Worthless stock and tax timing

/in , /by

In the last few years, you may have purchased stock in a dot-com that’s now out of business, or in another company whose share price is now just pennies. Does this mean you can take a tax loss for a worthless security? Here’s a quick look at the rules.

First, the stock must be completely worthless before you can claim a loss. For example, if it’s a publicly traded company and the share price is as low as a penny, it still doesn’t qualify as worthless. (If this is the case, you may be better off selling it to your broker for a penny and taking a regular capital loss.)

If it is worthless, you must be able to identify an event that caused it to become worthless and a date for that event. For example, even if a company declares bankruptcy, the stock may not be worthless if there’s a chance it will reorganize and emerge from bankruptcy. But if it becomes clear at a bankruptcy hearing that the creditors will own the reorganized company, you can consider your stock worthless at that time.

You must claim a worthless security’s loss in the tax year it became worthless. Because this is sometimes not obvious until later, the IRS allows you to go back seven years to file an amended return claiming the loss.

Because these are general rules and because it is often a judgment call to decide that a stock is worthless, we encourage you to contact our office with any questions you have.

Grandparents can help with college costs

/in , /by

Are you a grandparent who wants to help pay for a grandchild’s college education? You’ll find several ways to do this, each with its own limitations and tax consequences.

GIFTS. The simplest way is to make an outright cash gift to your grandchild each year. In 2014, you can give up to $14,000 without any gift tax liability. If your spouse joins in the gift, you can jointly give each grandchild up to $28,000 each year.

DIRECT PAYMENTS. You can give unlimited amounts without gift tax consequences if you make the payments directly to a qualified education institution on behalf of your grandchild. Payments can only be for tuition, not for dorm fees, meals, books, etc.

EDUCATION ACCOUNTS. You could set up a Coverdell education savings account or a Section 529 plan for your grandchild. These plans offer tax-free growth of amounts you contribute to them. Age, income, and contribution limits apply, however.

To discuss the options best suited to your circumstances, contact our office.

IRS posts “Taxpayer Bill of Rights

/in , /by

The IRS has just issued a “Taxpayer Bill of Rights” that you should be aware of.

The Rights are divided into ten main categories. According to this “cornerstone” document you have The Right:

* to be informed

* to quality service

* to pay no more than the correct amount of tax

* to challenge the IRS’s position and be heard

* to appeal an IRS decision in an independent forum

* to finality

* to privacy

* to confidentiality

* to retain representation

* to a fair and just tax system

Hiring family in the family business can cut taxes

/in , , /by

As the summertime school vacation season approaches, young family members may be looking for a job – and having a hard time finding one. Hire them in your family business, and you get a double benefit: helping the kids gain valuable experience and garnering tax breaks for your company.

Here’s what you need to know.

Whether your sole proprietorship business operates around the kitchen table or in the fields of your farm, wages you pay your under-age-18 children are not subject to social security, Medicare, or federal unemployment taxes. Note: You’ll have to pay social security and Medicare taxes when your children are age 18 or older. They’re exempt from federal unemployment taxes until they reach age 21.

Wages you pay your children are deductible from your business income, meaning potential savings for the business on self-employment tax and federal and state income tax.

The wages must be paid for legitimate work at a reasonable rate. Be aware of nontax issues too, such as your state’s youth employment rules, which can be more stringent than federal labor laws. If your business is a family farm, keep apprised of newly proposed regulations that may limit the parental exemption for employing young farm workers.

Wages do not impact “kiddie tax” calculations. In addition, your child can earn up to $6,200 of income during 2014 before owing federal income tax.

The payroll tax exemption is different from the self-employment rules, and applies to wages you report on Form W-2 at year-end. Income earned as contract labor, which is generally reported on Form 1099-MISC, is subject to self-employment tax.

Call us if you have questions about the tax consequences of employing family members.