Danasfields

In this article we’re going to look at the main ways of tax planning with the use of family members…

Paying wages to your spouse/civil partner and children through your Business

Your spouse/civil partner may not have any income at all, and most certainly your children don’t. This means their personal allowance is being wasted every year. Even children are entitled to a personal allowance.

If the amount up the level at which national insurance becomes payable of £5,715 in 2010/11 was paid to them as a wage, they would pay no tax on it and your business profits could be reduced.

Please note that children under the minimum school leaving age can only work a limited number of hours per week and local by-laws may restrict them further.

If you pay just 20% income tax and 8% Class 4 National Insurance on your business profits this would save you £1,600 for 2010/11 on each salary.

And how many children do you have?

STOP! It’s not quite that simple. To pay wages like this you need to follow the following rules…

It must be for work actually done. Now it’s going to be tough to argue your 2-year-old son is working for you but many spouses/civil partners do work and mature children may also help out. Maybe they do the books, answer the phone, stuff envelopes, etc. Keeping out of your way so you can get on doesn’t count, as valuable as it may be. Draw up a list of their responsibilities to help your case. At present they do it for free because it’s a family business but they can be paid for it. If you make your spouse a director, all the responsibilities imposed by Company Law on taking on this role must be worth something. You can also pay a family member a wage where you have a property that you rent out and the individual manages the properties. It’s reasonable to pay them a salary commensurate with what they actually do. How much would it cost to get someone in to do that job? The national minimum wage level is at least a good place to start but a higher wage can be paid if you can justify it.
The amount must actually be paid. It’s no good the accountant just putting it through the accounts at the end of the year. Pay it, ideally through a bank account rather than cash so it’s easy to prove it’s been paid and record it in your accounting records.
Comply with any PAYE procedures such as getting a P46 signed, completing an end of year PAYE forms as you would do for normal staff. It may also help keep up their National Insurance Contribution record even if they don’t pay National Insurance on the salary.

Making your spouse/civil partner a partner or shareholder in your business to reduce your tax bill

This has been very topical with the so-called Arctic Systems case involving Mr & Mrs Jones. The case was originally won by the Revenue but on appeal to the High Court has been won by the taxpayer and finally on appeal at the House of Lords has been won by the taxpayer and that decision is now final.

The basic idea is that income that is created by your efforts in the business is paid to your spouse/civil partner who pays lower rates of tax than you do, thus saving tax and NI for the whole family.

For example, for 2010/11 if your self-employed business had profits of £70,000, then £43,875 is taxed at basic rates but the remaining £26,125 of this is taxed at 40%, plus 1% NI. So by introducing your spouse/civil partner into the business they can pay basic rate tax on profits that would otherwise be taxed at higher rates.

As with many things in the tax world, its not always that simple. The major obstacle the Revenue has been trying to put in the way is what is known as the ‘settlements legislation’.

In a nutshell this says if you give something to your spouse which is not wholly or substantially a right to income (meaning that the subject of the gift has a capital value as well as an income producing element), and income that does arise will be treated as the spouse’s income for tax purposes.

However, after a long running battle in a well-known tax case known as Arctic Systems it is at present law that if you give your wife some ordinary shares in your company or perhaps a share in your partnership, this is not just a right to income but it also contains capital rights, as by owning the share they become entitled to a proportion of the assets when the business is closed down and have voting rights. Therefore the share is not just a right to income.

The actual facts of this case that was finally won by the taxpayer at the House of Lords cannot now be appealed are as follows…

Federal Solar Tax Credits Extended through 2016 for Off-Grid and Grid tie Systems!

On Wednesday, October 1, 2008, the Emergency Economic Stabilization Act of 2008 was signed. This act is very good news for solar customers since it contains to renewable energy legislation. Thirty per cent of commercial solar investment tax credit was extended to commercial and residential installations through the year 2017.

What this means is that the previous ,000 cap for residential solar installations will be eliminated under this new legislation. Starting January 1, 2009, if you purchase a residential solar electric system, you will be eligible for a 305 tax credit which includes installation.

You can even purchase your system now and wait till after Jan.1 2009 to install it, thus taking advantage of the 30% credit. You can use a sizing calculator to figure out your system needs.

You can always find more information on the rebates and financial incentives available in your state from the following resources:

http://www.dsireusa.org is a helpful guide to energy tax credits.

DSIRE list of Rules, Regulations and Policies lists all the net metering and licensing laws for each state as well as local and the utility companies.

They also list loans, grants, rebates, etc. that are offered by state, federal, non-profit, utility and local financial programs. This is listed for all states.

