to Pauline’s Tax Service for preparation. Some returns that include the earned income credit or
Address: 12365 Huron St., Suite 1800 Westminster Co 80234
Around the middle of the year it is a good idea to ensure that by the end of the year you will have withheld your tax liability due. No more, no less. It’s common to adjust your withholding’s during the year to reflect life events or just to put more money in your pocket at that time. Time and time again it’s also common that you forget to adjust the withholding’s back to cover your tax liabilities. Knowing what your tax due will be is half the battle, but equal parts importance to earning your wage and paying your bills. It should be part of your monthly budgeting.
There’s more to it obviously, but the Individual income tax formula is as follows and can be used to estimate your taxable income to give you an idea what your up against and give you time to gather your options to lower your taxable income in an effort to conserve AFTER TAX WEALTH.
Individual Income Tax Formula:
Income (broadly conceived) Add income together if you file married filing joint. Don’t forget distributions from 401k’s, retirement or taxable social security, investment income, and net self-employment income or loss.
Less: Exclusions Ill go into the list of exclusions later
= Gross Income
= Adjusted Gross Income
Less: [Itemized or standard deduction] and [exemptions] for every person on the tax form