TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from Scarulli in the TaxQuips Forum, with a good question. “My husband was critically ill and hospitalized for a month in 2012. I visited him daily (sometimes more often) as that was the only way I could get information from his doctors relating to his condition. Can I deduct the mileage back and forth to the hospital?”   Dear Scarulli, How awful for you! Is he all right now? Yes, of course you can deduct the mileage and parking fees at the hospital. The rate for 2012 was 23 cents per mile for medical mileage. But, do you have enough total medical expenses to use them? After all, for 2012 you must reduce your medical expenses by 7.5% of your adjusted gross income or AGI (that’s the bottom line on page 1 of your Form 1040). Be sure to take into account the cost of any supplies, wheelchairs, home-care assistance, etc. 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 Yimmy in the TaxQuips Forum, who wants to know. “I moved into a newly constructed home in Oct. 2012. Are the sales taxes paid on the construction materials used in building the home tax deductible? The home is in Georgia.”   Dear Yimmy, We get an answer from Mike Reed, EA in California. Congrats on finishing such big project. Yes, you can deduct the amount in the IRS sales tax table for Georgia, for your family size and income PLUS the sales tax paid on big ticket items. A home sounds like a big ticket. IRS Publication 600 (which has not been updated since 2006??) states that you can consider a home as a big-ticket item if any of the following apply: 1.) Your state or locality imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation. 2.) You purchased the materials to build a home or substantial addition or to perform a major renovation and paid the sales tax directly. 3.) Under your state law, your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation. The contract must state that the contractor is authorized to act in your name and must follow your directions on construction decisions. In this case, you will be considered to have purchased any items subject to a sales tax and to have paid the sales tax directly. After adding up all the sales tax paid plus the amount in the sales tax table, will that be more than the State Income tax you paid in GA for the year? If so, use the sales tax deduction, if not use the state income tax deduction. TaxMama® adds, if it turns out that you do qualify to deduct the sales taxes, REDUCE the basis of the house by the amount of the sales taxes you deduct. And remember, you can find answers to all kinds of questions about sales 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 Paul in the TaxQuips Forum, who says. “On my W-2 why does Code W say “Employer contribution to HSA” when it is the employee who made the contributions?”   Dear Paul, We get an answer from Susan Holtgrefe, EA of Erie Tax Prep. She says that Paul has found a prime example of IRS speak that makes you wonder what planet they came from. According to the expanded W-2 instructions: Code W—Employer contributions to a health savings account (HSA). Show any employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan to an HSA. So yes, that is your $. TaxMama adds that this code W tells the IRS that you did not pay tax on that money. You made the contribution using funds from your cafeteria plan. Great question. You can never be too careful when it comes to your money. And remember, you can find answers to all kinds of questions about payroll deductions, W-2s, 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 TaxSeason in the TaxQuips Forum, with this question. “Is there an easy or quick way to figure the commuting miles for people who file a Schedule C? (ie…5% of business miles)?” Dear Tax, Certainly there is. And these days, it’s even easier. Use Mapquest. Enter their home address and their business address. Print out the mileage information. Multiply by 2 (round-trip). Multiply by the number of days they went to work. And voila! Provable commuter miles. (In the past, I would just ask them how far to work and then do the math.) Why would I ever use percentage of anything? Never. After all, the ‘commute’ is a fixed distance. Any trip not going to the regular work location, is no longer commuting, right? It’s at least a temporary workplace; or they are business miles. Of course, if they file a Schedule C and work from home – commuting miles are ZERO! 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 Joe in the TaxQuips Forum, with a reasonable question. “I am going after an ex client that owes me $11K. Once you get the judgment how do you go after their assets? Does a lawyer handle that?”   