When you sell your home: the tax.

 Will You Owe Taxes When You Sell Your Home?

By Tom Copeland. Published with permission.

A family child care provider faces two potential taxes when she sells her home. One you can probably avoid and another you cannot.

Tax on the Profit

First the good news. You can avoid taxes on the profit on the sale of your home if the profit is less than $250,000 and you are single, or $500,000 if you are married. (Note: legally married same sex couples can now take advantage of this tax break.)

So, if you are single and bought your home for $150,000 and sell it for $400,100, you will owe taxes on $100 ($400,100 - $150,000 = $250,100) because the amount above the $250,000 exclusion is $100.

If you are married, you would owe no taxes on the profit because it's less than $500,000.

As you can see, most family child care providers will not owe any tax on the profit on the sale of their home.

Tax on the Depreciation

This second tax is not avoidable. You will owe taxes on the amount of depreciation you were entitled to claim on your home since May 1997.

This is true even if you didn't claim home depreciation on your tax return!

Let's look at an example. Rosalie Ryder purchased her home in 2000 for $200,000. Her Time-Space Percentage is 40% each year. She entitled to claim a depreciation deduction each year of about $2,500 ($200,000 x 40% = $80,000 divided by 39 year deprecation rule = $2,500).

Rosalie does child care in her home until she sells it on December 31, 2013. She used her home for her business for 13 years. She will owe taxes on the amount of depreciation she was entittle to claim for the past 13 years, or $32,500 (13 x $2,500 = $32,500).

What if Rosalie didn't claim house depreciation for some or all of these years?

She would still owe taxes on $32,500! The IRS rule says that if you are entitled to depreciate your home, you will owe taxes on this depreciation even if you didn't claim it. Therefore, always depreciate your home!

Don't let someone tell you, "Don't depreciate your home because you will have to pay more taxes when you sell your home." Since you will have to pay these taxes anyway, there is no reason to give up the tax benefit of claiming depreciation. You will always come out ahead financially when you depreciate your home because the taxes on the depreciation will be less than the tax benefit of claiming the depreciation.

You will owe this tax even if you stop doing child care for years before selling your home.

You will pay either a tax rate of 10%, 15% or 25% on the house depreciation. (The tax rate will be based on your tax bracket in the year you sell your home.)

So, Rosalie will either owe $3,250, $4,875 or $8,125 in taxes. Remember, she will owe these taxes even if she didn't depreciate her home.

Note: I've simplified the above example to exclude the value of land, home improvements, and expenses associated with the sale of the home. See my annual Family Child Care Tax Workbook and Organizer for the chapter "Selling Your Home."

Other Issues

If you show a loss for your business in one year, you won't be entitled to claim house depreciation for that year. Therefore, you won't owe tax on home depreciation for that year.

If you are single and live with someone else who owns the home, you aren't entitled to claim house depreciation and therefore won't owe any taxes on it when the home is sold. If you are married and your spouse (including legally married same sex couples) owns the home, you are still entitled to claim house depreciation and so would owe this tax.

If you haven't been claiming depreciation on your home, you can recapture all previously unclaimed depreciation by filing IRS Form 3115 Application for Change in Accounting Method. If Rosalie had not depreciated her home between 2000 and 2013, she can claim $32,500 of previously unclaimed depreciation using Form 3115 by filing it with her 2013 tax return.

See my article: "How to Claim Previously Unclaimed Depreciation."

Conclusion: if you are thinking about selling your home, talk with a tax professional who can advise you about the tax consequences of home depreciation.

I've written two other articles about home depreciation:
"Should You Depreciate Your Home?"

"How to Depreciate Your Home?"

Tom Copeland - www.tomcopelandblog.com

Image credit:thebigorangepress.com

For more information about how to depreciate your home and the tax consequences of selling your home, see my annual Family Child Care Tax Workbook and Organizer.

Posted by Tom Copeland at 10:24 AM in Record Keeping & Taxes | Permalink

Ready for your retirement?

