Is Rental Income Fully Taxable?

Owning real estate can help you offset your tax bill. Things like property taxes, mortgage interest, and PMI are all deductible. If you choose to rent out your property for the purpose of augmenting your income, it is important that you familiarize yourself with basic information related to it so that you will be able to maximize your earnings by maximizing your tax deductions. Let Practical Taxes explain what you need to know about rental income and taxes.

What is Rental Income?

Rental income refers to any payment you receive for the use of your property. Like other types of income, it has to be reported in the same year when you received it, even if it is supposed to be payment for the following year. For example, you enter into a contract where your property will have a 5-year lease. If your lessee pays rent for both 2016 and 2017 within the year 2016, you have to report both payments as income for the year 2016.

Likewise, if you make use of security deposits for final rent payment or to cover damages caused by the tenant, this should also be included as part of your income in the year when you received it (typically the year when your lease contract started). Don’t include security deposits, though, if it is to be literally used as a “security deposit”, meaning that you will return it to your lessee at the end of the lease.

In case of lease cancellation, the payment you receive will still be considered as rent, thus, it will also have to be reported as part of your rental income for that year.

Rental income and expenses are reported through Schedule E of IRS Form 1040.

What Expenses can be Deducted from Rental Income?

Because rental income is considered as income, the IRS will let you deduct expenses from rental income so that you will not have to pay taxes for the entire amount that is paid to you. Generally speaking, any cost you incur from operating, managing and maintaining your rental property can be considered as rental expense, and therefore deductible from your rental income. These expenses are those that are necessary to keep your property in optimal operating condition. Rental expenses include (but may not be limited to) the following:

• Repair costs such as fixing faulty plumbing; replacing broken doors, windows or cabinets; repairing damaged appliances; or repainting chipped or cracked paint.
• Insurance fees for fire, flood, liability and mortgage
• Maintenance fees such as utility expenses, cost of supplies, cleaning expenses, wages paid to maintenance personnel, salaries paid to managers or supervisors running the rental property, homeowner association dues or condo fees, pest control fees, and garbage disposal fees.
• Tax-related fees such as legal fees paid for tax preparation, mortgage interest payments, and local property taxes.
• Advertising and promotional expenses.
• Travel expenses you incur when the purpose of your travel is to check on your property or do other tasks related to renting your property such as collect rent.
• Losses from natural disasters (fire, flood, hurricane, Godzilla attack) or theft.

What Expenses cannot be Deducted from Rental Income?

At some point, you might consider upgrading or modernizing your property for better appeal and resale value. Expenses that are incurred for such purposes are not necessary to continue operating your rental property and are therefore not deductible from your rental income. Examples are structure additions (such as a new floor, a new room, any extension, a swimming pool) and constructions that can extend the usefulness of your property (such as adding a new roof or installing insulation).

To recover from expenditures like these, you may report the expenses as depreciation deductions through IRS Form 4562. Unlike expenses which you can deduct in full, depreciation cost has to be spread out equally over the number of years it is expected to be useful.

As for rental-related losses incurred, special rules referred to as Passive Activity Rules (PAL) will apply. In a nutshell, these rules restrict you from using passive income losses (such as those from your rental activities) to offset other taxable income that you have.

Practical Taxes Knows Rental Taxation Laws

If you are considering buying a house, condo, or apartment building to be used as a rental, you need to know some of these rules. If you have been considering it, but you haven’t taken the plunge, don’t let this dissuade you! Owning a rental can be a great source of revenue.

The best part of collecting rental income is that you just need to keep track of the numbers. Then let Practical Taxes, your accountant in Billings, MT, handle the rest. We have trained accountants that fully understand the rental income tax laws so that you don’t have to learn them.

Have you wondered how divorce affects taxes? Perhaps you are in the midst of a separation, or you are recently divorced. Going through a divorce is hard enough. Thinking about taxes at the same time might just be borderline torture. To help lighten the burden, even just a little bit, here are the most important things you need to know when it comes to taxes amidst divorce, particularly for the first year after.

Keep reading as your Practical Taxes, your tax preparation specialists in Billings, Montana explain what you need to know.

Divorce Affects Your Filing Status

As long as your divorce decree has not been finalized yet, your filing status remains a choice between married filing jointly, or married filing separately. Once finalized, you lose the joint return option and your choices revert to single, or head of household (if you and your spouse lived separately for at least the last half of the year, you had a child (or children) living with you for more than 6 months during the year, and you paid for more than 50% of the cost of maintaining your home to care for your child (or children).

Your Exemptions for Dependants May Change

Only one parent can claim a child as a dependent. To be able to claim your child, you must be what is referred to as the custodial parent. This means your child should have lived with you for more than 6 months out of the year (longer than he/she did with your ex-spouse). As a non-custodial parent, it will only be possible to claim dependent exemptions if the custodial parent agrees not to claim the exemption by signing a formal waiver or written declaration (IRS Form 8332).

