Itemizers Can File Starting February 14

The IRS today announced that it will start accepting tax returns with itemized deductions on February 14.  The IRS had previously announced that there would be a delay in accepting returns from itemizers.  The last-minute tax legislation passed by Congress on December 17th affected certain types of deductions, and the IRS said it needed time to update its computer systems for the changes.

College Savings Iowa Deduction Increases for 2011

The amount of deduction you can take for contributions to a "College Savings Iowa" program has increased by $54 for 2011.  The maximum deduction is now $2,865 per child, up from $2,811 in 2010.  The deduction limit is per parent, per child, so a married couple with two kids could deduct up to $11,460 in 2011 (4 x $2,865).

College Savings Iowa is Iowa's form of a "529 plan" that lets you save for college expenses.  Distributions from the plan are tax-free as long as the money is used for college expenses.  I wrote more about College Savings Iowa in this article.

Thanks to my friends at Radio Iowa for tipping me off to this story.

Iowa Deduction Finder: College Savings Iowa

One way to save for your children's or grandchildren's college tuition is through a "529 Plan."  A 529 Plan allows for tax-free earnings on investments, and distributions from the plan are tax-free as long as the distribution is used for college expenses. 

As an added bonus, Iowa allows a tax deduction for contributions to an Iowa 529 Plan (in Iowa it's called "College Savings Iowa").  For 2010, you can deduct up to $2,811 per parent per child for contributions to a College Savings Iowa Plan.  So a married couple with two kids could deduct up to $11,244 of contributions ($2,811 x 4).

Read more at the College Savings Iowa website.

Tax Implications of the Unlicensed Daycare Provider

One of my areas of specialty is in-home daycare operations, and it's something I haven't blogged about much.  One of the questions about in-home daycare operations is what the tax consequences are to an unlicensed daycare provider.

Different states have different licensing requirements for daycare providers.  In Iowa, an in-home provider can care for up to 5 children without being registered or licensed.  A provider caring for 6 children must be registered, and a provider caring for 7 or more children must be licensed.  (Read more at the DHS website.)

For tax purposes, your in-home daycare is considered a business whether you or not you are registered or licensed.  Income should be reported as business income; legitimate business expenses can be claimed as a deduction against business income.

The tricky part for the unlicensed/unregistered is figuring out whether they can take the deduction for "business use of the home."  This deduction allows a taxpayer to partially deduct expenses associated with the house, such as utilities and mortgage interest.  Only daycare operators who are licensed or registered with the state -- or who are not required to be licensed or registered -- can take the deduction for business use of the home.

So in Iowa, a provider caring for less than 6 children CAN take the deduction for business use of their home, because they aren't required to be registered or licensed.  But if a provider cares for 6 or more children and is not registered or licensed, then no deduction is allowed for business use of their home.  Of course, aside from the tax deduction issue, there could also be problems with the DHS!

Federal Tax Provisions and the State of Iowa

One of the considerations of tax planning is the impact of state taxes.  Many states follow along with most federal provisions for calculating income, but almost every state varies from federal law on at least a few items.  This is often referred to as "de-coupling" from federal law. 

For example, Iowa in 2009 "de-coupled" from federal law on Section 179 expensing and bonus depreciation.  Section 179 expensing was limited to $133,000 (as opposed to $250,000 on federal returns), and bonus depreciation was not allowed at all on Iowa returns.  (Read more about this tax issue in this article.)

Iowa often "de-couples" from other "extender" items such as the front-side deduction for college expenses and the front-side deduction allowed to K-12 teachers for out-of-pocket classroom expenses.  These were a part of the federal tax bill signed into law last week.  The Iowa legislature will decide next month on whether to de-couple from these items and not allow them to be deductible on Iowa tax returns.  It is a safe bet that the legislature will vote to de-couple on these items, and also on the increase in Section 179 and bonus depreciation.

One federal provision that Iowa is coupling with is the provision in the "health care bill" passed earlier this year that allows people to keep children on their health insurance through age 26.  The value of this insurance coverage will be tax-free for federal purposes, and Iowa has announced that it will go along with federal law in this case.  Read more in this informational post from the Iowa Department of Revenue.

IRS Says Itemizers Will Have to Wait a Bit to File

The IRS on Thursday announced that its computer systems won't be ready to handle certain types of tax returns until mid-to-late February.  This is because of certain tax law changes enacted in last week's tax bill passed by Congress.

The IRS says people who itemize deductions, people who claim a "front-side" deduction for college expenses, and K-12 teachers who take the "front-side" deduction for purchases of classroom supplies will have to wait to file until sometime in February. 

The IRS says it will soon give a more-solid date for when these types of returns can be filed.

Standard Deductions Increase Slightly for 2011 Tax Returns

On Thursday the IRS released the standard deduction amounts for 2011.  This will affect your 2011 tax return that you'll file in 2012.