Retirement Quiz

By Tom Copeland. Posted with permission

Most family child care providers, like most taxpayers, are not saving enough for their retirement.

Many do not have a good understanding of how to plan for their retirement. 

 

Test your retirement knowledge by taking this short quiz.

 

1) Social Security payments will replace approximately what percentage of the current earnings of the average taxpayer?

a. 20% b. 40% c. 60% d. 70%

 

2) If a provider's only work was doing child care for fifteen years and she had a profit over $400 for nine of those fifteen years, would she qualify to receive Social Security benefits?

a. Yes b. No

 

3) You can start receiving Social Security retirement benefits at age 62. If you do so you will receive lower benefits than if you waited until your full retirement age of 65, 66, or 67 depending on when you were born. Under what circumstances might you take benefits starting at age 62?

a. Current bad health b. Immediate financial stress c. History of early death in your family d. All of the above

 

4) If you aren't saving enough now to be able to retire at age 66/67 what can you do?

a. Work beyond age 66/67 b. Save more now c. Live on less in retirement d. All of the above

 

5) If you save $35 a week and earn 8% a year in a tax deferred IRA, how much will you have in twenty years?

a. $10,232 b. $15,741 c. $25,655 d. $37,143

 

6) Can a single provider making a profit of $75,000 invest in both a SIMPLE IRS and a Roth IRA each year?

a. Yes b. No

 

7) If you invest in an index fund you are adopting what type of an investment strategy?

a. Passive b. Active

 

Answers:

 

1) 40%. Of course the answer for you may be different. To find out how much Social Security benefits you will receive when you retire, go to www.socialsecurity.gov and check out their benefits calculator. Because Social Security benefits will not replace all of the money you will need for retirement, you need to identify other sources of retirement income: income from your investments, earned income in retirement, other.

2) No. You must work at least ten years to qualify to reecive Social Security benefits.

3) D. For each year you take Social Security benefits before your full retirement age of 65, 66 or 67, you benefits will decrease. For example, if you start claiming benefits at age 62, they will be about 25% less than if you waited until you were age 63. Therefore, before deciding on when to start taking Social Security benefits you should consult with your local Social Security office or with a financial advisor who can advise you.

4) D. Most providers will not have saved enough to be able to maintain their current standard of living by relying on Social Security and the interest on their investments. Therefore, all of these options are viable. Other possibilities can include: move to a less expensive home, receive an inheritance or change your job to one that pays more.

5) C. $25,655 Even a small amount of money can quickly grow over time. This means it is never too late to start saving money now for your retirement.

6) A. All providers are eligible to set up and contribute to a SIMPLE IRA
 (regardless of your income). You can set aside up to $12,000 of your profit into this tax-deferred IRA (2013 limits). You can contribute an extra $2,500 if you are age 50 or older. The deadline for establishing a SIMPLE IRA is September 30th. Single providers are eligible to contribute to a Roth IRA if their profit is less than $112,000; married providers can contribute if their family's adjusted gross income is less than $173,000. You can contribute a maximum of $5,500 per person to a Roth IRA in 2013. If you are age 50 or older you can contribute an extra $1,000. You can set up and contribute to a Roth IRA before April 15.

7) A. Index investing means you are investing in a fund that identifies specific investments and then holds onto them indefinitely. For example, an S&P Index Fund invests and holds onto the 500 largest U.S. companies that comprise the S&P 500. Active investing is when the manager of a fund buys and sells various investments throughout the year. For example, the XYZ Fund might consist of investments in thirty different companies at the start of the year, but the manager could buy stock in ten other companies duriretirementng the year and sell the investments of seven other companies. A passive investing strategy will result in lower management fees because of lower transaction costs and taxes. Therefore, most index funds will beat the returns of active managed funds over time.

Score yourself!
0 correct - Time to start paying attention to your retirement planning!
1 - 3 correct - Good start!
4- 6 correct - Excellect!
7 correct - You are a master!
 

