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1040nr Online1040nr online 5. 1040nr online Taxes Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: When To Deduct Taxes Real Estate TaxesSeparate elections. 1040nr online Making the election. 1040nr online Form 3115. 1040nr online Income TaxesAccrual of contested income taxes. 1040nr online Employment Taxes Other TaxesAdditional Medicare Tax. 1040nr online What's New Additional Medicare Tax. 1040nr online Beginning in 2013, you must withhold a 0. 1040nr online 9% Additional Medicare Tax from wages you pay to an employee in excess of $200,000 in a calendar year. 1040nr online Also, self-employed individuals may be required to pay Additional Medicare Tax on self-employment income. 1040nr online See Employment Taxes , and Self-employment tax , later. 1040nr online Introduction You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. 1040nr online You cannot deduct federal income taxes, estate and gift taxes, or state inheritance, legacy, and succession taxes. 1040nr online Topics - This chapter discusses: When to deduct taxes Real estate taxes Income taxes Employment taxes Other taxes Useful Items - You may want to see: Publication 15 (Circular E), Employer's Tax Guide 334 Tax Guide for Small Business 510 Excise Taxes 538 Accounting Periods and Methods 551 Basis of Assets Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch SE (Form 1040) Self-Employment Tax 3115 Application for Change in Accounting Method 8959 Additional Medicare Tax See chapter 12 for information about getting publications and forms. 1040nr online When To Deduct Taxes Generally, you can only deduct taxes in the year you pay them. 1040nr online This applies whether you use the cash method or an accrual method of accounting. 1040nr online Under an accrual method, you can deduct a tax before you pay it if you meet the exception for recurring items discussed under Economic Performance in Publication 538. 1040nr online You can also elect to ratably accrue real estate taxes as discussed later under Real Estate Taxes . 1040nr online Limit on accrual of taxes. 1040nr online A taxing jurisdiction can require the use of a date for accruing taxes that is earlier than the date it originally required. 1040nr online However, if you use an accrual method, and can deduct the tax before you pay it, use the original accrual date for the year of change and all future years to determine when you can deduct the tax. 1040nr online Example. 1040nr online Your state imposes a tax on personal property used in a trade or business conducted in the state. 1040nr online This tax is assessed and becomes a lien as of July 1 (accrual date). 1040nr online In 2013, the state changed the assessment and lien dates from July 1, 2014, to December 31, 2013, for property tax year 2014. 1040nr online Use the original accrual date (July 1, 2014) to determine when you can deduct the tax. 1040nr online You must also use the July 1 accrual date for all future years to determine when you can deduct the tax. 1040nr online Uniform capitalization rules. 1040nr online Uniform capitalization rules apply to certain taxpayers who produce real property or tangible personal property for use in a trade or business or for sale to customers. 1040nr online They also apply to certain taxpayers who acquire property for resale. 1040nr online Under these rules, you either include certain costs in inventory or capitalize certain expenses related to the property, such as taxes. 1040nr online For more information, see chapter 1. 1040nr online Carrying charges. 1040nr online Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. 1040nr online You can elect to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. 1040nr online For more information, see chapter 7. 1040nr online Refunds of taxes. 1040nr online If you receive a refund for any taxes you deducted in an earlier year, include the refund in income to the extent the deduction reduced your federal income tax in the earlier year. 1040nr online For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1. 1040nr online You must include in income any interest you receive on tax refunds. 1040nr online Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. 1040nr online The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. 1040nr online Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. 1040nr online See Taxes for local benefits , later. 1040nr online If you use an accrual method, you generally cannot accrue real estate taxes until you pay them to the government authority. 1040nr online However, you can elect to ratably accrue the taxes during the year. 1040nr online See Electing to ratably accrue , later. 1040nr online Taxes for local benefits. 1040nr online Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. 1040nr online These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. 1040nr online You should increase the basis of your property by the amount of the assessment. 1040nr online You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. 1040nr online If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax. 1040nr online Example. 1040nr online To improve downtown commercial business, Waterfront City converted a downtown business area street into an enclosed pedestrian mall. 1040nr online The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. 1040nr online The city is paying the principal and interest with the annual payments made by the property owners. 1040nr online The assessments for construction costs are not deductible as taxes or as business expenses, but are depreciable capital expenses. 1040nr online The part of the payments used to pay the interest charges on the bonds is deductible as taxes. 1040nr online Charges for services. 