• The personal exemption amount will increase to $3,700 (up from $3,650 for 2010 returns).
• The standard deduction for married couples will be 11,600 (up $200 from 2010); $5,800 for single and married filing separately (up $100); and $8,500 for head of household (up $100).
• The tax bracket thresholds will increase slightly.  For example, the 25% tax bracket for a married couple will begin at $69,000 (up $1,000 from 2010).

Read more in this IRS news release.

Additional Standard Deduction for Real Estate Taxes is No More

Many tax breaks that had expired or were set to expire got extended in the tax bill passed by Congress last week.  But one break that did not get extended and thus has gone away is the additional standard deduction for property taxes paid.

This tax break allowed people who don't itemize deductions to add up to $500 ($1,000 for married taxpayers) to the standard deduction for property taxes paid.  This was a handy extra deduction for anyone who didn't have enough itemized deductions and had to take the standard deduction.  Unfortunately, this tax break expired on December 31, 2009, and was not renewed in any legislation in 2010, meaning that this extra deduction for non-itemizers has ridden off into the sunset.

People who itemize deductions will still get to claim an itemized deduction for property taxes, same as always.  The expiration of this tax break only affects those who take the standard deduction.

Section 179 and Bonus Depreciation for Iowans

Following up on my last post about Section 179 expensing and bonus depreciation:  one other aspect of tax planning for asset purchases is to examine what your state's rules are.  Some states, such as Iowa, do not follow federal guidelines for either Section 179 or bonus depreciation.

For example, in Iowa, Section 179 expensing is capped at $134,000, and bonus depreciation is not honored at all.  If your federal Section 179 expense exceeds $134,000, you'll only be able to deduct $134,000 as Section 179 expensing on your Iowa return; the rest will have to be depreciated.  This means an Iowan  could easily have to track two sets of basis and two sets of depreciation schedules - one for the IRS and one for Iowa.

Iowa isn't the only state that does this.  For example, I prepared an Ohio tax return last year, and they have a strange "5/6" rule on bonus depreciation and Section 179 expensing.  The rule gets its name because you have to add back 5/6 of the bonus depreciation amount as income on your Ohio tax return.  And for Section 179 expensing, you have to compare the amount of Section 179 expensing in the current year with the amount that would have been allowable if it was still 2002 (when the 179 limit was $25,000).  Basically, you add back to income 5/6 of the dollar amount of Section 179 expensing in excess of $25,000.

Preparing this Ohio return opened my eyes to the fact that Iowa, while it rightfully ranks very poorly in tax friendliness, is not the only state with mystifying tax rules.

More on Section 179 and Bonus Depreciation

I have had a number of visitors to this blog with questions about Section 179 expensing, which is something I posted about briefly last week (December 10).  I'll go into a little more detail in this post.

When a business purchases an asset that has a useful life of more than 1 year, the tax code gives the business 3 options for deducting the cost of that asset:  depreciation, Section 179 expensing, and bonus depreciation.

Depreciation means the business can deduct a certain amount of the purchase price each year over a number of years set by the tax code for that type of asset.  For example, computers are depreciated over 5 years.  The number of years is set by the code and has nothing to do with how long you actually intend to use the asset in your business. 

Section 179 expensing allows you to write off 100% of the cost of the purchase of an asset in the year of purchase.  For 2010 and 2011, a business can write off up to $500,000 of asset purchases.  If you purchase more than $2 million of assets during the year, your Section 179 deduction will be phased out.  Your total Section 179 deduction is limited to your taxable income for the year; unused Section 179 expenses in one year can be carried forward to the next year.  Please note that most - but not all - property qualifies for Section 179 expensing.  Examples of property that does NOT qualify is leased property and air-conditioning or heating units.

Note for rental property owners:  Section 179 does not apply to rental properties; if you own rental property, you can't use Section 179 expensing.

Bonus depreciation is a sort of hybrid between regular depreciation and Section 179 expensing, where you can claim 50% of the cost of an asset as a deduction, and then depreciate the remainder of the cost.  Bonus depreciation is available to rental property owners.  One caveat on bonus depreciation:  it can only be claimed on assets that are brand new.  (Section 179 can be claimed on used assets, as long as the asset is "new" to your business.)  One other note on bonus depreciation:  the tax bill being debated right now by Congress proposes to allow 100% bonus depreciation on assets purchased between September 9, 2010, and December 31, 2011.  (UPDATE:  this proposed legislation became official in the tax bill passed by Congress.)

Most of the time, a business will just take the Section 179 expense and be done with it.  It provides an immediate deduction and eliminates the need for cumbersome depreciation schedules.  However, Section 179 expenses are limited to the amount of taxable income (as calculated before the Section 179 deduction).  In other words, Section 179 cannot create a business loss.  But regular depreciation and bonus depreciation can create business losses.  Plus, if you expect that your business income will grow in future years but you won't be purchasing assets in those years, it might be nice to have a depreciation deduction available to offset the increase in income. 
As you can see, your depreciation/Section 179/bonus depreciation strategy is part of tax planning and is a good conversation to have with your tax advisor.