Dear Joe, No doubt, each state has different rules. But if you know where the assets are – like the employer, or major clients (accounts receivable), or bank account numbers, or vehicles….give the SPECIFIC information to the officers working with the court. Here in Los Angeles, we have Marshall or Sheriff with an office in the courthouse. We fill out their form with the specific information on where to find specific assets (account numbers, addresses, etc.). We pay the fee. They go get it. Once they have it, they hold it for 30 days. Then they turn it over to us. Incidentally, for a slightly higher fee, the officer will sit in the deadbeat’s office all day, embarrassing the person, and collecting all the money that comes in the mail, money from customers or clients who walk in, etc. All these costs are added to the judgment. So, while you advance the money, the person you’re suing has to pay it. Plus interest on the judgment. Incidentally, if you don’t quite have the judgment yet, you could ask the court to insist he provide a list of his assets (discovery). Read this terrific article about discovery in a divorce case. Do a little research and look up the rules in your state. And remember, when suing a business, be sure to also name the individual owner(s) in the lawsuit as well. So, if the business is dissolved, you can still collect from the owner(s) assets. (Note: If it’s not appropriate to include the owners, the Court will remove them. But will rarely add them.) And remember, you can find answers to all kinds of questions about collecting judgments, 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 TacoBrielle in the TaxQuips Forum, with a common misconception. “I can’t seem to get a definitive answer about this, so I’m asking here. I filed my federal return with a refund amount of $1,132. This refund went to the IRS for previous tax debt that was still owed to them. However, I had to amend my return because I received a late W-2 that I had forgotten. With the addition of this W-2, my refund was changed to $840. So I technically ‘owe’ $292 with the amended return. Since the IRS received the $1,132, do I still owe the IRS this money with my amended return?” Dear Family, The reason I selected this question, from the many that have poured in this month, is – this does confuse people. So… Dear Taco, Of course you owe it! Let me explain how this process works: You RECEIVED the first refund, whether it feels like it or not. It was your money. You (unwillingly) SPENT that refund to reduce your prior tax debt. This IS the definitive answer. And no doubt, this is the answer you’ve been getting everywhere. It’s just not the answer you want. And remember, you can find answers to all kinds of questions about the IRS grabbing refunds, 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 tbachrodt in the TaxQuips Forum, with this question. “I recently filed my taxes. I am already receiving the American Opportunity Credit and Lifetime Credit. I just received an additional 1098T in the mail that I forgot was coming. Do I need to file an amended return, even though I am already eligible for the 2 education credits?”   Dear TBA, Did the additional 1098-T show any additional scholarships in excess of your costs? Have you already used the maximum education credits? In fact, CAN you use BOTH the American Opportunity Credit and Lifetime Credit? Ah…you must have more than one person getting educated. I hope? Otherwise, there’s only one credit per person. No, if there would be no change to your tax return, this is one of those times when you don’t need to do a thing! And remember, you can find answers to all kinds of questions about amending 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 .

Today TaxMama® hears from Goran in the TaxQuips Forum, with this issue. “My client and his mom were on the mortgage together. That property went through foreclosure. Naturally, they file separate tax returns. Which one will report the 1099-C?”   Dear Goran. Aaah…a question that’s easy. But one that applies to many people who share ownership of assets and get only one 1099 to report a variety of income sources, like this 1099-C. (This is called nominee income.) First of all, the IRS computer will be looking for income on ONE tax return. So, whose Social Security Number is on the 1099-C? That person certainly has to report it. Now, if Mom was only responsible for half of it, she needs to include a disclosure statement saying so – and spelling out that the other half belongs to her son, including his name, address SSN and the amount of his share. She will be filing her tax return on paper, not electronically, in order to include this information. Once you’ve taken care of that, they will each report their share of the cancelled debt -and do their own computations about insolvency or whatever needs to be done to minimize the tax impact. And remember, you can find answers to all kinds of questions about how to split up 1099 income 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 Susan in the TaxQuips Forum, with an unusual question. “PA recognizes common law marriages if they started before ‘05. So, if they are now separated, are they doomed to the MFS status until a judge signs a divorce decree? Or, since nothing was filed with the state to begin with can they just say no more and be done with it. Will the IRS accept that? I am amazed at how many people out there just split and never untie their knots.” Hi Susan That’s a good question. Since the marriage is recognized by the law, I would think they would need to get a formal divorce. In fact this is what Cathy Meyer, the About.com divorce guide recommends. If you are unsure and have a client in that position, don’t practice law. Refer them to an attorney. And yes, you make an excellent point. I wonder how many common law couples just walk away from such situations, without filing for a proper divorce. And what are the ultimate consequences? Thanks for bringing that up. And remember, you can find answers to all kinds of questions about common law marriages, 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 someone in the TaxQuips Forum, who keeps asking similar questions about California LLCs and Canadian Limiteds owning an S Corp. So, let me tell you a little bit about S Corporation rules.   