Things to Remember at Tax Time

April 15^th is approaching and it is time to begin crossing T's and dotting I's in preparation for paying taxes. As tax time draws near, you want to make sure you file all the proper forms and take all deductions you're entitled to. Following are some things to keep in mind as you prepare your tax form.

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Things to Remember at Tax Time

Tax time is rapidly approaching.  You want to file all the proper forms and take all deductions you're entitled to. Following are some things to keep in mind as you prepare your tax form.

• Gifts. Did you give away any money this year? The gift tax can be very confusing. If you gave away more than $13,000 in 2009, you will have to file a Form 709, the gift tax return. This does not necessarily mean you will owe taxes on the money, however, and most folks making gifts will owe no tax. Click here for more information.
• Medical Expenses. Many types of medical expenses are tax deductible, from hospital stays to hearing aids. To claim the deduction, your medical expenses have to be more than 7.5 percent of your adjusted gross income. This includes all out-of-pocket costs for prescriptions (including deductibles and co-pays) and Medicare Part B and Part C and Part D premiums. (Medicare Part B premiums are usually deducted out of your Social Security benefits, so be sure to check your 1099 for the amount.) You can only deduct medical expenses you paid during the year, regardless of when the services were provided, and medical expenses are not deductible if they are reimbursable by insurance. Click here for more information.

No Estate Tax in 2010 - Good and Bad News

There is currently no tax on the estates of those dying during 2010.   Although it is possible that Congress could reinstate the tax retroactively in 2010, the possibility is uncertain, at best.  If Congress fails to act, however, although a few wealthy families will benefit, many families with smaller estates will pay capital gains on inherited assets.  Moreover, executors and successor trustees must contend with new, and what may prove to be significant, administrative burdens.

Under the provisions of a Bush-era tax-cut bill enacted in 2001, the value of estates exempt from the tax has increased over the past eight years while the tax rate on estates has been reduced, so that in 2009 only an individual estate worth $3.5 million or more is taxed, at a rate of 45 percent. For the year 2010, according to the 2001 law, the estate tax disappears entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more.

For persons with larger estates, their estate plans will need to reviewed and reconciled with the lack of

Tax Rules Change Treatment of Gains on Sale of Vacation or Second Home

If you have a vacation or second home, there was a change in the federal income tax law as part of the 2008 Housing Act about which you should be aware.   Most homeowners are familiar with the homesale exclusion, a provision of the tax code which excludes from taxable gain as much as $500,000 of gain if they meet certain conditions. The $500,000 exemption is the maximum exclusion for a married couple filing jointly; taxpayers filing individually get an exemption of up to $250,000. To be eligible for the full exclusion, a taxpayer must have owned the home, and lived in it as his or her principal residence-for at least two of the five years prior to the sale. Because of the "principal residence" requirement, vacation or second homes normally don't qualify for the exclusion. However, in what some saw as a loophole, the law permitted taxpayers to convert their second home to their principal residence, live in it for two years, sell it, and take the full $250,000/$500,000 exclusion available for principal residences, even though portions of their gains were attributable to periods when the property was used as a vacation or second home, not a principal residence.   The new law closes that "loophole" by requiring homeowners to pay taxes on gains made from the sale of a second home to reflect the portion of time the home was not used as a principal residence (e.g, vacation or rental property). The amount taxed will be based on the portion of the time during which the taxpayer owned the home that the house was used as a vacation home or rented out. The rest of the gain remains eligible for the up-to-$500,000 exclusion, as long as the two-out-of-five year usage and ownership tests are met. The new law in effect reduces the exclusion based on the ratio of years of use as a principal residence to the total time of ownership. For example, if a taxpayer owned a vacation home for ten years, but lived in it as a principal residence only for the final two years prior to sale, the maximum available exclusion would be reduced by four-fifths. Accordingly, a $400,000 gain on the sale that would be eligible for the full exclusion under pre-Act law would be reduced by four-fifths, to $80,000. The good news for current owners of second homes is that the new law is not retroactive. The tightening applies only to sales after 2008. Plus, any periods of personal or rental use before 2009 are ignored for purposes of the provision. The new law also does not change the rule that allows homeowners to take advantage of the homesale exclusion every two years. Taxpayers can still move from one home to the other with full tax exclusion if they only own one home at a time. Moreover, the taxpayer still qualifies for capital gain treatment on the amount of gain that cannot be excluded. The tax planning opportunity available to you between now and December 31, 2008, is that if you convert your second residence into your primary residence before January 1, 2009, you will completely avoid the rule above.  You would then have up to three years to sell your old primary residence to claim the full home sale exclusion on the old primary residence. Then two years after the sale of the old primary residence you can sell the second home/ now primary residence and again claim the full home sale exclusion. The decision to move your primary residence involves more than just savings taxes on a later sale. Your primary residence has other income, property and estate tax implications, estate planning and asset protection planning implications, and financial implications that should be fully understood prior to making such an important decision.  Consult an elderlaw  attorney and accountant or tax professional as soon as possible, though; one cannot just "flip a switch" to covert a second home to a primary residence.