1040nr online Water bills, sewerage, and other service charges assessed against your business property are not real estate taxes, but are deductible as business expenses. 1040nr online Purchase or sale of real estate. 1040nr online If real estate is sold, the real estate taxes must be allocated between the buyer and the seller. 1040nr online The buyer and seller must allocate the real estate taxes according to the number of days in the real property tax year (the period to which the tax imposed relates) that each owned the property. 1040nr online Treat the seller as paying the taxes up to but not including the date of sale. 1040nr online Treat the buyer as paying the taxes beginning with the date of sale. 1040nr online You can usually find this information on the settlement statement you received at closing. 1040nr online If you (the seller) use an accrual method and have not elected to ratably accrue real estate taxes, you are considered to have accrued your part of the tax on the date you sell the property. 1040nr online Example. 1040nr online Alberto Verde, a calendar year accrual method taxpayer, owns real estate in Olmo County. 1040nr online He has not elected to ratably accrue property taxes. 1040nr online November 30 of each year is the assessment and lien date for the current real property tax year, which is the calendar year. 1040nr online He sold the property on June 30, 2013. 1040nr online Under his accounting method he would not be able to claim a deduction for the taxes because the sale occurred before November 30. 1040nr online He is treated as having accrued his part of the tax, 181/366 (January 1–June 29), on June 30, and he can deduct it for 2013. 1040nr online Electing to ratably accrue. 1040nr online If you use an accrual method, you can elect to accrue real estate tax related to a definite period ratably over that period. 1040nr online Example. 1040nr online Juan Sanchez is a calendar year taxpayer who uses an accrual method. 1040nr online His real estate taxes for the real property tax year, July 1, 2013, to June 30, 2014, are $1,200. 1040nr online July 1 is the assessment and lien date. 1040nr online If Juan elects to ratably accrue the taxes, $600 will accrue in 2013 ($1,200 × 6/12, July 1–December 31) and the balance will accrue in 2014. 1040nr online Separate elections. 1040nr online You can elect to ratably accrue the taxes for each separate trade or business and for nonbusiness activities if you account for them separately. 1040nr online Once you elect to ratably accrue real estate taxes, you must use that method unless you get permission from the IRS to change. 1040nr online See Form 3115 , later. 1040nr online Making the election. 1040nr online If you elect to ratably accrue the taxes for the first year in which you incur real estate taxes, attach a statement to your income tax return for that year. 1040nr online The statement should show all the following items. 1040nr online The trades or businesses to which the election applies and the accounting method or methods used. 1040nr online The period to which the taxes relate. 1040nr online The computation of the real estate tax deduction for that first year. 1040nr online Generally, you must file your return by the due date (including extensions). 1040nr online However, if you timely filed your return for the year without electing to ratably accrue, you can still make the election by filing an amended return within 6 months after the due date of the return (excluding extensions). 1040nr online Attach the statement to the amended return and write “Filed pursuant to section 301. 1040nr online 9100-2” on the statement. 1040nr online File the amended return at the same address where you filed the original return. 1040nr online Form 3115. 1040nr online If you elect to ratably accrue real estate taxes for a year after the first year in which you incur real estate taxes, or if you want to revoke your election to ratably accrue real estate taxes, file Form 3115. 1040nr online For more information, including applicable time frames for filing, see the Instructions for Form 3115. 1040nr online Note. 1040nr online If you are filing an application for a change in accounting method filed after January 9, 2011, for a year of change ending after April 29, 2010, see Revenue Procedure 2011-14, 2011-4 I. 1040nr online R. 1040nr online B. 1040nr online 330, as modified and clarified by Revenue Procedure 2012-19, 2012-14 I. 1040nr online R. 1040nr online B. 1040nr online 689, and Revenue Procedure 2012-20, 2012-14 I. 1040nr online R. 1040nr online B. 1040nr online 700, or any successor. 1040nr online Revenue Procedure 2011-14 is available at www. 1040nr online irs. 1040nr online gov/irb/2011-04IRB/ar08. 1040nr online html. 1040nr online Income Taxes This section discusses federal, state, local, and foreign income taxes. 1040nr online Federal income taxes. 1040nr online You cannot deduct federal income taxes. 1040nr online State and local income taxes. 1040nr online A corporation or partnership can deduct state and local income taxes imposed on the corporation or partnership as business expenses. 1040nr online An individual can deduct state and local income taxes only as an itemized deduction on Schedule A (Form 1040). 1040nr online However, an individual can deduct a state tax on gross income (as distinguished from net income) directly attributable to a trade or business as a business expense. 1040nr online Accrual of contested income taxes. 1040nr online If you use an accrual method, and you contest a state or local income tax liability, you must accrue and deduct any contested amount in the tax year in which the liability is finally determined. 1040nr online If additional state or local income taxes for a prior year are assessed in a later year, you can deduct the taxes in the year in which they were originally imposed (the prior year) if the tax liability is not contested. 