In order to get your federal tax credit, download the IRS form 5695, ‘Residential Energy Credits’ from http://www.irs.gov, then simply fill it out and file it with IRS.

The form that is available right now is (form 5695) which is for 2007, with the ,000 cap in place, However, with this new legislation, we are looking forward to much more specific information to be forthcoming.

 States across the US are dealing with budget shortfalls and a popular new law that seems to be spreading is what the New York Post has called the “Amazon Tax”. To help understand the concept, let’s start with Max who lives in California and wants to buy a new flat screen television. Max goes down to Walmart, finds the perfect TV and pulls out his credit card. Included in the purchase prices of Max’s new TV is sales tax which Walmart collects and sends on to the state of California.

In fact in 2008 just over 26% of California’s total state revenue came from sales tax. Suppose Max thinks better about the purchase and instead goes back home to search for televisions online. Max in fact finds the exact same TV online at Bob’s television and pet emporium in El Paso Texas. Since Bob is in Texas and Max is in California, Bob does not charge Max sales tax, because Texas, like every other state, does not require companies to collect sales tax on items that are sold outside of the state.

Now technically Max is required to report his purchase to California and pay the sales tax that he would have paid if he had purchased the TV at Walmart.

Of course Max is probably not going to do that, because nobody else in California or in any other state does it. California doesn’t like it, but they don’t really want to track down every Max who buys a TV and hound him for sales tax. The state would much rather go after Bob who sells a 100 televisions a month to California residents and make Bob pay the tax on the TVs he ships into their state. Essentially it is much easier to collect tax from Bob, plus Bob doesn’t get to vote in California elections, so who cares if he’s mad at state government.

The only thing Bob has going for him is a legal concept called nexus.

Nexus basically means that Bob doesn’t have a business presence in California, so California has no legal right to require him to collect or pay tax to their state. What the Amazon tax is attempting to do is expand the concept of nexus. Let’s say Sue promotes Bob’s TV business by advertising on websites or any other way she can to get people to buy televisions from Bob. In return Bob pays Sue for every TV sold within 200 miles of her home, which happens to be in Garden Grove, California. Sue doesn’t work for Bob, she is and independent business person who just promotes Bob’s business. Through the Amazon tax what California wants to say is Bob has nexus in the state because of his relationship with independent business person Sue.

So far New York and Rhode Island have passed Amazon tax laws. North Carolina has said it will pass the Amazon tax, possibly as early as July. California, Connecticut, Florida, Hawaii, Illinois, Maryland, Minnesota and Tennessee have all indicated they are studying the possibility and have proposed laws in their legislatures now.

I am not sure how Amazon.com feels about having a tax named after their company, but they have certainly been playing hardball with states that pass the tax. When New York and Rhode Island passed the tax, Amazon sent letters to all of it’s affiliates in those states telling them Amazon would no longer be paying commissions to or signing up affiliates in those states. According to , the last week of June the same letters went out to North Carolina and Hawaii affiliates.

The impact for the states, at least in regards to Amazon affiliates, is not only does the state not get the sales tax, but they loose any income taxes on Amazon commissions, that were being paid by the affiliates in their state. Overstock.com is another major online retailer that has followed Amazon in cancelling affiliate programs.

Obviously Amazon is in a unique position that they could be hugely impacted by having to collect sales tax for every state and they can probably afford to push back by dropping affiliates in specific states. It is too early to tell who will win in this game of chicken. As recent as July 2 the governors of California and Hawaii both vetoed Amazon tax bills presented by their respective legislatures. It appears that right now many states, and many other companies with affiliate programs are choosing to sit on the sidelines and watch Amazon and Overstock battle it out with a few states to see which side is winning, before they jump into the war.

The tax will not impact advertising revenue earned by bloggers and websites, as it is directed at sales tax which is typically charged on products. You will be affected if your site directly markets products for out of state vendors earning commission on items sold.

Online E-tailers, eBay sellers and anyone who ships products to out of state customers be sure you keep good records of where your income is generated. 

