Tax Tips

Some tax-free income never hurts

Many taxpayers often leave town when a local festival or event draws in tourists. If you’re one of them, you might be able to rent out your house for a few days and earn tax-free income.

Taxpayers who rent out their own homes for fewer than 15 days per year receive tax-free income from the rental. To qualify for this tax- free treatment, you must rent out your home for 14 days or less and personally use the home for 15 days or more during the year.

Please note, no deduction is allowed for any rental-related expense, such as getting the house professionally cleaned before or after your visitors arrive. However, deductions of mortgage interest and property taxes are allowed on Schedule A for the entire year.

The who, what, when, why and where

When clients become their own employer and stop receiving their own paycheck, I’ll usually schedule estimated tax payments, so the government can still collect taxes from their income.

Why pay estimated tax?

Estimated tax payments are used to pay tax on income that is not subject to withholding. This includes income from self- employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You may also have to pay estimated tax if the amount withheld from your salary, pension or other income is not enough to cover your tax liability.

Who must pay estimated tax?

Individuals, sole proprietors, partners or S corporation shareholders who expect to owe tax of $1,000 or more when they file their return will generally have to make estimated tax payments. The same applies to corporations that expect to owe $500 or more. You may also have to pay estimated tax for the current year if you had a tax liability for the prior year.

When are estimated payments due? For estimated tax purposes, the year is divided into four payment periods, each with a specific payment due date. If you don’t pay enough tax by the quarterly due date, the IRS may charge a penalty, even if you are due a refund when you file your income tax return.

Where and how are estimated taxes paid?

In most cases, you can pay online using the Electronic Federal Tax Payment System (EFTPS). I’d be happy to work with you to determine how much you’ll need to pay.

Ease the burden of payments

The cost of higher education is steep and gets worse every year. Fortunately, if you pay interest on a qualified student loan, you’re generally able to deduct some of that interest.

Here are a few pointers to help guide you in claiming the deduction:

  • You can deduct up to $2,500 in student loan interest that you paid during the year.
  • You can claim the deduction as an adjustment to income, so you don’t need to worry about itemizing your deductions on Form 1040, Schedule A.
  • You cannot claim the deduction in any tax year in which your filing status is married filing separate.
  • For 2015, the deduction is subject to modified adjusted gross income (MAGI) phase- outs for anyone with MAGI between $65,000 and $80,000 ($130,000 and $160,000 for married filing jointly).
  • You can claim the student loan interest deduction indefinitely until the loan is repaid.

If you have any questions on this topic or on any relevant credits that may be available to help you offset the cost of higher education, give us a call.