TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from Kelly in the TaxQuips Forum, who is confused. Let me summarize. “Kelly’s father died, leaving the house to the children. But the value is less than $5 million, so no estate tax return needs to be filed. Why do they need to file anything to report the sale of the property?” Hi Kelly, I know how confusing this can be. But, believe it or not, you’re talking about two different things. The return that does not need to be prepared is a Form 706 because the value of the estate was less than $5 million. But when you sell a property, a tax return must be filed by someone. In this case, it would be the decedent’s estate – a Form 1041. Yes, I know it’s confusing. They are both called ‘estate returns’. Wouldn’t it be nice if there were names that were CLEARLY different? Alas, that’s not the case. So…to report the SALE, you DO need to file, and issue K-1s. In this case, it will probably be an advantage to the heirs, because they’ll probably get some losses to deduct due to the commissions and other costs of selling the house. Get a tax pro to do this. And remember, you can find answers to all kinds of questions about inheritances, 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 Mark in the TaxQuips Forum, who is bewildered. Let me summarize. “Mark received a post-doctoral fellowship that covered his salary to do research. It came with insurance and other employee benefits. The income was reported to him on a 1099-MISC. He paid taxes on the income. Two years later, the IRS is asking him to pay self-employment taxes on that income. Why? And how can he resolve this?” Dear Mark, I am so sorry that you’re going through this. And I will give you a couple of suggestions about how to handle this. But first, the commercial…or admonition. If you are smart enough to qualify for grants and to do research, you’re also smart enough and responsible enough to read the paperwork that comes with it. I am willing to bet that if you pull out the docs, it spells out your financial responsibilities. Also, when you get a 1099-MISC with an amount in the Self-Employment box, the IRS computers will be looking for (amazing concept) the Schedule SE in the return, showing that you’re paying the self-employment taxes. Now, how could you have gotten around this – or at least, reduced your taxes? And you can do these things now – and send the appropriate documents to the IRS to reduce the taxes. 1) You should have reported the income on Schedule C – where, yes, you could have deducted all relevant costs related to the research – supplies, materials, books, possibly even your computer (if the project was for at least three years). Probably not mileage, since you’re working in the same place all the time. 2) You can use Form 8919 to claim that you were an employee and not responsible for the SE taxes. (READ THE INSTRUCTIONS TO FORM 8919 CAREFULLY.) You will also have to fill in a Form SS-8 to explain WHY you were not an employee. This form has a series of detailed questions it asks about the nature of your work, and the relationship to your employer. However, it is quite likely that the IRS will ask for a copy of your grant contract. And if that grant spells out that you are on your own, (2) may not be a viable option. But it doesn’t hurt to try. Consider getting an experienced tax pro to help you. Perhaps you can get some of the penalties waived. Though, I think, at this point, the only penalties are for late payment. That will not be waived. And remember, you can find answers to all kinds of questions about grants, 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 Grace in the TaxQuips Forum, with this charming question. “We have a friend that is dying of terminal cancer and is expected to pass away within 6 months. We will use a web-site that easily allows fund gathering. But we need to know if there are tax consequences to her estate if all the money is not used by the time of her death. Can it be given to her son as joint owner of a savings account? One of the donors is concerned it will get tied up in her estate and get taxed. Is he correct? Can’t people just give money to those in need, without worrying about either issue, since it’s not a really large amount?” Dear Grace. That is so sweet of you and your friends. As long as these people are not looking for a charitable contribution, they are all welcome to help out. They can each give your friend up to $13,000 a year without the giver needing to file a gift tax return. That shouldn’t be a problem, should it? Set up the account as a joint account with the lady’s son. That way, when she dies, it will automatically be his, without any fuss. How’s that for making things simple? And remember, you can find answers to all kinds of questions about gifting, 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 Robert in the TaxQuips Forum, who has this tale of woe. “My car was parked in front of the house and was hit by a hit and run driver. The car had about $10k in damage that my insurance took care of. I had a professional report done where they took pictures of the vehicle and gave comps of similar vehicles. The report stated that the diminished value of the vehicle was approx. $7,000. I have seen all over the internet that it can be a tax write off, but these are from the sites of the people who do the reporting and get paid for it. I would like an opinion of a tax expert if this in fact a legitimate write-off?” Dear Robert, Wow, an accident without you even being involved! Yes, there is a tax break, sort of. I say ‘sort of’ because it’s a very ungenerous break. You might be able to get a casualty loss deduction on Form 4684. But, before you can use it, you first have to reduce your loss by 1)10% of your adjusted gross income (the bottom line on page 1 of your Form 1040 long form) 2) $100 and possibly – 3) 2% of your adjusted gross income, for the portion of the vehicle you used for your job (if you did use this car for your job). So, by the time you get done reducing your casualty loss, there often isn’t enough to bother with. But, try it and see if it works for you. However, if you used the car for business (not a job) reported on Schedule C, you won’t face any of those limits for the business portion of the loss. Read IRS Publication 547 for more details on how it works. I hope you end up with a net deduction after all your inconvenience. And remember, you can find answers to all kinds of questions about casualty 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 various people in the TaxQuips Forum, with a variety of questions about illegal activities or very private information. Dear Family, TaxMama.com is a public website. We set it to require a log-in in order to help us identify those who use it – and to, hopefully, discourage scammers from accessing the