The purpose of home insurance is obvious. The tax rules surrounding home insurance, though, aren’t always so clear. For example, if your insurance won’t cover you for a given loss, are you simply left holding the bag, or can you expect some tax relief? And what about premiums–can you deduct them or not? Here are some tax tips to help you make sense of it all.
If your home or possessions are damaged, destroyed, or stolen, you may get a tax deduction
If you suffer a home-related loss, begin by reading your homeowners policy carefully to find out what is and isn’t covered. Section 1 of your policy explains the types of property coverages, lists the specific perils that you’re insured against (e.g., damage caused by fire, theft, and hail), describes the exclusions from coverage (e.g., damage caused by a flood or earthquake), and details any conditions that you must meet for coverage to apply.
In many cases, your homeowners insurance will reimburse you for your loss. Sometimes, though, you’ll be only partially reimbursed or not compensated at all. In such cases, you may be entitled to some tax relief.
If your home is damaged or destroyed in an accident or by an act of nature (e.g., windstorm, lightning), and your homeowners insurance does not completely reimburse you for the loss, you may be able to claim a casualty loss tax deduction on your federal income tax return. (A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.) In addition, if your personal possessions are stolen, damaged, or destroyed, you may be able to claim a theft or casualty loss tax deduction if you’re not fully reimbursed for your loss.
How does the theft or casualty loss deduction work?
You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft loss deduction. For individual taxpayers, the casualty or theft deduction is subject to two limitations. First, you can’t deduct the first 0 of any loss. So, if your watch was stolen from your bedroom and nothing else was taken, you’re out of luck (at least in terms of a deduction). Second, even if your loss exceeds 0, you can only deduct casualty and theft losses if the total amount you lost in the year (after the 0 per casualty threshold) exceeds 10 percent of your adjusted gross income (AGI).
If you’re reimbursed for your loss by your insurer, you must subtract this reimbursement amount when calculating your loss for tax purposes. In other words, you do not have a casualty or theft loss to the extent you are reimbursed. Also, keep in mind that if you do suffer a property loss and the property is covered by insurance, you should file a timely insurance claim. Otherwise, you may not be able to deduct your loss.
Calculating the amount of your loss
If you suffer a personal (as opposed to business) property loss, the amount of your loss is the smaller of (1) the decrease in the fair market value (FMV) of the property as a result of the loss or (2) your adjusted basis in the property before the loss. (Adjusted basis is usually your cost, increased or decreased by various events.) After determining the smaller figure, you subtract any insurance reimbursements.
For example, assume a fire severely damaged your home. You had bought the house for ,000 (adjusted basis) a few years ago, and it was appraised at ,000 before the fire. It was worth only ,000 after the fire. Your insurance company paid you ,000 for the loss. Here’s what you do:
1.Adjusted basis in the property before the loss: ,000
2.Decrease in property’s FMV: ,000 (,000 minus ,000)
3.Loss: ,000 (smaller of 1 or 2, above)
4.Subtract insurance reimbursement of ,000
5.Amount of loss: ,000
Finally, you’d apply the two deduction limitations (0 deductible; 10 percent of AGI) to determine the amount of your casualty loss deduction.
In general, you’ll use Form 4684 to figure the amount of your deduction; consult a tax professional if you need help. IRS Publication 584 can also provide you with additional information.
What about insurance deductibles?
With most homeowners insurance policies, you must pay a deductible before the insurer will reimburse you (partially or fully) for your loss. So, if you have a policy with a 0 deductible and you suffer a theft loss, you’ll have to cover the first 0 of your loss out of pocket. It’s possible, though, that you’ll be able to write off this deductible as a theft loss on your federal tax return (subject to the 0 and 10 percent rules).
Can you normally deduct your homeowners insurance premiums on your tax return?
If you’re like most people and use your home only for personal purposes, you can’t deduct your homeowners insurance premiums on your tax return.
Deducting your homeowners insurance premiums when you have a home office
If you have a home office and qualify to take a home office deduction, you may be able to deduct some of your housing expenses, including part of your homeowners insurance premiums, on your federal income tax return. A special formula is used to determine which portion of your housing expenses may be traced or allocated to your home office, and you’ll be able to deduct the same percentage of your homeowners insurance premiums. For example, if you can allocate 15 percent of your housing expenses to your home office, you’ll be able to deduct 15 percent of your premiums.
If you have a home-based business, though, you should consider purchasing additional insurance. A standard homeowners policy typically won’t provide coverage for your business equipment in the home, and it won’t cover business-related personal liability losses at all (including the delivery person who slips and falls). You may be able to add an endorsement to your existing homeowners policy, buy a home-based business package policy, or buy individual business insurance. Those insurance premiums would then be fully deductible against business income.

The purpose of home insurance is obvious. The tax rules surrounding home insurance, though, aren’t always so clear. For example, if your insurance won’t cover you for a given loss, are you simply left holding the bag, or can you expect some tax relief? And what about premiums–can you deduct them or not? Here are some tax tips to help you make sense of it all.

