Q:

Subject: daughter’s taxes

 

Kerry,  Our daughter is a student at NAC in Harrison.  She has lived in Harrison since July with my mom and has worked part time at Home Depot since July.  So this year she will have her own W2 form.  I am guessing that she will need to file her own taxes?  I just want to be sure before I tell her to do it. 

A:

That’s not necessarily the case.  It’s a bit of a gray area. 

Since she was a student, you are still allowed to claim her as a dependent if you have been paying for more than half of her living expenses during the past year, even if she isn’t in your home. If you’ve been giving her money for living costs while she was at your mom’s, you can count that as part of your support contribution.

If your mom has been covering your daughter’s living costs while she was there, and you covered them for the early part of 2006, it may be that neither of you paid more than 50% of her living costs for the entire year of 2006; which would mean that your daughter would have to claim her own personal exemption.

The real test that make most tax sense is based on how much she earned during the year.  If she made more than $5,150, she will save on taxes by claiming herself.  If she made less than that, there is no need for her to claim herself and it would be better tax-wise for you to claim her, as long as you met the more than 50% support test.

I hope this isn’t too confusing.

Kerry

Q:

Subject: Question regarding C corporations and double taxation

Hi Kerry,

 

I just visited your web site and found it very informative.  I’m sure you’ve heard this before but I attended a Real Estate Investors seminar and they spoke of setting up a C corporation for asset protection and tax savings purposes.  And of course, for a fee, they would help us do that.

 

Later, another investor from the seminar and I decided to purchase a Mobile Home Park in Mabelvale Arkansas.  I am from Connecticut and my investment partner is from California.  We decided to go ahead with setting up a C corporation as had been suggested at the seminar.  So now we each have C corporations set up in Nevada.  Those two C corporations manage XYZ LLC.  That XYZ LLC is then the single member of another LLC that ownes the Mobile Home Park.

 

The reason why I am writing to you is to get your opinion on the whole thing.  In my opinion, it seems to be overkill.  It seems to be very layered and I’m not sure if we will gain any tax savings from it.  I think we probably could have just created an LLC that owns the Mobile Home Park and get some good insurance and be done with it. 

 

I understand that as the rental income profit from the Mobile Home Park is placed into the two C corporations we will have to pay tax on that income.  However, how do we get money out from the two C corporations without having to pay tax again (double taxation)?  If there is double taxation then what is the purpose served by the C corp?  Or is that not an issue in this case? 

 

Anything you can offer on this subject would be greatly appreciated.

 

Thanks,

A:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

You definitely need to make sure whoever you work with has experience in multi-state taxation.  Even though your corporation may be chartered in Nevada, which has no State income taxes, the fact that the property is located in a taxable state (Arkansas) means that your corp and/or LLC will have to file income tax returns with that state.  This applies to any state in which you have property or are physically present to earn money.  You may not have to actually pay any Arkansas tax if the net income has been shifted out of state properly; but you do have to file an income tax return or else the State DFA will assume that all of the gross receipts are pure profit.

Any good tax advisor can help you avoid double taxation of C corp income.  There are many ways to do that.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

What Is The IRS Thinking? – Forbes magazine looks at how IRS has been implementing the new more generous rules for non-spouses to roll over inherited IRA accounts.

Basic common sense tips from Nolo Press.

Seven Steps to Lower Your Taxes 

Top Seven Tax Deductions for Seniors and Retirees

Created at Atom Smasher by KMK

From the latest Intuit ProConnection Newsletter:

Numerous Tax Changes Now in Place for 2007 and 2008 – Good look at what’s in store for the next two years; at least until the next tax law.  Includes a handy summary for clients in MS Word format.