Image credit: www.ifa-fiv.org

For more information see my book Family Child Care Money Management and Retirement Guide

www.tomcopelandblog.com 

Child care program manual

 

Find the child care program manual at http://www.dhs.state.il.us/page.aspx?item=9877, or in DHS> about DHS> Publications> Manuals> Family and Comunity Services Manual> Child Care Program Manual. The manual is a public document and it is very important for child care providers be familiar with it.

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An autistic youth of 14 years, incapable to speak, begins to explain its world and its sensations using the keyboard of a computer. A fundamental document to understand the autism. See the video.

When a parent leaves owing money

When a Parent Leaves Owing Money: Small Claims Court or Collection Agency?

By Tom Copeland. Published with permission.

A parent, Barbara Riegel, leaves your family child care program owing you money. Should you take her to court or hire a collection agency to go after your money?

If Barbara owes you money for days that you provided child care, your chances of winning in small claims court is very high (probably 90%). The only circumstances where a judge might rule against you is if Barbara's child was injured while in your care, or if you were grossly negligent in your treatment of the child.

If Barbara owes you money for failing to give you a two-week notice upon leaving, your chances of winning in court are more problematic. Legally, you should win since she violated your contract. Unfortunately, some judges will listen to a parent complain about the care her child received, and not enforce the contract. Your best defense in court is to tell the judge: 1) Barbara never complained about care before she left; 2) Barbara never made a complaint to licensing; or 3) licensing said the complaint was unfounded.

Some providers will go to court, not because of the money but because of the principle that the parent should not get away with breaking the contract. Going to court takes time and a little money for the court filing fee. There is no guarantee that you will win. Even if you do win, you may have to pursue Barbara further if she refuses to pay after receiving the court judgment.

Instead of going to court, you could hire a collections agency to contact the parent on your behalf in an attempt to collect the money owed you. Such agencies can write letters and call Barbara. If they are successful they will keep a percentage of the amount collected. This fee can vary, but it could be as high as 30%. To find out the names of collection agencies in your area, Google “collections agency in [name of your town].”

There is no right or wrong about which path to choose: court or collections agency. Before making your decision your first step should be to write a letter to the parent demanding that the money you are owed be paid by a specific deadline. Tell Barbara if the deadline is not met you will go to court or hire a collections agency. Such letters sometimes do work. If not, you can make a decision whether or not to proceed against the parent.

What do you do?

Using a "Demand Letter" To Collect from a Parent

If a parent leaves your family child care program owing you money, your first step in trying to collect is to send the parent a "demand letter."

A "demand letter" is a formal request for the money owed you. It shows the parent that you are serious about enforcing your contract. I have talked with child care providers who have received payment after sending such a letter.

Below is a sample "demand letter." Your letter should contain these five elements:

* The dates you cared for the child

* The amount the parent owes you under your contract

* A demand for payment by a specific deadline

* A notice that you will take legal action of the parent doesn't respond by the deadline

* Your signature and the date of your signature

August 1, 20xx

Dear Francene:

On May 1, 20xx you signed a contract with me to provide child care services for your daughter Sally. The contract states that you would pay me $175 per week for care. On July 1, 20xx you informed me that you would be leaving my program. At that time you owed me $175 for the week of June 25-29th.

Our contract also states that you must give me a two-week written notice when you leave my care. You did not do so. Therefore, you also owe me $350 for the two weeks after you gave me notice on July 1st.

This letter is to notify you that you owe me $525 ($175 + $350). If you do not pay me by August 15, 20xx I will have no choice but to take legal action and sue you in small claims court. At that time I will sue you for $525, plus court costs and my expenses.

If you have any questions please contact me. If you cannot afford to pay the entire amount you owe me at once, I will accept a reasonable payment plan.

Sincerely,

Maria Sanchez

Make a copy of your "demand letter" and bring it with you if you go to court. Send your letter by certified mail so you will have proof that the parent received it.

www.tomcopelandblog.com

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