Dear Family, An S corporation is not for everyone. First of all you must meet the basic criteria: To qualify for S corporation status, the corporation must meet the following requirements: Be a domestic corporation Have only allowable shareholders including individuals, certain trust, and estates and Have no more than 100 shareholders Have one class of stock (which means that all owners share profits proportionately) Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations. may not include partnerships, corporations or non-resident alien shareholders (in other words – no Canadian or foreign shareholders, no S corporation shareholders.) In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders by the 15th day of the 3rd month after formation. In addition, shareholders who own more than 2% of the business are not entitled to regular employee benefits. Having the company pay for your health care requires excessive paperwork. The working officers/owners/shareholders of the corporation cannot simply draw out money whenever they feel like it. They must be on payroll, getting paid a reasonable salary. (Note: Reasonable is undefined, but the IRS knows when it’s not reasonable – got it?) Now that the IRS is cracking down on S corps that underpay their officers, there aren’t many good reasons to form them any longer. For more information, visit the IRS page about S corps. And remember, you can find answers to all kinds of questions about S corporations, 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, who asks an intriguing question. “I understand that both reinvested dividends and reinvested capital gains distributions get added into a mutual fund’s Cost Basis. But what about Foreign Tax Paid? Does Foreign Taxes Paid also get directly added into a fund’s Cost Basis?”   Hi RJ, Although the answer was obvious to me, I had to think about this for a bit in order to give an explanation that would be clear. So… What do reinvested dividends and reinvested capital gains have in common? Before they are reinvested, you report the income and pay tax on that income. Then, you use those dividends or capital gain proceeds to buy more shares. The basis is increased because you are BUYING more shares. Can you see that clearly? Now, when it comes to the foreign taxes, are you reporting income from the foreign taxes? No. You get to take a DEDUCTION or better yet, a CREDIT. You get a tax benefit, not a tax hit. So…nope. You don’t add them the basis. And remember, you can find answers to all kinds of questions about foreign tax credits, basis, 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 Front9532 in the TaxQuips Forum, who wants to clear up something confusing. “Both my wife and I have Health Savings Accounts (HSA accounts). In 2012 our health insurance plan qualified as a High Deductible Family Health Plan. I am ineligible to make a contribution to my plan since I am over 65. My wife turned 65 in July 2012. I’d like to know, what is the maximum contribution my wife can make to her HSA in 2012?”   Ok Front, Let’s see how this works, going through the steps logically. YOU cannot contribute at all, you say. All right. Your wife will get the extra contribution – but she can only contribute for 7 months. (Being eligible on the first day of July lets her have that month as well – unless her birthday is the first of July?) So, let’s see what the instructions to Form 8889 say. Note: The last month rule is – if you are eligible on the first day of December (or your tax year), you are an eligible individual for the entire year. That rule does not apply to your wife. So…she gets to deduct 7/12 of $6150 = $3588 Plus 7/12 of $1000 = $583, for a total of $4,171 Normally, I would not run these numbers for you. That’s what tax software is for. But, I was curious to see how this would work out – so you’re in luck. Oddly enough, it turns out to be a logical computation. And remember, you can find answers to all kinds of questions about special tax benefits 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 JJ in the TaxQuips Forum, with an unusual situation. “I leased a car this fall. I paid for the entire sum up front, in a single payment. What is the correct deduction for federal taxes?”   