1040nr online You cannot deduct them in the year in which the liability is finally determined. 1040nr online The filing of an income tax return is not considered a contest and, in the absence of an overt act of protest, you can deduct the tax in the prior year. 1040nr online Also, you can deduct any additional taxes in the prior year if you do not show some affirmative evidence of denial of the liability. 1040nr online However, if you consistently deduct additional assessments in the year they are paid or finally determined (including those for which there was no contest), you must continue to do so. 1040nr online You cannot take a deduction in the earlier year unless you receive permission to change your method of accounting. 1040nr online For more information on accounting methods, see When Can I Deduct an Expense in chapter 1. 1040nr online Foreign income taxes. 1040nr online Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. 1040nr online S. 1040nr online possession. 1040nr online However, an individual cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. 1040nr online S. 1040nr online tax under the foreign earned income exclusion or the foreign housing exclusion. 1040nr online For information on these exclusions, see Publication 54, Tax Guide for U. 1040nr online S. 1040nr online Citizens and Resident Aliens Abroad. 1040nr online For information on the foreign tax credit, see Publication 514, Foreign Tax Credit for Individuals. 1040nr online Employment Taxes If you have employees, you must withhold various taxes from your employees' pay. 1040nr online Most employers must withhold their employees' share of social security, Medicare taxes, and Additional Medicare Tax (if applicable) along with state and federal income taxes. 1040nr online You may also need to pay certain employment taxes from your own funds. 1040nr online These include your share of social security and Medicare taxes as an employer, along with unemployment taxes. 1040nr online Note. 1040nr online Additional Medicare Tax is only imposed on the employee. 1040nr online There is no employer share of Additional Medicare Tax. 1040nr online Your deduction for wages paid is not reduced by the social security and Medicare taxes, Additional Medicare Tax, and income taxes you withhold from your employees. 1040nr online You can deduct the employment taxes you must pay from your own funds as taxes. 1040nr online Example. 1040nr online You pay your employee $18,000 a year. 1040nr online However, after you withhold various taxes, your employee receives $14,500. 1040nr online You also pay an additional $1,500 in employment taxes. 1040nr online You should deduct the full $18,000 as wages. 1040nr online You can deduct the $1,500 you pay from your own funds as taxes. 1040nr online For more information on employment taxes, see Publication 15 (Circular E). 1040nr online Unemployment fund taxes. 1040nr online As an employer, you may have to make payments to a state unemployment compensation fund or to a state disability benefit fund. 1040nr online Deduct these payments as taxes. 1040nr online Other Taxes The following are other taxes you can deduct if you incur them in the ordinary course of your trade or business. 1040nr online Excise taxes. 1040nr online Generally, you can deduct as a business expense all excise taxes that are ordinary and necessary expenses of carrying on your trade or business. 1040nr online However, see Fuel taxes , later. 1040nr online For more information on excise taxes, see Publication 510. 1040nr online Franchise taxes. 1040nr online You can deduct corporate franchise taxes as a business expense. 1040nr online Fuel taxes. 1040nr online Generally, taxes on gasoline, diesel fuel, and other motor fuels that you use in your business are included as part of the cost of the fuel. 1040nr online Do not deduct these taxes as a separate item. 1040nr online You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. 1040nr online For more information, see Publication 510. 1040nr online Occupational taxes. 1040nr online You can deduct as a business expense an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. 1040nr online Personal property tax. 1040nr online You can deduct any tax imposed by a state or local government on personal property used in your trade or business. 1040nr online Sales tax. 1040nr online Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. 1040nr online If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. 1040nr online If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. 1040nr online If the property is depreciable, add the sales tax to the basis for depreciation. 1040nr online For more information on basis, see Publication 551. 1040nr online Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. 1040nr online Also, do not include these taxes in gross receipts or sales. 1040nr online Self-employment tax. 1040nr online You can deduct part of your self-employment tax as a business expense in figuring your adjusted gross income. 1040nr online This deduction only affects your income tax. 1040nr online It does not affect your net earnings from self-employment or your self-employment tax. 1040nr online To deduct the tax, enter on Form 1040, line 27, the amount shown on the Deduction for one-half of self-employment tax line of Schedule SE (Form 1040). 1040nr online For more information on self-employment tax, see Publication 334. 1040nr online Additional Medicare Tax. 1040nr online Beginning in 2013, you may be required to pay Additional Medicare Tax on self-employment income. 1040nr online See Form 8959 and the Instructions for Form 8959 for more information on the Additional Medicare Tax. 1040nr online Prev Up Next Home More Online Publications
If you're facing foreclosure, get housing counseling and other assistance.
