If you rent out all or a portion of your vacation home for less than 15 days, you don’t have to report the income. But expenses associated with the rental won’t be deductible.

If you rent out your vacation home for 15 days or more, you’ll have to report the income. But you also may be entitled to deduct some or all of your rental expenses — such as utilities, repairs, insurance and depreciation. Exactly what you can deduct depends on whether the home is classified as a rental property for tax purposes (based on the amount of personal vs. rental use):

Rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.

Nonrental property. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.

In some situations, it may be beneficial to adjust your personal use of a vacation home — or the number of days you rent it out — so that it will be classified in a more beneficial way for tax purposes.

A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income.

Unfortunately, modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2012 phaseout range is $173,000–$183,000.
• For single and head-of-household taxpayers, the 2012 phaseout range is $110,000–$125,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

If the income-based phaseout prevents you from making Roth IRA contributions and you don’t already have a traditional IRA, a “back door” IRA might be right for you. How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion.

An employer enjoys several advantages when it classifies a worker as an independent contractor instead of an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws. However, there’s a potential downside: If the IRS determines that workers have been improperly classified as independent contractors rather than employees, the employer can be subject to significant back taxes, interest and penalties.

To determine whether a worker is an employee or an independent contractor, the IRS considers three categories of factors related to the degree of control and independence:

1. 1.      Behavioral. Does the employer control, or have the right to control, what the worker does and how the worker does his or her job?
2. 2.      Financial. Does the employer control the business aspects of the worker’s job? Does the employer reimburse the worker’s expenses or provide the tools or supplies to do the job?
3. 3.      Type of relationship. Will the relationship continue after the work is finished? Is the work a key aspect of the employer’s business?

The determination of the proper classification under these factors may not always be clear. Fortunately, the IRS offers two programs that may provide some relief: 1) the Classification Settlement Program (CSP), which is available to employers undergoing an audit and allows qualified employers to prospectively reclassify workers as employees, and 2) the Voluntary Classification Settlement Program (VCSP), which allows employers to reclassify workers as employees at a relatively low tax cost outside of the audit process and without the need to go through the normal administrative correction processes.

Now that the U.S. Supreme Court has generally upheld 2010’s health care act, it’s important to consider how it will affect your tax liability. One way might be your Medicare tax liability.

Under the act, starting in 2013, higher-income taxpayers will be subject to an additional 0.9% tax on wages and self-employment income that exceed specified thresholds, generally $200,000 for single filers and heads of households and $250,000 for married taxpayers filing jointly ($125,000 for married taxpayers filing separately).

On top of that, taxpayers are scheduled to be subject to a new 3.8% Medicare tax on net investment income to the extent that their modified adjusted gross income (MAGI) exceeds specified thresholds, also generally $200,000 for single filers and heads of households and $250,000 for married taxpayers filing jointly ($125,000 for married taxpayers filing separately).

Investment income does not include distributions from IRAs, pensions, 401(k) plans or other qualified retirement plans. But distributions from these plans could trigger additional Medicare taxes on net investment income by increasing MAGI.

If your income might be high enough to subject you to these additional taxes next year, consider accelerating income into 2012 where possible. However, you’ll need to keep in mind whether such actions could trigger the alternative minimum tax.

Also consider whether, before year end, you should sell highly appreciated assets you’ve held long term. It may make sense to recognize gains now rather than risk paying Medicare tax on them next year.

These strategies may also prove beneficial if ordinary and long-term capital gains rates increase as scheduled next year. But keep an eye on Congress: A repeal of the provision imposing the additional Medicare tax (as well as an extension of current income and long-term capital gains rates) could occur.

Like many parents, you may send your children to day camp during the summer. But did you know this might make you eligible for a tax break?

Day camp is a qualified expense under the child or dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2012, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Be aware, however, that overnight camp costs don’t qualify for the credit.

Many valuable tax breaks expired at the end of 2011. But they aren’t dead in the water; it’s likely Congress will revive at least some of them. Here are several that may benefit you or your business if extended:

• The alternative minimum tax (AMT) “patch” (higher AMT exemptions and exemption phaseout ranges),
• The deduction for state and local sales taxes in lieu of state and local income taxes,
• The deduction for qualified higher education tuition and fees,
• Tax-free IRA distributions to charities,
• 100% bonus depreciation,
• The research tax credit,
• Accelerated depreciation for qualified leasehold improvement, restaurant and retail improvement property, and
• Various energy-related tax incentives.

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