If your home or possessions are damaged, destroyed, or stolen, you may get a tax deduction

If you suffer a home-related loss, begin by reading your homeowners policy carefully to find out what is and isn’t covered. Section 1 of your policy explains the types of property coverages, lists the specific perils that you’re insured against (e.g., damage caused by fire, theft, and hail), describes the exclusions from coverage (e.g., damage caused by a flood or earthquake), and details any conditions that you must meet for coverage to apply.

In many cases, your homeowners insurance will reimburse you for your loss.

Sometimes, though, you’ll be only partially reimbursed or not compensated at all. In such cases, you may be entitled to some tax relief.

If your home is damaged or destroyed in an accident or by an act of nature (e.g., windstorm, lightning), and your homeowners insurance does not completely reimburse you for the loss, you may be able to claim a casualty loss tax deduction on your federal income tax return. (A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.) In addition, if your personal possessions are stolen, damaged, or destroyed, you may be able to claim a theft or casualty loss tax deduction if you’re not fully reimbursed for your loss.

How does the theft or casualty loss deduction work?

You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft loss deduction.

For individual taxpayers, the casualty or theft deduction is subject to two limitations. First, you can’t deduct the first 0 of any loss. So, if your watch was stolen from your bedroom and nothing else was taken, you’re out of luck (at least in terms of a deduction). Second, even if your loss exceeds 0, you can only deduct casualty and theft losses if the total amount you lost in the year (after the 0 per casualty threshold) exceeds 10 percent of your adjusted gross income (AGI).

If you’re reimbursed for your loss by your insurer, you must subtract this reimbursement amount when calculating your loss for tax purposes. In other words, you do not have a casualty or theft loss to the extent you are reimbursed. Also, keep in mind that if you do suffer a property loss and the property is covered by insurance, you should file a timely insurance claim. Otherwise, you may not be able to deduct your loss.

Calculating the amount of your loss

If you suffer a personal (as opposed to business) property loss, the amount of your loss is the smaller of (1) the decrease in the fair market value (FMV) of the property as a result of the loss or (2) your adjusted basis in the property before the loss. (Adjusted basis is usually your cost, increased or decreased by various events.) After determining the smaller figure, you subtract any insurance reimbursements.

For example, assume a fire severely damaged your home. You had bought the house for ,000 (adjusted basis) a few years ago, and it was appraised at ,000 before the fire. It was worth only ,000 after the fire. Your insurance company paid you ,000 for the loss. Here’s what you do:

Adjusted basis in the property before the loss: ,000
Decrease in property’s FMV: ,000 (,000 minus ,000)
Loss: ,000 (smaller of 1 or 2, above)
Subtract insurance reimbursement of ,000
Amount of loss: ,000

Finally, you’d apply the two deduction limitations (0 deductible; 10 percent of AGI) to determine the amount of your casualty loss deduction.

In general, you’ll use Form 4684 to figure the amount of your deduction; consult a tax professional if you need help. IRS Publication 584 can also provide you with additional information.

What about insurance deductibles?

With most homeowners insurance policies, you must pay a deductible before the insurer will reimburse you (partially or fully) for your loss. So, if you have a policy with a 0 deductible and you suffer a theft loss, you’ll have to cover the first 0 of your loss out of pocket. It’s possible, though, that you’ll be able to write off this deductible as a theft loss on your federal tax return (subject to the 0 and 10 percent rules).

Can you normally deduct your homeowners insurance premiums on your tax return?

If you’re like most people and use your home only for personal purposes, you can’t deduct your homeowners insurance premiums on your tax return.

Deducting your homeowners insurance premiums when you have a home office

If you have a home office and qualify to take a home office deduction, you may be able to deduct some of your housing expenses, including part of your homeowners insurance premiums, on your federal income tax return. A special formula is used to determine which portion of your housing expenses may be traced or allocated to your home office, and you’ll be able to deduct the same percentage of your homeowners insurance premiums. For example, if you can allocate 15 percent of your housing expenses to your home office, you’ll be able to deduct 15 percent of your premiums.

If you have a home-based business, though, you should consider purchasing additional insurance. A standard homeowners policy typically won’t provide coverage for your business equipment in the home, and it won’t cover business-related personal liability losses at all (including the delivery person who slips and falls). You may be able to add an endorsement to your existing homeowners policy, buy a home-based business package policy, or buy individual business insurance. Those insurance premiums would then be fully deductible against business income.

 

The purpose of home insurance is obvious. The tax rules surrounding home insurance, though, aren’t always so clear. For example, if your insurance won’t cover you for a given loss, are you simply left holding the bag, or can you expect some tax relief? And what about premiums–can you deduct them or not? Here are some tax tips to help you make sense of it all.