Simultaneous with the dependency exemption, the spouse who claims it is also entitled to claim the Child Tax Credit (up to $1000 per child under 17 years of age), as well as one of the higher education credits — either the American Opportunity Tax Credit (up to $2500) or the Lifetime Learning Credit (up to $2000).

Alimony and Child Support Payments

If you’re the one who’s paying alimony, you will be entitled to tax deduction for the payments, provided you pay the alimony in cash, and the conditions of the alimony are explicitly expressed in the divorce settlement/agreement. On the other hand, the recipient of the alimony will have to pay income tax for the amount received.

Conversely, payments for child support are not deductible, and child support payments received are not taxable. The IRS recognizes that supporting one’s child is a parent’s obligation, so child support payments are deemed tax-neutral.

When it comes to medical expenses, even if you are not the custodial parent, you can claim these as deductions if you have been continuing to pay your child’s medical bills even after the divorce.

Expect a Transfer of Assets

When property is transferred to one spouse, the recipient does not need to pay tax for that. It is only when he/she decides to sell it that capital tax gains will be charged. The bad news? The tax will cover the cumulative value from before the transfer was made up to the present. To illustrate, if the husband transfers real property to his wife, no tax will be charged yet. When the wife sells the property later on, she will be charged with capital gains tax on the appreciated value from the time the property was still a joint ownership, up to the present time when the property is being sold to a third party.

For retirement savings, it is advisable to do the transfer under a QDRO (Qualified Domestic Relations Order). This will give the recipient access to the funds, and will relieve you of the burden of paying the tax.

Practical Taxes Knows How Divorce Affects Taxes

The good news is that you don’t have to worry about your taxes. Just bring in the appropriate paperwork (most will automatically be sent to you shortly after the new year begins), and we will take care of the rest. Our highly trained accountants understand how divorce affects taxes so that you don’t have to.

Practical Taxes offers affordable tax preparation, and other accounting services, to the Billings, MT community.

Most people want to reduce their tax bill as much as possible. So they look for all of the tax deductions that they can find. While this is a great way to lower your taxable income, to really look for a reduction in your tax bill, you want to look for all of the tax credits that you can find.

If you are working on preparing your taxes, and you are wondering the difference, don’t worry. Most people we talk to only have a little bit of an idea of what the difference is between a tax credit and a tax deduction. Keep reading as your accountant in Billings explains.

What is a Tax Deduction?

Every year, when you file your taxes, you have to report how much income you made. Most of the money you make is subject to taxes. But the government does allow you to reduce the amount that you report when you have spent that money elsewhere. These tax deductions lower the amount of money that you have to report, and subsequently lower your tax bill.

For instance, if you spend $2,500 on property taxes in any given year, the government doesn’t want to tax you again on that money. So you can deduct the amount spent on property taxes off of your taxable income.

Assuming that you are in the 25% tax bracket, deducting that $2,500 will lower your tax bill by $625.

What is a Tax Credit?

Tax credits are far more valuable than tax deductions. In order to encourage people to pursue more education, adopt children, and a variety of other pro-social activities, the government offers tax credits. These credits will lower a person’s tax bill dollar for dollar.

For instance, let’s suppose you spent $2,000 on tuition to earn your degree this year. That’s good for the economy, good for you, and good for everyone all around. The government wants to make sure that you’re not being taxed on that $2,000, and because they’re so generous they actually want to reward you. You can claim the American Opportunity Tax Credit and receive a credit toward your tax bill.

Regardless of which tax bracket you are in, a credit worth $2,000 will lower your tax bill by $2,000.

How to Maximize your Credits

If you’re wondering how to do your own taxes, and maximize your refund, then you need to pay attention here. Maximizing your credits will go the furthest to offsetting your tax bill.

To reduce how much you owe in taxes the most, you need to be aware of which credits are available to you. Here are a few that you may be able to claim:

• Earned Income Tax Credit
• Child Care Credit
• Lifetime Learning Credit
• Adoption Credit
• Saver’s Credit

Naturally if you are working with an accountant, such as one of the professional’s at Practical Taxes, then they will automatically check to see if you qualify for one, or more, of these credits.

Let Practical Taxes help find Tax Credits for you

There is no need to slog through your taxes every year. Instead, an accountant at Practical Taxes can take care of all of the tax preparation work for you. You bring in your documents, we find you the biggest refund possible, and you only have to worry about collecting your check from the government. It really is that simple.

Want to learn more about how we can help save you a lot of time and money? Give us a call at 406-894-2050 and learn about our tax preparation services in Billings, MT.

Freelancing has taken off in popularity in recent years. It’s easier to find the jobs with the help of the internet, wages have been stagnant for quite a while, and the idea of earning a few hundred to a few thousand extra dollars each month is appealing.

