IRS cautions employers to comply with federal recordkeeping requirements

IRS has reminded employers about the importance of keeping good records. Under Reg. § 31.6001-1(e)(2), employment tax records must be maintained for at least four years after the later of the due date of the tax for the return period to which the records relate, or the date the tax is paid.

IRS notes that the records should include the following information:

• Employer identification number (EIN)
• Amounts and dates of all wage, annuity, and pension payments
• Amounts of tips reported
• The fair market value of in-kind wages paid
• Names, addresses, Social Security numbers, and occupations of employees and recipients
• Employee copies of Forms W-2 that were returned as undeliverable
• Dates of employment
• Periods for which employees and recipients were paid while absent due to sickness or injury, and the amount and weekly rate of payments made to them by the employer or third-party payers
• Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V)
• Dates and amounts of tax deposits
• Copies of returns filed
• Documentation for allocated tips
• Documentation for fringe benefits provided, including substantiation

A willful failure to keep required records is a misdemeanor punishable by a fine of up to $25,000 ($100,000 for corporations) and/or imprisonment for up to one year.

Making the best tax use of a vacation home under the latest rules

A soft real estate market in many areas has led to buying opportunities in vacation or second homes.  This market offers a chance to provide the family with a place to rest and relax at a possibly reduced cost and at the same time have a shot at capital appreciation over the long term.  It also offers a chance to earn some rental income when the owner or family members aren't using the property. 

  

  Tax-free vacation home income

A taxpayer who rents his vacation home for less than 15 days during the year doesn't report rental income and can't claim offsetting vacation home deductions.  This one-of-a-kind tax break can be a windfall for those who own properties in prime vacation spots or in other sought-after areas (e.g., one near a prime sporting event) where even a few rental days can bring in substantial dollars.

  Vacation home used as a residence

A vacation home is treated as used as a residence during a tax year if personal use exceeds the greater of 14 days or 10% of the days the property is rented to others during the year at a fair rental.  Although the property is considered to be a residence, the owner still must treat the rental portion of the vacation home separately from the personal portion.

Rental portion-

Rentals are included in income on Schedule E, but may be offset with deductions for the rent-related portions of expenses such as utilities, maintenance, upkeep, mortgage interest, real estate taxes and insurance. The owner also may claim a depreciation deduction relating to the rental use.  However, deductions can't exceed rental income less:

• Deductions related to the rental activity itself, such as advertising and broker's commissions.

 

• Deductions (such as interest and real estate taxes) allocable to the rental use which would be deductible whether or not the vacation home was rented out.

Excess expenses are carried forward and may be used in a future year when there's additional rental income.

Personal portion-

The owner deducts on Schedule A the real estate taxes and mortgage interest allocable to personal use of the home. Because personal use exceeds the greater of 14 days or 10% of the days it is rented out during the year, the vacation home is a qualified residence for purposes of the mortgage interest deduction.  Assuming the taxpayer doesn't own another vacation home, and meets the other rules for deducting qualified residence interest, he can fully deduct the personal-use portion of the year's mortgage interest.

 

  Vacation home used as rental property

A vacation home is treated primarily as rental property for a tax year in which personal use of the unit doesn't exceed the greater of 14 days or 10% of the days the property is rented out during the year at a fair rental.  In this situation, the owner's deductions are restricted by the passive loss rules, not by the vacation home rules.

Rental portion-

As rental property, the income and deductions from the vacation home generally are automatically treated as passive in nature.  If deductions allocable to the rental portion exceed rental income, the loss generally can only offset other passive income until the property is disposed of. However, if the owner actively participates in the vacation home rental venture and adjusted gross income (AGI) doesn't exceed $100,000, then he can shelter non-passive income with up to $25,000 of losses from active-participation real estate rental activities, including the vacation home rental enterprise.  The $25,000 allowance starts to phase out when AGI exceeds $100,000, and disappears completely when AGI reaches $150,000.

Personal portion-

The owner gets a Schedule A itemized deduction for the real estate taxes allocable to his personal use of the vacation home.  However, since personal use does not exceed the greater of 14 days or 10% of the time the unit is rented out, the home is not considered a qualified residence under Code Sec. 163(h)(4)(A)(i)(II) .  As a result, the interest paid on a mortgage secured by the vacation home, and allocable to personal use, will be treated as nondeductible personal interest.

Tax-free sale of vacation home

A taxpayer may sell his regular home at retirement and move into what had been his vacation home. If the vacation home is later sold, gain on the sale of both homes is eligible for the up-to-$250,000 exclusion ($500,000 for qualifying married taxpayers) if each is owned and used as a principal residence for at least two of the five years preceding the sale date of each home, and two years elapse between the sales.  However, that part of the gain attributable to depreciation for post-May 6, '97 periods isn't eligible for the exclusion.  Short temporary absences for vacations or other seasonal absences, even if the taxpayer rents out the property during the absences, are counted as periods of use for purposes of the two-out-of-five year ownership and use requirement.

 

Connecticut Tax News

Effective January 1, 2008

Exempts sales of passenger motor vehicles, as defined in Conn. Gen. Stat. § 14-1, with an EPA estimated city or highway gasoline mileage rating of at least 40 miles per gallon. The exemption applies to sales occurring on or after January 1, 2008, and on or before June 30, 2010.

 

Please keep in mind that we have described only the highlights of the new law.  Please give us a call if you would like more details on any aspect of this legislation.