Edward A. Lyon, JD
TaxTuneup.com, Inc.
3416 Shaw Ave #5
Cincinnati OH 45208
513.321.2821
elyon@taxtuneup.com
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Nanny Tax
The nanny tax is a payroll
tax you pay on wages for household employees. You'll really need to pay it if you
want a high-ranking cabinet post. This includes Social Security and
Medicare, plus federal unemployment tax and any state workers' compensation
and unemployment taxes.
You owe the tax if you pay a household
employee more than $1,100 in any year. Figure the tax on
Schedule H and
carry the amount to
Form 1040. For more information, see
IRS
Publication 926, "Household Employer's Tax Guide."
Nanny Wages
(See
Dependent Care Credit,
Flexible Spending
Account)
Native American Healing Rituals
Deductible Medical
Expense subject to the 7.5% floor.
Net Operating Loss
A net operating loss, or NOL, is a business loss that exceeds your current business income. You
can use a net operating loss to shelter other income from the year of the
loss. If your other income isn't enough to absorb the loss, you can carry
the loss back to claim a refund of taxes paid in previous years, then carry
any remaining loss forward to offset future income. For losses in tax years
beginning before August 6, 1997, the carryback period is three years and the
carryforward period is 15 years. For losses in tax years beginning after
August 6, 1997, the carryback period is two years and the carryforward
period is 20 years. Here are the rules:
-
You can choose to relinquish
the carryback period and forego and immediate tax refund if you think the
tax savings from future years will be worth more than the refund. This
makes sense if your tax bracket in the future will be higher than in the
past. To make this election, attach a letter to your return for the year
of the loss.
-
To carry back your net
operating loss, subtract the loss from your previous year's adjusted gross
income. You'll also have to recalculate various itemized deductions
allowable only after exceeding a certain floor of adjusted gross income.
You can use
Form
1045 to claim the refund within one year from the end of the tax
year for which you are claiming a refund, or
Form
1040X to claim the refund within three years.
-
Report carryforward losses as
"Other Income" on
Form 1040.
-
The net operating loss rules
apply to losses from proprietorships, partnerships, limited liability
companies and partnerships (if taxed as partnerships), S corporations, and
also casualty losses.
Example:
In 2005, 2006, and 2007, you report annual profits of $2,000 from a
sideline consulting business. In 2008, you report a $9,000 loss. You can
file amended returns to claim a refund of taxes you paid from 2005-07 and
carry forward the additional $3,000 to offset future income.
For more information, see
IRS
Publication 536, "Net Operating Loss."
Newsletters
(See Subscriptions)
Newspapers
(See Subscriptions)
No-Additional-Cost Service
(See Employee Discount)
Nondeductible IRAs
Nondeductible IRAs
are ordinary Individual
Retirement Accounts for taxpayers who don't qualify to deduct their annual
contributions. If you actively participate in an employer retirement plan
and your income exceeds the deduction limits for ordinary IRAs, you can
still contribute to a nondeductible IRA to get tax-deferred compounding
without the up-front deduction.
Use
Form
8606 to report nondeductible contributions, and keep a copy of
each Form 8606
as you add to the account. When you withdraw money from the account,
allocate part of the withdrawal to your original contribution. To figure
the tax-free portion of each withdrawal, divide the sum of all
nondeductible contributions by the sum of all your IRA account balances.
Repeat the same process for future years' withdrawals. Each year, as you
withdraw money, your "nondeductible balance" will shrink by the tax-free
portions of each year's withdrawals.
Example:
In 2000, 2001, and 2002, you make a total of $6,000 in nondeductible
contributions. The account is now worth $20,000 and you'd like to withdraw
$2,000. Since $6,000 of the $20,000 balance, or 30%, is from nondeductible
contributions, 30% of your $2,000 withdrawal, or $600, is tax-free. The
next year, your account grows back to $20,000. You'd like to take out
another $2,000. Since just $5,400 of your $20,000 balance, or 27%, remains
from nondeductible contributions, 27% of your $2,000 withdrawal, or $540,
is tax-free.
Nonqualified Deferred
Compensation
Nonqualified deferred
compensation plans, or "deferred comp plans," are arrangements where a
business promises a future income or benefit to an employee--presumably when
the recipient's tax bracket will be lower than today. The business gets no
current tax break for the promise, even if the business sets aside money to
pay the future benefit. At the same time, the employee pays no tax on the
promise until the benefit "substantially vests," or the employee actually
becomes entitled to the money. This risk of forfeiture provides the tax
deferral. These plans are called "nonqualified" to distinguish them from
qualified plans that give you an immediate deduction for contributions to
the plan.
Typically, the business
establishing the plan establishes a trust and funds it with permanent life
insurance on the life of the employee. A "rabbi trust" (so-named because
the first one the IRS approved was set up for a rabbi) provides that money
you put in the trust remain subject to the claims of the employers?
creditors. A "secular trust" isn't subject to creditors? claims; however,
the IRS argues that contributions to a secular trust are immediately
taxable to the employee. Earnings inside the policy grow tax-deferred, and
the entire death benefit is available for the business or the employee.
(If the death benefit is payable directly to the employee's designated
beneficiary, the employee will be taxed on the value of the death benefit
provided. Table P.S. 58 specifies the value of that benefit depending on
the employee's age and the amount of coverage. See
Group Term Life
Insurance.)
Deferred comp plans are
popular tax-advantaged supplemental retirement programs, as well as
"golden handcuffs" to retain favored employees. There are no coverage
requirements or nondiscrimination rules as there are with qualified plans.
The business can pick and choose which employees to reward on a
confidential basis.
Nonqualified Stock Options
(See Stock Options)
Nontaxable Income,
Nontaxable income, or exclusions
from income, includes all sorts of receipts that taxpayers mistakenly report
to the IRS. Make sure you don't enrich the Treasury with taxes on income you
don't have to report. Each of these types of income may be partially or
fully tax-free:
For more information, see
IRS
Publication 525, "Taxable and Nontaxable Income."
Nose Job
(See Cosmetic Surgery)
Nursery School
(See
Dependent Care Credit)
Nursing Costs
Deductible Medical
Expense, subject to the 7.5% floor (Registered nurse fees are fully
deductible; practical nurse fees are deductible for medical services only).
Nursing Home
Deductible Medical
Expense, subject to the 7.5% floor, if the patient is confined for
medical treatment.
If you pay an up-front entrance
fee to a continuing care facility, you can deduct whatever portion of the
fee you can show relates to medical costs. However, if the fee is
refundable, part of it is considered a "loan" to the facility. You might owe
tax on imputed interest if the "loan" tops certain amounts. The facility
will tell you how much of this "interest" is taxable.
Nylon Stockings
Deductible Medical
Expense, subject to the 7.5% floor, if prescribed for varicose veins.
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