Section 179 Limits for 2010 and 2011

The Section 179 expensing limits have been increased for 2010 and 2011.  A Section 179 election allows businesses to elect to expense asset purchases in the year of the purchase, rather than depreciating those assets over a period of years.  For both 2010 and 2011, businesses can elect to expense up to $500,000 of assets in any one year.  (NOTE:  watch legislation this month to see if anything happens with the 2011 limits.)

Section 179 does not apply to owners of residential rental property.  However, rental owners can take advantage of "bonus depreciation," a special election to expense 50% of the cost of an asset and depreciate the remaining 50%.  Bonus depreciation is an option available to businesses, as well.  In some cases, a business may not want to take a Section 179 expense, and instead take bonus depreciation.

Iowa taxpayers should keep in mind that Iowa does not follow along with federal Section 179 rules or with federal bonus depreciation.  Iowa only allows Section 179 expensing of up to $133,000, and does not honor bonus depreciation at all.  This means an Iowa business or rental property owner could very easily have to track multiple depreciation schedules and basis information.

IRS Announces Mileage Rates for 2011

The IRS has released the mileage rates for 2011.  The regular mileage rate increased by 1 cent; the rate for medical mileage increase by 2.5 cents; and the rate for charitable mileage remains the same as in 2010.

• Mileage rate for 2011:  51 cents per mile (up 1 cent from 2010)
• Medical mileage rate:  19 cents per mile (up 2.5 cents from 2010)
• Charitable mileage rate:  14 cents per mile (same as 2010)

Major Tax Changes Proposed in Debt Commission Report

President Obama's "Debt Commission" released a report today (Wednesday) with recommendations on how to cut the federal deficit.  The Commission says its recomendations would reduce the federal debt by $4 trillion over the next 10 years. The Commission is made up of 6 Republicans, 6 Democrats and 6 others appointed by the President. In order for any of these recommendations to be put before Congress, at least 14 members of the Commission need to approve the plan. The Commission is set to conduct a vote on Friday.

Major changes to the tax code are a part of the plan.  The Commission proposes repealing the alternative minimum tax, creating three tax brackets for individuals (12%, 22% and 28%), and eliminating all itemized deductions (everyone would take a standard deduction, but certain tax credits would be allowed for mortgage interest and charitable contributions).

Corporate taxes would have one flat rate of 28%.

The proposal includes much more than just tax reform.  You can read the entire proposal here, and a CNN article about the proposal here.

Cell Phone Tax Rules Relaxed

The Small Business Jobs Act of 2010, signed into law in September, removes employer-provided cell phones from the category of "listed property."  This means employers can take a deduction for the cost of the cell phones without having to collect burdensome documentation of business vs. personal use from employees. 

In the past, employees would be taxed on the value of the personal calls made from employer-provided cell phones.  This change would appear to eliminate this, although the IRS has not released further guidance on the issue.

Removing cell phones from the "listed property" category means that employees can deduct the cost of cell phones used by the employee as an unreimbursed employee expense without the employee having to meet the "condition of employment" and "for the convenience of the employer" tests.  However, the employee will still have to track the amount of time spent on personal vs. business calls, to calculate the deduction.

For self-employed taxpayers, the change means a relaxation in the strict documentation requirements for cell phones.  However, I would recommend that a self-employed person who uses a cell phone for both business and personal purposes still keep a log of their calls.

Self-Employed Can Deduct Health Insurance for Self-Employment Taxes

People who are self-employed and provide their own health insurance will be able to deduct the insurance premiums from business income, thus reducing their self-employment taxes.  Normally, the self-employed can only deduct health insurance premiums when calculating income tax, but not for calculating the self-employment tax. 

The same rules and restrictions that normally apply to self-employed people who deduct insurance premiums will still apply (e.g. must not be eligible for coverage under a spouse's insurance plan).

This change is effective for 2010 only and was part of the "Small Business Jobs Act" that was signed into law in September.

Can I Deduct Summer Camp Expenses?

If you send your kids to camp this summer, you might be able to deduct the cost on your tax return. The IRS allows a deduction for summer day camps, but not for overnight camps. In order for a day camp to be deductible, you have to meet two basic rules.

1. Your child must be under age 13.
2. The expenses must be incurred so you can work or look for work.

These are the same rules that have to be met in order to deduct daycare expenses.
The cost of the day camp would be included with your other childcare expenses, such as daycare expenses. You can claim up to $3,000 of childcare expenses per child per year, up to a maximum of $6,000 total for two or more kids. You then get to claim a credit of between 20-35% of that amount, depending on your income.
As mentioned earlier, the cost of overnight camps is not deductible, nor is the cost of sending your kids to summer school.

This is a basic overview of the subject. As always, if you have specific questions about your situation, consult your tax advisor.