TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from SwampWiz in the TaxQuips Forum, who is frustrated (can you blame him? Please read his detailed rant. Following is simply a summary.)  “I had read an official IRS notice that stated that if the individual’s income were to be “higher” than the one that had been proposed for the subsidy, the individual would face a tax liability for that difference. Unfortunately, I cannot seem to locate that document online! Dear Swampy,  You’ve come to the right place. The information on the reconciliation of the credit can be found at IRS Regulations 1.36B-4(a)(3)(i).  (Courtesy of page 4-39 of the updated Spidell Annual Update syllabus) Note that there is a limit on the repayment if they have received excess credits. They may end up repaying less than the full amount of the subsidy. Try to figure all this out. It’s absurd that the legislators made it all this complicated. As Josh Brolin said in one of the few episodes of Mr. Sterling, Congress should not pass any tax laws without being required to prepare their own tax returns. And remember, you can find answers to all kinds of questions about the Health Care Act and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Pope in the TaxQuips Forum, with a request.  “Could you publish a table showing 2013 & 2014 standard tax items. Things like standard deductions; personal exemptions; mileage rates (business, medical, charity); income limits—phaseout of itemized deductions; etc.?” Hi Pope, Good question. But I don’t need to. Here’s a good source, mostly, all in one place on Steve Hopfenmuller’s www.smbiz.com website. It’s where I go to find up-to-date tables quickly: Corp and Individual Tax Rates for several years, up to 2014 Scroll down to find Standard Deductions and Exemptions and Phaseouts Vehicle Tables, including mileage (and included depreciation), Depreciation limits and Lease Inclusions And remember, you can find answers to all kinds of questions about quick resources and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Pia in the TaxQuips Forum, with the kind of question people often ask.  “We were wondering if it is tax-deductible to deduct the installation of hardwood floors for my autistic daughter who is severely allergic to carpet. Carpet causes uncontrolled seizures.” Dear Pia,  Anytime you want to claim a home improvement as a medical deduction, you need to do two things: 1) Get a letter from the doctor saying that this is a medical necessity. 2) Figure out how much the improvement adds to the value of the house. If the cost is more than the increase in value (if any), then you can deduct the difference as a medical expense - providing you met condition #1. I hope this works for you. Regardless, I am sure your daughter feels much better. And remember, you can find answers to all kinds of questions about medical expenses and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum

Today TaxMama® hears from Johnathan in the TaxQuips Forum, with a good question.  Let me summarize. “Although I have lived in my home for more than two years, I don’t have proof of that. My voter registration, driver’s license and banking all show a friend’s address. What kind of penalties will I face if the IRS disallows my personal residence exclusion when I sell my house this year?” Dear Jonathan,   Sigh…this IS going to be a problem. And it’s the kind of thing that affects many people. Let’s look at other proofs of residence, shall we? Does your state have a homeowner’s credit on the property tax? Did you claim it? Is your name on the utility bills? Was a tenant’s name on the utility bills during that time? Do the utility bills show actual usage of utilities – or just the bare minimum charges? Your credit cards generally ask for a street address, even if you use PO Boxes, etc. Did you use your home address? Or your friend’s? Did you get involved in any local groups, clubs, religious organizations? Do you know any neighbors who can testify that you lived there? You may be able to get them to sign a sworn, notarized affidavit. Be creative and look at ways to prove you lived there. If you claim the personal residence exclusion and lose it? You will have to pay taxes on the gain on the sale of the house – after you deduct all the commissions and selling costs. (Will the profit really be all that high?) The good news is, since you have owed the house for more than 1 year and 1 day, you will face long-term capital gain rates. Probably no higher than 15% unless you’re in a really high tax bracket. I doubt that you would face fraud penalties. IRS looks at good faith and sincerity. But, this is a good lesson for others to learn. When you buy a residence – update all your registrations (DMV, driving license, voters, etc.) I hope this works out for you. And remember, you can find answers to all kinds of questions selling your home and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Shelli in the TaxQuips Family Forum, with this concern.  “Have any of you mastered how you will handle this year’s Electronic FBAR filing requirements for your clients? Is there software that will assist?” TaxMama Note: The FBAR form is for people who have or control financial assets outside the U.S. If the total of all the offshore accounts reaches $10,000 or more during the year, the form must be filed with the U.S. Treasury (not the IRS) by June 30th of the following year. The penalty for not filing the form starts at $10,000.   