If your home or possessions are damaged, destroyed, or stolen, you may get a tax deduction

If you suffer a home-related loss, begin by reading your homeowners policy carefully to find out what is and isn’t covered. Section 1 of your policy explains the types of property coverages, lists the specific perils that you’re insured against (e.g., damage caused by fire, theft, and hail), describes the exclusions from coverage (e.g., damage caused by a flood or earthquake), and details any conditions that you must meet for coverage to apply.

In many cases, your homeowners insurance will reimburse you for your loss.

Sometimes, though, you’ll be only partially reimbursed or not compensated at all. In such cases, you may be entitled to some tax relief.

If your home is damaged or destroyed in an accident or by an act of nature (e.g., windstorm, lightning), and your homeowners insurance does not completely reimburse you for the loss, you may be able to claim a casualty loss tax deduction on your federal income tax return. (A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.) In addition, if your personal possessions are stolen, damaged, or destroyed, you may be able to claim a theft or casualty loss tax deduction if you’re not fully reimbursed for your loss.

How does the theft or casualty loss deduction work?

You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft loss deduction.

For individual taxpayers, the casualty or theft deduction is subject to two limitations. First, you can’t deduct the first 0 of any loss. So, if your watch was stolen from your bedroom and nothing else was taken, you’re out of luck (at least in terms of a deduction). Second, even if your loss exceeds 0, you can only deduct casualty and theft losses if the total amount you lost in the year (after the 0 per casualty threshold) exceeds 10 percent of your adjusted gross income (AGI).

If you’re reimbursed for your loss by your insurer, you must subtract this reimbursement amount when calculating your loss for tax purposes. In other words, you do not have a casualty or theft loss to the extent you are reimbursed. Also, keep in mind that if you do suffer a property loss and the property is covered by insurance, you should file a timely insurance claim. Otherwise, you may not be able to deduct your loss.

Calculating the amount of your loss

If you suffer a personal (as opposed to business) property loss, the amount of your loss is the smaller of (1) the decrease in the fair market value (FMV) of the property as a result of the loss or (2) your adjusted basis in the property before the loss. (Adjusted basis is usually your cost, increased or decreased by various events.) After determining the smaller figure, you subtract any insurance reimbursements.

For example, assume a fire severely damaged your home. You had bought the house for ,000 (adjusted basis) a few years ago, and it was appraised at ,000 before the fire. It was worth only ,000 after the fire. Your insurance company paid you ,000 for the loss. Here’s what you do:

Adjusted basis in the property before the loss: ,000
Decrease in property’s FMV: ,000 (,000 minus ,000)
Loss: ,000 (smaller of 1 or 2, above)
Subtract insurance reimbursement of ,000
Amount of loss: ,000

Finally, you’d apply the two deduction limitations (0 deductible; 10 percent of AGI) to determine the amount of your casualty loss deduction.

In general, you’ll use Form 4684 to figure the amount of your deduction; consult a tax professional if you need help. IRS Publication 584 can also provide you with additional information.

What about insurance deductibles?

With most homeowners insurance policies, you must pay a deductible before the insurer will reimburse you (partially or fully) for your loss. So, if you have a policy with a 0 deductible and you suffer a theft loss, you’ll have to cover the first 0 of your loss out of pocket. It’s possible, though, that you’ll be able to write off this deductible as a theft loss on your federal tax return (subject to the 0 and 10 percent rules).

Can you normally deduct your homeowners insurance premiums on your tax return?

If you’re like most people and use your home only for personal purposes, you can’t deduct your homeowners insurance premiums on your tax return.

Deducting your homeowners insurance premiums when you have a home office

If you have a home office and qualify to take a home office deduction, you may be able to deduct some of your housing expenses, including part of your homeowners insurance premiums, on your federal income tax return. A special formula is used to determine which portion of your housing expenses may be traced or allocated to your home office, and you’ll be able to deduct the same percentage of your homeowners insurance premiums. For example, if you can allocate 15 percent of your housing expenses to your home office, you’ll be able to deduct 15 percent of your premiums.

If you have a home-based business, though, you should consider purchasing additional insurance. A standard homeowners policy typically won’t provide coverage for your business equipment in the home, and it won’t cover business-related personal liability losses at all (including the delivery person who slips and falls). You may be able to add an endorsement to your existing homeowners policy, buy a home-based business package policy, or buy individual business insurance. Those insurance premiums would then be fully deductible against business income.