Housing - Avoiding Foreclosure
If you miss your mortgage payments, you may lose your home through foreclosure. Your lender can use foreclosure as a legal means to repossess your home. If you owe more than your property is worth, a deficiency judgment is pursued. Both foreclosures and deficiency judgments have a negative impact on your future credit. You should avoid foreclosure if at all possible.
These steps can help:
- Do not ignore the letters from your lender. If you're having problems making your payments, call or write to your lender's loss mitigation department immediately. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses, loan documents/ type of mortgage, tax returns, the amount of equity in your home. Without this information, they may not be able to help.
- Stay in your home for now. You may not qualify for assistance if you abandon your property.For example, the Hope for Homeowners program only offers 30-year fixed-rate mortgages to owner occupiers.
- Contact a HUD-approved housing counseling agency. Call 1-800-569-4287 or TDD 1-800-877-8339 for the housing counseling agency nearest you. These agencies are valuable resources.
HUD counselors frequently have information on services and programs offered by government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.
Mortgage and Foreclosure Scams
Most mortgage professionals are trustworthy and provide a valuable service by allowing families to own a home without saving enough money to buy it outright. But dishonest or "predatory" lenders do exist and engage in lending practices that increase the chances that a borrower will lose a home to foreclosure. Some abusive practices include:
- Lease-back or rent-to-buy scams: You are asked to transfer the title to your home "temporarily" to the scam artist who promises to obtain better financing for your mortgage and allow you to stay in your home as a renter with the option to purchase the home back. However, if you do not comply with the terms of the rent-to-buy agreement, you will lose your money and be evicted like any other tenant.
- Fake "government" modification programs: These scams claim to be affiliated with the government or require that you pay high fees in order to benefit from government modification programs. Remember that you do not have to pay any fees to participate in government-approved programs. Some frauds may even use words like "federal" or "government-approved" or acquire website names that make consumers think they are associated with the government.
- Refinance fraud: The scam artist offers to be an intermediary between you and your mortgage lender to negotiate a loan modification. The scam artist may even instruct you to make payments directly to him or her, which the scammer will send to the lender. However, the scam artist will not forward the payments to your lender and you could still lose your home.
- "Eliminate your debt" claims: Some companies may make false legal claims that you are not required to repay your mortgage or that they know of "secret laws" that can eliminate your debt. Do not believe these claims.
- Refinance scams: You are encouraged to sign "foreclosure rescue" loan documents to refinance your loan. In reality, you have surrendered ownership of your home because the loan documents are actually deed transfer documents. You may falsely believe that your home has been saved from foreclosure until you receive an eviction notice months or even years later.
Beware of Foreclosure Rescue Scams-Help is Free
- Beware of anyone who asks you to pay a fee in exchange for a counseling service or modification of a delinquent loan.
- Scam artists often target homeowners who are struggling to meet their mortgage commitment or are anxious to sell their homes. Recognize and avoid common scams.
- Beware of people who pressure you to sign papers immediately or who try to convince you that they can save your home if you sign or transfer the deed to your house over to them.
- Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
Making Home Affordable
The Making Home Affordable Program offers opportunities to modify or refinance your mortgage to make your monthly payments more affordable. It also includes the Home Affordable Foreclosure Alternatives Program for homeowners who are interested in a short sale or deed-in-lieu of foreclosure. Go to makinghomeaffordable.gov or call the Homeowner's HOPE Hotline, 1-888-995-HOPE (4673).