What happens, however, is that many people begin freelancing without taking into consideration the effect that it will have on their taxes. There is nothing wrong with bringing in money on the side, and you don’t have to be set up as a business to do it. But you do need to make sure that you are keeping track of your income, and know just how much you will pay in taxes come tax season.

Taxes as a W2 Employee

When you are an employee, you get the benefit of having taxes automatically taken from your paycheck. While many people hate this, claiming it’s a free loan to the government, it’s actually in your best interest.

Your employer pays a portion of your taxes for you. Legally they have to pay half of your FICA taxes, as well as provide worker’s compensation insurance, and submit your taxes without charging you. In the end, you get the better end of the deal.

That’s not the case as a freelancer.

Taxes as a Freelancer

Your taxes as a freelancer are going to look vastly different than your taxes as an employee. And there are several reasons for that.

No Withholdings – As an employee, a portion of your earnings are held back. As a freelancer, you don’t get that option.

100% FICA – As an employee, your employer pays 7.65% of your FICA taxes. As a freelancer, you are responsible for the full 15.3%.

Self Employment Tax – If you’re confused about the FICA portion above, don’t worry. As a freelancer you pay self employment tax; it’s just paying the employer share of FICA taxes.

Without regular withholdings, and having that extra 7.65% included in your taxes, your tax bill can add up quickly. Especially if your freelancing brings in a lot of money.

But there is a silver lining. The self employment tax is deductible from your income. And being self employed you can write off a significant number of things: such as a portion of your cell phone bill, some of your utilities, mileage getting to and from meetings with clients, supplies, and more. Keep accurate records, save receipts, and don’t try to cheat the system or an audit might not work out well for you.

So what will your taxes as a freelancer look like?

First you need to estimate your total household income. Let’s suppose it is $50,000 plus $12,000 you make from freelancing. Using Bankrate’s income tax calculator, we see that you owe $11,290 (after standard deduction and writing off the employer half of FICA taxes). Without the freelancing income, your tax bill is $6,806 (not including any deductions you may have made for business expenses).

Earning $12,000 increased your tax bill $4,284. When it comes time to do your taxes in the spring, make sure you have figured your taxes as a freelancer.

Practical Taxes can Help

Fortunately, all you have to worry about is having enough in your savings account to cover anything that is owed when tax season rolls around. Leave the rest of it up to Practical Taxes, your accounting expert in Billings, MT. We know the laws, we know the rules, and we can help you get the largest tax refund possible. You work hard to earn extra income as a freelancer, don’t give all that money back to the government if you don’t have to!

Practical Taxes is located at 1503 13^th St. West in Billings, MT. We can prepare your taxes, help with your bookkeeping, understand your taxes as a freelancer, and do payroll if you need it. Call us today at 406-894-2050.

As humans we have a wide array of fears. Many fear death, many others fear failure. Some fear spiders, some snakes, some fear other people. The business owner compounds those fears with other fears that other people don’t ever experience. For instance, the business owner fears what will happen if his top client drops off. Or perhaps he fears that nobody will ever take his business or product seriously. If you want to be able to overcome your fear, your first step is to understand what you fear.

Sizing Up Your Fears

Let’s suppose you are afraid of snakes. Your initial reaction is to say that you fear snakes. They give you the willies and whenever you look at one you get a creepy crawly feeling. But what you are describing is the feeling you get from the snakes, not the actual fear itself.

Instead, you have to dig a little deeper. Your fear likely stems from something you saw or heard when you were younger. You fear that a snake will bite you, poison you, and you will end up dying (yours is a fear of death, not exactly snakes). Or you are scared that one will wrap around you and never let go. Or perhaps you worry that one will crawl into your mouth. The idea is that you don’t fear the snake per se, but rather what the snake can do to you.

Let’s take a look at the business owner. Many claim that they fear failure. But really they do not fear that their business will fail; but rather that they won’t be able to make the income that they need. It’s not exactly about the business failing, but about how it reflects back on them (fear that their reputation and sense of self worth will be damaged) and about how they will survive without this business (a true entrepreneur knows that they will fail, and they have to start again from a new angle).

More than anything, though, the business owner has a fear that trumps all others: regret. This is why many entrepreneurs take some big risks. They know that their idea should work, but they are unsure of whether or not it will work. They are afraid of failure, but even more they fear the regret that they will have if they don’t even try.

Overcoming Your Fear

Determine which fear is setting you back the most. Then deeply analyze that fear and find the root underlying cause. Doing so will help you understand where your fear comes from, and how to overcome it.

When you have boiled things down to exactly what you’re afraid of, then you can take steps toward dispatching that fear. This is the hard part and requires you to constantly face the fear, and push through it. Every time you overcome, it gets a little bit easier.

Practical Taxes Can Help

If you are a business owner, you have a lot on your plate. As a full service accounting firm in Billings, Montana we can help you overcome some of your fears by taking the stress out of your day. We offer a variety of services, like payroll, tax preparation, bookkeeping, and more. Let us take care of your busy work, so you can take care of overcoming your fears.