Dear Shelli You’ll be able to do it directly from the BSA site. It would be wise to identify all your clients who are going to need to file the FBAR form early in the year. Then register them at the site as soon as you can. File the new Form 114 when you get all the data. Note: I haven’t found a copy of the form yet. But if the IRS operates the way they have been, you can count on the new form not being available in time. Regardless…get your clients registered into the system. It will be a fun year! And remember, you can find answers to all kinds of questions filing requirements and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Patricia in the TaxQuips Forum, with this question.  “I have a client who is 70.5 and working for his own company. He has a 401k plan. Does he have to start taking distributions from his 401k because he is 70.5, even though he is still working? Can he still contribute to his 401k since he is still working? Finally, is there a difference in any of the above if his company is an S or C Corp?”   Dear Patricia, Mike Reed, our Enrolled Agent in California replies: Yep – because he is more than a 5% owner, RMD’s are required. RMDs are generally not required if still employed, even part time, at 70.5+ (never seen one that was required, but still used the word “generally”), with the exception being more than 5% owner. From the 

Today TaxMama® hears from Chan  in the TaxQuips Forum, with this question “If my business had an unexpected loss of $102k at end of year last year but I made my quarterly payments anyway – will I have a large refund or credit if so? Where did my tax dollars go? Why has my accountant made me pay in more money all year?” Dear Chan, Your accountant made you pay those estimated taxes all year for two reasons: 1) You had substantial profits last year – and those ES payments are based on last year’s taxes. Or in the last year for which your accountant has numbers (2011). When did you give him the profit and loss statement for 2012? (If you are like some of my clients, I didn’t see those numbers until last week - and got some major surprises.) 2) You didn’t have the good sense to meet with your accountant during the year to re-evaluate your required estimated taxes – and to discuss your losses, as they were incurred. If you had done that, two good things would have happened to you: i) Your accountant would have told you to stop making those quarterly payments. ii) Your accountant might have been able to give you some guidance on how to avoid more losses, or to increase your profits – or even suggested that this might be a good time to cut your losses and get out of the business. (Note: If you WERE seeing your accountant and s/he didn’t do those two things noted above? Then you definitely need a better accountant. NOW!) You will get a tax refund for all those excess estimated tax payments. So, the sooner you get your bookkeeping together, the sooner you can file your tax return and get your money back. And remember, you can find answers to all kinds of questions about re-balancing your income taxes and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from “AReasonableMan” in the TaxQuips Forum, with a question about his wife’s inheritance.  Essentially, it boils down to this. His mother-in-law died. Among the items his wife inherited is an IRA. When a person is over age 70 ½, they are required to draw a certain amount out of their IRAs and retirement plans each year – or face a substantial penalty. This is a called a Required Minimum Distribution or RMD. The Man says his mother-in-law did not draw her RMD for the year before she died. The IRA administrator sent it to his wife. The Man wants to know, who pays tax on this RMD – his wife or mother-in-law?                                                                       Dear Mr. Oh So Reasonable, Mike Reed, EA in California responds, with a great deal of detail, including links to the sources of information. In essence, Mike explains that if the RMD had been drawn during Mom’s lifetime, the taxes would have been paid by her estate. Since the RMD was drawn after her death, the beneficiary (his wife) is responsible for the taxes. Mr. Oh So Reasonable complains about all this and the unfairness of it all – and the fact that the IRS doesn’t provide any information about this. Whine, whine, whine… In fact, the IRS does, and TaxMama® provides a variety of links that pop up easily in any quickie Google search. Clearly, he never even looked. But the real issue I want to bring out is – if you are so concerned about keeping taxes lowest? Deal with this during a person’s lifetime. Mom was clearly in her 70’s. Help her deal with her tax issues (like taking an RMD in January), and help her put together a written will or trust. I know, it’s a tough conversation. But done with love, and honest concern, rather than pure greed and hostility, this is an important conversation to have. It will keep taxes low. It will keep probate costs low (or eliminate them in many states). It will reduce friction among the heirs and survivors. And remember, you can find answers to all kinds of questions about post-death tax issues and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from George in the TaxQuips Forum, with this question. “I just bought a new truck to use for business use and I have a few questions: 1. I want to add a few after-market parts – running boards, heated seats, and heated steering wheel. Will I be able to deduct the cost of these  items on my taxes? If it matters, I use a 4-wheeler to plow snow at the rental houses. I use the truck to haul the 4-wheeler around. The heated wheel and seats are nice when coming in out of the cold. But I don’t think anyone could argue that they are “needed”. (I’m not that’s sure if that’s required for the deduction or not) 2. I plan to use the truck for 100% business use, however it’s possible that could change and I’m wondering if that would affect the possible deductions with the items above if I use it for some personal use. 3. What happens if I use the truck for 100% business use for the first few years but then in the 7th or 8th, it drops to 90% business use? Is there any kind of recapture (or something similar) that i would have to do?”   Dear George, Mike Reed, EA in California responds, with wisdom. Mike explains that to deduct a business expense it must be ordinary and necessary. Your expenses sound both ordinary and somewhat necessary. Now, do you expense these items (completely write them off in the first year) or depreciate them over several years? If they are going to last more than a year, you should expense each item over its expected useful life. However in reality if the asset is valued at less than a couple hundred dollars you can expense it all in the initial year without any problems. If you have several hundred dollars in added equipment, avoid any problem and use a five year life. Depreciation of motor vehicles has several restrictions. You should talk with a tax professional to be sure you start off with the most advantageous method for your situation. If you use the truck 80% for business and 20% for personal, then you simply allocate the expenses by the usage. Figure this percentage each year – keep a mileage log, and log all expenses. And remember, you can find answers to all kinds of questions about vehicle costs and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Shauna in the TaxQuips Forum, with this news. “I just found out that I was pregnant and my baby is due in October. Would it be smart to add my unborn child to my W-4 now? Also which would I come out better doing, claiming head of household or just single (because I am a single parent)?”   Dear Shauna, Mike Reed, EA in California congratulates you on the expected arrival! Mike says, you can change your W4 withholding certificate with your employer at any time. The IRS has a handy link to a withholding calculator. As for filing Head of Household or Single, HOH is always better if you qualify. TaxMama adds that Mike is right about the withholding. However, please be careful and run the numbers to see what your taxes will be. It will be a hardship if you have reduced your withholding too much and have to pay in April. Take care of each other. This will be an adventure. And remember, you can find answers to all kinds of questions about filing statuses and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Crazy4Cats in the TaxQuips Forum, with this a very long question. Let me summarize. “Her husband works in Illinois and they live in Wisconsin. When they started out, they went to a storefront preparer who told them there is reciprocity between the states, and apparently only prepared a WI tax return. She and her husband have been doing their own taxes using software for many years – getting huge refunds from WI. Now WI is telling them that they have been preparing their returns incorrectly all these years and WI wants their money back. What can she do now?” Dear Crazy4Cats, Sorry that you’re going through all this based on one-time advice from a store-front preparer. Typically, when you work in one state and live in another, it’s wise to read up on the laws yourself to see exactly how to report the income. Are you saying that you only filed a Wisconsin tax return and did not include the Illinois income? You cannot get away with NOT reporting the income in either state. When they say there is reciprocity, it means you must report the income in the state where you live – even if you don’t report it in the state where you work. In fact, the way reciprocity works is – you file a tax return in the state where you work. Then, you report the same income in Wisconsin. You get a credit for the taxes you paid to Illinois. However, there IS a question I can answer. The state of Wisconsin has a 4-year statute of limitations on audits. So, they can only go back 4 years, in theory. However, the bad news is, all tax agencies have NO LIMIT on the time they can go back when it comes to unreported income. Most likely, though, they will only go back 4 years. Wisconsin wants you to file correct return for 4 years, and you must file a return with Illinois to collect your refund from them to avoid the double taxation. The bad news is, you only have three years from the due date of the Illinois return to be able to collect a refund. You are apt to be out one year’s refund. So you want to get to work on this quickly. I do suggest that you go to an Enrolled Agent to help you sort this out and to help you avoid penalties with the state of Wisconsin. You can find one locally at NAEA | Powering America’s Tax Experts or get in touch with a CPA. For the rest of the answer, please visit the TaxQuips Forum. And remember, you can find answers to all kinds of questions about multiple state tax returns and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

1) A plane was coming in for a landing at the Athens airport. As the plane flew was low over some hills , a lady asked the flight attendant: “What’s that stuff on those hills?” “Just snow,” replied the flight attendant. “That’s what I thought,” said the lady, “but this fellow in front of me said it was Greece.” 2) An instructor in chemical warfare asked soldiers in his class: “Anyone know the formula for water?” “Sure. That’s easy,” said one student. It’s H, I, J, K, L, M, N, O.” “What, what?” exclaimed the instructor in bewilderment. “H to O,” explained the student. 3) A famous admiral and an equally famous general were fishing together when a sudden squall came up. When it died down both eminent warriors were struggling helplessly in the water. The admiral floundered his way back to the boat and pulled himself painfully in. Then he fished out the general, using an oar. Catching his breath, he puffed: “Please don’t say a word about this to anyone. If the Navy found I can’t swim I’d be disgraced. “Don’t worry,” the general said. “Your secret is safe. I’d hate to have my men find out I can’t walk on water.” Courtesy of Marilyn Kirschenbaum, who is keeping me laughing this year Your clean humor is welcome! Read more Money Funnies and Inspiration here: http://taxmama.com/category/asktaxmama/money-funnies/

Today TaxMama® hears from Straffan in the TaxQuips Forum, with this quick question. “Do you have to keep a separate log with start and stop odometer readings for each business trip? Or can you just add mileage notes to a daily planning diary? Would you still have to include odometer readings in the diary to comply with IRS requirements?” Dear Straffan, A few weeks ago, I read a Tax Court case that blew my mind. (I must admit, I don’t remember the citation.) The Tax Court disallowed the mileage deduction because the taxpayer only noted where he was going in his daily diary. In other words, he noted only the name of the client. He did not include the starting address for the day. the address of the client or appt. the miles to that place. the next address or appt. the miles to that place. and so forth. I could not believe that the Tax Court wanted that much detail. Who would have time to get any work done if we spent all our time entering information we already know because we often see the same people or go to the same places all the time. So, to answer your question, you may keep all the notes in your daily diary. BUT, expand the amount of data you enter, to include the specifics – who, what, where, and how far. Good luck getting anything else done! And remember, you can find answers to all kinds of questions about business expenses and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Amaq in the TaxQuips Forum, with this question. “We sell a B2B software all over the world. We are based in Pakistan. Many of our clients are from USA so we want to register an LLC in either Wyoming or Delaware.  We do not have any physical presence in US, nor will be hiring any regular employees for now (currently looking for commission based and virtual employees only).  Would you kindly provide various tax rates such as Federal etc., applicable to us, if any, considering we have never been physically present in USA? We are processing payments via 2Checkout service and our annual revenue is less than $50,000. Dear Amaq, If you register a company in the US, and you set up a bank account or merchant credit card account in the US to receive the funds, you HAVE EARNINGS IN THE US. All your sales, less expenses, will be taxed here for federal (national) tax purposes. I am not clear why you need to register a presence in the US at all. Your business is doing fine without it. I urge you to avoid the extra tax complications unless you have a really good reason. You asked about the rates. As an LLC, you need to select a way to file your taxes. You cannot file as a US individual or a US partnership, or an S Corp, since those al require you to have Social Security numbers (in essence). So your only choice for reporting is as a C Corporation. (That’s a regular corporation.) Here is a schedule of the tax rates for C Corps. So if you do want to set up that LLC, this will help you decide if the costs are worth it. And remember, you can find answers to all kinds of questions about LLCs and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® wants to alert you about some important deadlines looming at the end of June 2013.     Dear Family, There are two important deadlines coming up on June 30, 2013. Beware, even though that date falls on the weekend, I am not seeing any evidence that the deadline has been extended to the following Monday, July 1st. First deadline is for taxpayers with bank accounts or financial assets overseas containing a total of $10,000 or more at any time during 2012. You must file an