Hi JJ What does that mean? You paid for the entire 2 or 3 year term up front? Why? If you could afford that, why not buy a car instead? Never mind. None of my business. Every once in a while, I read things or hear advice on the radio about prepaying expenses. And the experts don’t make it really clear that when you prepay a year or two worth of expenses, you don’t get that massive deduction. You only get a deduction for the expenses that were due within the year you made the payment – 3 or 4 months worth. All that other money is wasted for now. But you’ll get to use in the future. For instance: For 2012, you may deduct the business use percentage of that part of the cost that would have applied to 2012. For 2013, you may deduct the business use percentage of that part of the cost that would have applied to 2013. For 2014, you may deduct the business use percentage of that part of the cost that would have applied to 2014. Are you getting the picture? You don’t get an extra deduction for all the advance payments. You still don’t get to deduct more than 12 months at a time – ever. And you don’t get the full 12 months in 2012, since you only leased it for 3-4 or 5 months. Besides, remember, you can only deduct the BUSINESS use percentage. And you need to reduce that by the Lease Inclusion Amount for your particular vehicle – even when you use the car 100% of the time. Be prepared to prove your TOTAL Mileage and your BUSINESS miles. So keep really good records. And remember, you can find answers to all kinds of questions about vehicles and leasing 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 Chuck in the TaxQuips Forum, with this question. “So I received a 1099-MISC after I filed my taxes last year. (Yes I jumped right out there and got ‘em done and in.) What do I need to do to now so Uncle Sam doesn’t come looking for me? Ahem… file a revised tax return? How do I go about doing that? Would it be better to mutter through it myself, or take this issue to someone that charges to do these things?”   Dear Chuck, If it was for a lot of money, I would file an amended return with both the IRS and your state. After all, you’ll be paying self-employment taxes, in addition to income taxes. The sooner you pay it, the better. If it was a small amount (you decide ‘small’ or ‘large’), let it go. The IRS computer will send you a CP-2000 notice with a proposed assessment. Just pay it. Then file the amended return with your state. Can you do it alone? What software did you use last year? They probably have a 1040X version for you to use. If not, TaxSlayer does. Ideally, do it through the software you used last year. Call their tech support line for assistance if you need it. For this year, a) slow down and wait for all W-2s and 1099s to arrive. b) DO BOOKKEEPING! If you’re freelancing like that, it’s your responsibility to keep books and records. Other people sending you 1099s is NOT your accounting system. (I could spank you.) If you need a good system, you can use FreshBooks, OutRight or QuickBooks Online*. They all have mobile versions of their apps to make it really easy for you to track transactions all day long. In fact, as I am looking at this, I found that Intuit even offers something called GoPayment that allows you to accept credit cards on the go. And integrate the payment into QB.* *These are commissioned links. But, that’s not why I recommend them. They’re terrific, inexpensive options. And they are so much fun! Bookkeeping is more fun than ever! And remember, you can find answers to all kinds of questions about operating a business 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 Sheba in the TaxQuips Forum, who needs guidance. “My daughter is a first year college student out of state. She has a partial loan, partial scholarship and grants. I don’t know what to do with the information from the 1098-T. I still claim her as a dependent and I pay part of her tuition, too. What form do I use for her, or should I just include it all in my own taxes.”   Hi Sheba, Hmmmm… I am not sure, especially since I don’t know all the details and how the grants were issued or for what they were used. May I recommend that go to a VITA center and have them help you with your daughter’s tax return? Will your daughter be back before April 15th? She will need to go with you, since you cannot sign for her. You can get free assistance and show them all the details. Since you have been paying the tuition, it’s quite likely that you can include the costs in your own tax return for either the American Opportunity Credit or the Tuition and Fees deduction. But if any of the grants or scholarships your daughter received went towards covering living costs or anything other than tuition, books and supplies, it’s possible that some of the scholarships or grants may be taxable. In that case, it might be more advantageous for your daughter to pick up the costs. I wish I could give you a more definitive answer. But something on that 1098-T may require that your daughter report something on her tax return. Without seeing it, I have no idea. That’s why I recommend that you have someone look at it – and your tax situation and your daughter’s. If your income is too high to qualify for VITA, and you’re too young for the TCE program (under age 60), you can turn to online tax software. All three of the bigger providers will answer specific tax questions for you. Just upload the documents so they become part of the tax return file. AND their support folks can see it, and they will answer you and give you guidance IF you call and ask for it (via chat, email or phone).   And remember, you can find answers to all kinds of questions about education costs and credits 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 .