Unmarried Couples and Home Mortgage Interest
It is becoming increasingly common for couples to live together and remain unmarried, which can lead to potential tax problems when they share the expenses of a home but only one of the couple is liable for the debt on that home.
Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words, a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate but is not directly liable for the debt.
For example, if the one who is not liable on the mortgage makes the payment, that individual is not allowed to deduct the interest portion of the payment and neither is the other person, because he or she did not pay it. This can lead to some complications where one of the couple is the bread winner and would benefit tax-wise from an interest deduction, but the other person is the liable party on the loan. It is not uncommon for couples who both work to share the mortgage payments in the mistaken belief that they can each deduct their share of the mortgage interest on their individual tax returns.
Although state law governs what constitutes equitable ownership, equitable ownership can generally be established if both parties are on title to the property even if only one is liable on the loan. The premise behind equitable ownership is that an individual is protecting his or her ownership in the home by making some or all of the mortgage payments.
This position was recently upheld in a 2011 Tax Court decision where the court denied a taxpayer’s home mortgage interest deduction that she paid until she became co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments.
If you are in a similar situation and have questions related to sharing potentially tax deductible expenses, please give your Accountant or Tax Preparer a call.
Misclassifying Workers Can Be Costly!
Hiring independent contractors instead of employees can save a lot of money in employment taxes and employee benefits. And it can be a mine field of tax problems if workers are misclassified as independent contractors when they should have been treated as employees.
The three primary characteristics the IRS uses to determine the relationship between businesses and workers are behavioral control, financial control, and the type of relationship.
1. Behavioral Control - Covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
2. Financial Control - Covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
3. Type of Relationship - Relates to how the workers and the business owner perceive their relationship.
If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.
This issue has been heating up recently as the government looks for ways to reduce the deficit. A recent study by the IRS estimates there are 3.4 million workers misclassified as independent contractors, causing a loss of $2.7 billion in tax revenue.
The IRS initiated an expanded focus on this issue in 2010 and continues to ratchet up enforcement with increased audits, and now the IRS and the Department of Labor have begun to share information and collaborate on this issue.
The IRS just recently announced a Voluntary Classification SettlementProgram (VCSP) that allows employers to come into compliance by making a minimal payment covering past payroll. Employers wishing to participate in this program must apply for the program at least 60 days before they want to start treating the workers as employees. To be eligible, the employer must have filed the required 1099 forms for the workers in the previous three years and not be under audit concerning the employees.
If you have questions related to worker classification, please give your accountant or tax preparers office a call.
Year-end Capital Gains Strategies
2011 has produced some significant gyrations in the financial markets that have had an impact on everyone’s portfolios. But for tax purposes, gains and losses are not measured by the increased or decreased value of your portfolio, but by gains and losses recognized from the sale of capital assets during the year. So you still have until the end of the year to structure your gains and losses to suit your particular tax situation.
Conventional wisdom has always been to minimize gains by selling “losers” to offset gains from “winners,” and, where possible, generate the maximum allowable $3,000 ($1,500 for married taxpayers filing separately) capital loss for the year.
As a reminder, the maximum long-term (assets held for more than a year) capital gains are still at the all-time low maximum rate of 15%, and unless changed by Congress, will remain at that rate through 2012. Taxpayers who are in the 15% or lower marginal tax rate actually enjoy a 0% tax rate on long-term capital gains and should do whatever is possible to take advantage of that tax benefit. The capital gains rates are currently scheduled to revert to 20% (10% to the extent a taxpayer is in the 15% or lower tax bracket) in 2013.
Assets that are not held long-term, referred to as short-term capital gains, do not receive the benefits of the special rates afforded long-term capital gains. Taxpayers achieve a better overall tax benefit if they can arrange their transactions so as to offset short-term capital gains with long-term capital losses.
If you exercised incentive (qualified) stock options with your employer this year and you are still holding the stock, selling the stock before year’s end to avoid phantom income created by the alternative minimum tax may be appropriate.
If you are planning substantial gifts to charity or to relatives and have capital assets that have appreciated in value, gifting the appreciated assets rather than cash may be beneficial.
Finally, as an advance warning, the reporting of the sale of capital assets will become significantly more complicated this year. With the advent of brokerage firms being required to track and report basis for stock sales, the transactions for the year will have to be segregated into four possible groups: those for which the broker reported basis and those for which the broker did not know basis, and each of those categories split by short- and long-term transactions. The IRS has developed the new Form 8949 for this purpose. Each category of transactions must be reported on a separate Form 8949, and then the totals transferred to a redesigned Schedule D. The IRS requires this separation of transactions tofacilitate its computer matching of transactions.
The actions mentioned above may have additional factors that must be considered and require careful planning. You are encouraged to consult your accountant or tax preparer before acting on any of the suggested strategies
Frank’s Tax and Business Service
120 York Rd
Kings Mountain, NC28086-3151
(704) 739-4039 Fax: (704) 739-3934
e-mail: [email protected]
Web Site: File Your Return Online
Franklin Katz, ATP, PA, PB,
Providing Professional Accounting Services and Income Tax Preparation
Circular 230 Disclaimer – Any tax advice in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding related
penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction