TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from RJ in the TaxQuips Forum, with a travel question. “I am a single member LLC. I have a long-term (3 year) out-of-state contract, which requires me to be physically onsite at the client’s location 75% of the time (3 weeks per month). I am currently renting an apartment and deducting the rent as lodging expense, in addition to my meals/groceries/utilities/etc. If I buy a condo at the remote location, can I “rent” the condo to my LLC (at fair market rent) and use the property on my personal return as an income producing property (I own several other properties so I currently file a schedule E). Eventually, when the contract ends, I intend to rent the property to other tenants. Also, Is it better to use actual living expenses or GSA per diem rates? My work location is Juneau, AK which has a very high cost of living and a generous per diem rate. My legal residence is Virginia.”   Dear RJ, If you have a three-year contract, the IRS does not consider it temporary. Juneau IS your tax home. You do not get to deduct any of the lodging or meal expenses. Temporary means under a year. This is the kind of thing to research with a tax pro BEFORE accepting the contract. If you had known, you could have negotiated a higher fee to account for the duplicated expenses in Juneau and Virginia. Sorry to be the bearer of bad news. But – under no circumstances should your LLC be involved in paying this rent or any of your travel expenses. And remember, you can find answers to all kinds of questions about travel 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 Raj in the TaxQuips Forum, with a common issue. Let me summarize. (You can read the discussion here ) His tax return is being audited and the IRS auditor wants copies of receipts for his hotel stays for all his travel. But he used the IRS per diem rates, so he didn’t keep receipts. Can she disallow all his travel if he can’t produce the receipts?                                                                      Dear Raj, The IRS allows you to use certain standardized systems to deduct business expenses – like mileage, travel, meals and, this year, even office in home. This is designed to simplify computations, and perhaps, to reduce incidences of audits. However, in all cases, you still need records, receipts, etc. -  proofs that you did engage in those activities, did spend money on those things, etc. So, when you’re using per diem lodging expenses, you still have to have receipts or some other tangible proof that you actually stayed in those towns for those specific nights. Self-employed people can’t use per diem rates for lodging. They must use actual expenses – and keep receipts. However, everyone may use per diem rates for meals and incidentals. Again, it helps if you have records to prove you were in a specific town, on a specific date, for business purposes. If you are an employee, entitled to use lodging per diems, often, when you stay in an area long-term, you stay with your parents, a friend, or relatives, rather than a hotel. Be sure to pay rent, or your share of upkeep on the home. Get detailed receipts for your rent or the payments. The receipts should show the date, the amount paid, and to whom the amount was paid – and for what. When you are paying rent to such folks, be sure they understand that they are reporting the rental income. When you keep good records and have receipts, you can find yourself paying someone $500 a month for a room. However, you could be entitled to deduct $2,310/mo ($77×30 – average rates in the continental US) – or even as much as $8,850/mo ($295×30 in Manhattan), if you look up your city’s specific rate. And remember, you can find answers to all kinds of questions about substantiating travel 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 Pierre in the TaxQuips Forum, with this issue. “In 2012, an S-Corp had an employee who stole cash from them through the inventory and sales. They own a NAPA Auto Parts store. They have camera tapes on him and have reported the theft to NAPA. They did not report the theft to the police or to their insurance company because he was a family acquaintance and did not want to cause harm to the family. The total loss was approx $25,000.00 Can they write any of this loss off even though it wasn’t reported to police or insurance, just to NAPA, their franchise corporate? I looked it up and don’t see anything about police reports or insurance reimbursement, only that they ask how much was the insurance reimbursement. Please let me know you take on it should we write it off.” Dear Pierre, Nope. If they want a theft loss, they MUST file a police report AND the perp must be convicted. Otherwise, there is no proof of a theft loss. (Since not everyone is caught, it’s important to, at least, have a copy of a police report and file number.) Mike Reed, EA adds that Tax Topic 515 covers casualty losses:  The loss, regardless of whether it is a casualty or theft loss, must be reduced by any salvage value and by any insurance or other reimbursement you receive or expect to receive. So, if they didn’t report it to the insurance company, how would you expect to compute the loss? Frankly, the guy isn’t much of a family friend if he engaged in Grand Theft or Grand Larceny. And if they don’t report the jerk, he’ll do it to someone else – another ‘family friend’, who will also be too gutless to report him. And so on. Sorry, the IRS isn’t in business to make it to up to them if they don’t have the balls to own up to their responsibilities. Remember, if the insurance company would have covered all or some of the loss if it had been reported, the deduction would only have been the difference. Good luck explaining this to your clients…of course, if the family really wants to protect them, the whole family should bring pressure to bear on the thief to set a payment plan to repay the whole thing. [Additional TaxMama note: Think about this in terms of employee business expenses. If the employee could have submitted the expenses to the employer for reimbursement, but didn’t – the IRS doesn’t allow a deduction. Anytime a reimbursement is available, but not used, you can’t deduct that part of any loss or expense.] And remember, you can find answers to all kinds of questions about theft losses 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 Marisa in the TaxQuips Forum, with this problem.  Let me summarize. (You can read the details.) “After her father’s death, Marisa received a settlement from a drug company class action suit. It was not taxable in her state. But now she has a notice from the IRS demanding taxes, based on a 1099MISC issued under her name and SSN. What should she do?”   Dear Marisa, So sorry you’re going through this stress. But…take a deep breath.  There’s nothing to worry about. First of all, the letter you got is making a ‘proposed’ assessment. It’s not written in stone yet. Second, this income is not taxable for federal purposes. But the IRS doesn’t know it until you tell them. Clearly, it’s for damages to his health (drug co related). Settlements on physical damages are not taxable. If you have anything at hand to explain what the settlement is, just send a reply to the IRS with a copy of the document (the paperwork you gave the court should suffice). They will remove the assessment. If you no longer have anything on hand, send them a reply with an explanation anyway. Tell the IRS you will be sending them proof soon. Get copies of paperwork you need. And send it along with the IRS document number on the IRS letter you received. The key is – REPLY ASAP. And remember, you can find answers to all kinds of questions about IRS assessments 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 RJ in the TaxQuips Forum, with this question.  “I just came across TaxMama’s 2012-09-04 TaxQuip to “Ivan” entitled “Late Gift Tax Return” (at TaxMamas TaxQuips : TaxMama’s Free Daily Tax Podcasts or Late Gift Tax Return | taxmama | taxquips), which says (in part): ... 2) Did you know that if a gift tax should have been filed and wasn’t, the donee (the recipient) may be liable for the gift tax? ... That’s something I wasn’t aware of. Could you please give some more information on this?” Dear RJ, Unless you have a specific question relating to you or a client, I shan’t be looking for general information. However, you are certainly welcome to do the same search I would. Google the following and read the resulting links:  ”irs.gov recipient liable for gift tax” Or search the Tax Court Opinions for “recipient”, “gift tax” You might have fun doing this. And remember, you can find answers to all kinds of specific questions about gifts 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 YbSick in the TaxQuips Forum, with a common question.  “In a short sale where they abandoned the property and they receive a cancellation of debt, is it non-taxable since it was on their personal residence? Is there a time limit on how long after they move out of the property it can still be excluded? Assume for the time being that they did not borrow more money above the original mortgage.”   Dear YbSick, Mike Reed, our EA in California has good news. The Mortgage Debt Relief Act of 2007 was extended through Dec 31, 2013. The provision allows exclusion of acquisition (or improvement) debt from income. There is no set time limit between the date the T/P leaves or abandons the property and when the 1099-C is issued. Use Form 982 to avoid taxation on the cancelled debt. Remember that even though the cancellation of debt income may be excluded, there could be a gain on the sale – which is usually excluded by §121, as sale of a personal residence. But be sure to report the transaction on the new Form 8949, so that IRS has a record of this. And remember, you can find answers to all kinds of questions about short sales 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 Harry in the TaxQuips Forum, who is frustrated.  “IRS is denying a refund for 2006 individual return. The individual Form 1040 return was filed in 2010 and most of the tax was paid through withholding. An amended return was filed in 2012, requesting a refund of all tax paid due to a casualty loss omitted from the original return. According to 1040-X instructions, IRS pub 556 and a call to the IRS call center, the taxpayers understood they were within the time frame that allows a refund, within three years of the filed return. The taxpayer did the due diligence that would be expected and filed a 1040-X refund claim accordingly.  IRS is now denying the refund based upon IRC 6511(b)(2)(a) & IRC 6513(b)(1), which indicate no refund will be allowed more than 3 years after tax is paid although there is no reference to that in either the instructions to 1040-X, Pub 556 or the call to the IRS call center.      Dear Harry, Essentially, our enrolled agents, Laura in Hawaii and Mike in California are correct. If that first tax return was filed by April 15, 2010, then it was filed on time. Once you file a tax return, you do have three years to amend it. However, to get a refund, you must file for the refund within three years of the due date, or within 2 years of the date it was paid. The amended return didn’t qualify for either. I am not sure why you say the instructions to the 1040X don’t spell that out? I looked at the instructions. Under “When to File” it says exactly that. Sorry to be the bearer of bad news. Why didn’t the call center tell you? Who knows? They don’t get a lot of training and often make errors, or give incomplete information. And remember, you can find answers to all kinds of questions about IRS procedures 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 Then150 in the TaxQuips Forum, with a long post (you can read it on your own). Let me summarize. He’s from New Zealand and studied and worked in the U.S. off and on for a couple of years. He messed up his tax returns and wants to fix them – and he may end up owing money. He also wants to get his wife an ITIN (alien ID #) and sent off her original documents (birth certificate, etc.) to the IRS. Now, he’s sitting on tenterhooks waiting to get them back – and to get her ITIN issued. What now?      Dear Then150, Bill Porter, our EA from the Twin Cities, MN provides a detailed answer about how to fix the tax problems. What I’d like to do is address the ITIN application and those original documents. You really should have gone to a tax pro – one who is an acceptance agent. I really don’t like the idea of giving up my original documents (birth certificate, etc) to the black hole that is the IRS paperwork processing system.  They even have Acceptance Agents in NZ. They can review your documents and certify to their authenticity. It can take more than 6 months for the IRS to process your application. I do hope you get your documents back. Sigh. Meanwhile, if it has been more than 3 months, call the IRS at 800-829-1040 to make sure they have a record of having received your documents. If they have lost them, or don’t know the status, call the Taxpayer Advocate Service and get help tracking them down. And remember, you can find answers to all kinds of questions about IRS procedures 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 AShepherd in the TaxQuips Forum, with a sensible question. “I filed married filing separately this year because, at the time, my husband was incarcerated. He is out now. Can we file jointly still and if so, how can we ( will a 1040x do the job)? I couldn’t claim anything, our kids the EIC etc…. I only got 56 bucks back. Please help we really need the money.” Dear AShepherd, Mike Reed, EA explains. Yes, Per Pub 501 you can change from MFS to MFJ – you must file within 3 years of the original due date. This will be an amended return, thus you do not “return” the $56, the 1040X will compute any balance or refund due. 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 Jack in the TaxQuips Forum, who is frustrated. Let me summarize. After not filing for a while, he got caught up. Now, the IRS has sent his wife a notice saying she didn’t report the sales of her stock. Jack says all that information was right there on their joint return. Why is he getting a threatening, registered letter now?   Dear Jack, Mike Reed, EA explains what is probably going on. As you are finding out, the world operates much simpler when things are filed on time and refunds are timely refunded. Late filings result in more “looks” and more “questions” causing more time and stress – as you said, above. I seriously doubt the IRS “lost your records” – in the end I bet you’ll find the “mistakes” are right there in black & white – the wrong forms, the wrong entries, the wrong expectations. The IRS is pretty efficient – over 124 Mil returns filed last year. Make yourself a promise to be prompt in the future. If necessary enlist an EA to help with your taxes – in the end you’ll pay less, sleep better and enjoy life more. Rita Lewis, EA points out that the notice may be a result of a Substitute for Return that the IRS filed on your behalf when you didn’t originally file a tax return. TaxMama® adds this. After not filing for years, the IRS doesn’t really have a record of your wife’s tax return. Believe it or not, even in the 21st century, the IRS computers only look at the first Social Security Number on the tax return – unless you have a history of filing jointly. That’s why the IRS computers never saw a tax return filed under your wife’s SSN. You may well be able to resolve this with a phone call. Be sure to follow up in writing – after getting the IRS agent’s name and employee ID# – to confirm your conversation. And remember, you can find answers to all kinds of questions about IRS procedures 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 Laura in the TaxQuips Forum, with a tough question. “In 2011 my Elderly client (78) pulled all the money out of a retirement account which his wife had set up for him some years back. My client learned about the account upon her passing and withdrew all the funds not knowing there would be tax implications. The 1099R has the box checked (TAXABLE AMOUNT NOT DETERMINED with a DISTRIBUTION CODE 7). I am trying to figure out the client’s basis. The contact at the bank has no idea what I am talking about. What should I do? Is there anything I can do to reduce my client’s taxable income?”   Dear Laura, What is the source of this 1099R? Is it company retirement account, an IRA or an annuity? With an annuity, the company should know the original cost paid for the annuity. That would be the basis. With a company retirement account, his former employer might know if there was any after-tax money contributed. The IRA, on the other hand? First see if their tax return contains a Form 8606 – NonDeductible IRAs. That form is designed to track the basis. Not everyone includes it in the return – especially for older IRAs. You would need to dig out prior year tax returns as far back as you can go to determine if there were any non-deductible contributions. On the other hand, you can ask him if he was aware of any. Most likely there were no such contributions made, so the whole thing is taxable. Mike Reed, EA adds, if your client does not have past returns, possibly you can get a transcript. And remember, you can find answers to all kinds of questions about retirement accounts 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 a couple of people in the TaxQuips Forum, with similar questions. The second one combines both person’s concerns. “My wife is a graduate student who received a few research grants this year. Some of them want to give the money directly to her instead of through the university, and have asked for a W9. This money will be used entirely for lab equipment, field work, etc., None of it will be used for personal income to her. How is this handled? Do we include it in our income? Are the lab supplies and travel and such deductible as education expenses (my guess is not)? Or would I be able to set this up as a business and handle the income and expenses that way?”   Dear Beagle and JMG, In order to get the grant, you must submit a proposal involving doing certain research or performing certain actions. Clearly, personal services are involved in order to merit the grant. So, yes, it does go on Schedule C. Your wife would report ALL the income. She can report it on Schedule C. She can claim a deduction for the directly-related expenses. She can deduct the reimbursed expenses – since they will be included in her 1099-MISC. Track all her income AND all her expenses. Read IRS Publication 334 to learn more about allowable expenses. And if she pays anyone, have her be sure to get a signed Form W-9 from them when she engages their services – OR put them on payroll if they are her employees. And for the answer to the question about employee business expenses, please read the reply in the TaxQuips Forum. And remember, you can find answers to all kinds of questions about research grants and scholarships 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 Angel in the TaxQuips Forum, with a naive question. “I travel out of the country, on average, 6 months a year. My company handles everything pretty well, but I do have one question. If we take a day off for whatever reason, we lose our per diem for that day. Is this legal as we are still out of the country on business? We work 6 days a week and are off most Sundays; but we get per diem on Sundays even though we don’t work. Just wanted to get someone else’s opinion as this doesn’t make sense to me.”   Dear Angel, How your company chooses to pay you is strictly company policy. There is nothing legal or illegal about it. And if they do the same thing for everyone in your position, it’s not even discriminatory. I know, it’s not the answer you want. This is not a tax question. It’s a labor law issue, right? I bring this up because it’s important to understand the difference between company policy and labor laws. In most states, a company is required to provide break times when you work more than a certain number of hours. Unless there is a union contract, they are not required to provide paid sick leave or vacation, if they don’t want to. Most companies do, because employees expect it and they want to attract employees who stay with them for the long term. So, the time to complain, or negotiate for better benefits is when you get hired. Or, once you start doing an outstanding job, you can lobby for more perks – for yourself and others in your position. And remember, you can find answers to all kinds of questions about per diems 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 Clifford in the TaxQuips Forum, with an excellent question. “I was told in an investment class that dividend income and social security income could be “blended ” to reduce taxes. We were told that up to $70,700 dollars could be sheltered from taxes. When we asked how this could be done, they said to speak to our tax accountant. Mine doesn’t seem to know anything about this, and he worked for the IRS as an auditor for many years.”     Hi Clifford, As it happens, when you are married filing jointly, you are in the 15% tax bracket until your taxable income reaches $70,700. In that tax bracket, qualified dividends are tax-free. Suppose you have $70,700 worth of qualified dividend income. All your dividends would be tax-free. As h2os points out, since you also have Social Security income, up to 80% of your SS income will be taxable. That will raise your adjusted gross income (AGI). However, if you have enough itemized deductions (like mortgage interest, medical expense and charitable contributions) to offset your SS income, you could, conceivably, pay no income tax whatsoever. And remember, you can find answers to all kinds of questions about tax-free living 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 MelissaMarie in the TaxQuips Forum, with a new problem. Let me summarize. She sold her home at a loss last year. She had bought it in 2008 using the Homebuyers Credit – which was required to be repaid – unless she sold the home at a loss. This year, the IRS is holding up her refund because she didn’t include the annual $500 repayment on her tax return – which she did not owe! What can she do?   Dear MelissaMarie, You have my deepest sympathy. The whole first time homebuyers credit thing was so messed up when they set it up, I am not surprised that there is such mess at the back end. Many people and tax pros are running into problems with it. Since this is affecting so many people, I suspect that the Taxpayers Advocate Service may not be willing to take it on. But ask them. They did a great job on the front end. You can call them at 1-877-777-4778. And since it’s been this long – and you have been tracking it (keep notes), they may be willing to step in. NOTE TO READERS: If you or your clients are having problems with the Homebuyers Credit this year, please let me know. I am working on an article (and talking to the IRS) to find ways to help avoid this problem in the future. (Please post your responses in the TaxQuips Forum – here.) And remember, you can find answers to all kinds of questions about the first time homebuyers credit 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 .