information and using it against you. When I do see posts that are excessively sensitive or private, I do my best to change your display name to only a first name and last initial. And to remove your SSNs, visible email addresses and phone numbers. But folks, this IS a public website. And there are other places, like Facebook, LinkedIn, Twitter, etc., where you post. Please, please, please be careful about what you post. Just yesterday, two people posted information about illegal activities. Don’t do things like that. If you or anyone you know has done something you know (or fear) is illegal – talk to an attorney. Never post it in a public venue of any kind. With a private consultation with an EA or CPA, you have a similar privilege for tax planning – but not for criminal activities. With an attorney, you have attorney-client privilege on all conversations, including many related to criminal activities. Please, DO work with an attorney when you need to undo something you know is a problem. Even if you DO need a tax professional, you must start with the attorney first; then have the attorney engage the tax pro of your choice to help you – under the attorney’s privileged information umbrella. Folks, remember, things that you post in public places are apt to be there forever – when you’re job hunting, when you’re seeking credit, when you’re up for promotions or government contracts – or when you’re audited. Be smart. Don’t post your entire life out there for the public to see. And remember, you can find answers to all kinds of questions about privacy, 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 interesting twist. “I am an analyst with a high-tech firm and I teach one course a year at the University Extension in our area. While the course topic is related to my field, I don’t consider myself to be “in the business” of teaching. I have no expenses related to teaching the course (not even mileage, I commute by bike). Can I consider this to be hobby income so I don’t pay self-employment taxes on the income?” Dear Susan, Bill, the TaxMan from Boston says – If the school issues you a 1099-MISC I can almost guarantee you, the amount they paid you will be reflected in Box 7 (Nonemployee Compensation). The IRS will assuredly be looking for a Schedule C to report that income on your return; and you would definitely have earned income subject to SE tax if you have some kind of written agreement/contract with the school. I have had this squabble with many clients who want to put it to Line 21 of the Form 1040 to avoid the SE tax. TaxMama adds – That’s an interesting interpretation. But it is work. And it is pure profit. And, as Bill points out, the IRS will be looking for a Schedule SE, since the income is reported as non-employee compensation. If you want to pick a fight with the IRS, try treating it as hobby income and take the case to the Tax Court to see how the Court interprets your point of view. Take it seriously and be diligent in your defense – and you just might win. Who knows, it could be fun! But…I think that’s rather a long shot. And remember, you can find answers to all kinds of questions about hobbies, work, 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 Dave in the TaxQuips Forum, with an excellent question (let me summarize). “His friend’s daughter bought a home in 2008 subject to the First Time Homebuyer Credit repayment. During 2011, she was deployed to Iraq for 11 months. Can she file an amended return and have the entire balance of her repayment waived, since she qualifies for the special military exception?”   Dear Dave, At first, I didn’t think so. But you and Bill Porter, our Tax Pro from Minnesota, made me take a second look at the law. Rule for the Military and Certain Other Federal Employees In many cases, the credit repayment (recapture) requirement is waived for members of the uniformed services, members of the Foreign Service and employees of the intelligence community. This relief applies where a home is sold or stops being the taxpayer’s principal residence after Dec. 31, 2008, in connection with government orders received by the individual (or the individual’s spouse) for qualified official extended duty service. The credit is still allowable even if this happens during the year of purchase. Qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles away from the taxpayer’s principal residence (whether inside or outside the U.S.) or while residing under government orders in government quarters. Extended duty is defined as any period of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period. Apparently – more than 90 days of extended duty qualifies your friend’s daughter to waive the repayment. It’s good to know there ARE some benefits for serving your country! And remember, you can find answers to all kinds of questions about the homebuyers credit, military 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 Jeanne in the TaxQuips Forum, with a sad question. “My husband passed away in May 2012. Could I file as head of household? And can I claim him for the full year? He had income from SSI which had no taxes taken out.” Susan Holtgrefe our EA in Pennsylvania responds. Hi Jeanne, I am so sorry for your loss. Fortunately you can still take advantage of filing Married Filing Jointly this year. You will need to write ‘deceased’ and the date of death after his name. Where his signature goes, sign it ‘Filing as surviving spouse’. Next year, if you have a dependent child in the household, you may be able to use the Qualifying Widow status. And remember, you can find answers to all kinds of questions about death, filing status 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 Cassandra in the TaxQuips Forum, who really IS a Mystery Shopper. “I am a mystery shopper and work for 30+ different companies. To some, I give my Social Security number – to others my EIN. Do I need to report the income I earned for the companies I supplied my EIN to separately (as a business) than the income I earned under my social security number?”   Dear Cassandra, Is it fun being a mystery shopper? And do people spot you? I remember working for a movie theater where someone always seemed to know when the shopper was coming. We get a reply from Rita Lewis, our EA in the CT and NY area. Rita says: You will report all the income you make on your Schedule C of your Form 1040. You may list each company if you want to track them or just report the conbined income you make. Ask Turbo Tax how to do your data entry for the method you choose. If your EIN was issued to you as an individual, sole proprietor, or single member LLC, then it all gets reported on your Form 1040. If your EIN was issued to a business entity, such as a partnership or corporation, then report income for that EIN on the partnership or corporation tax return. TaxMama adds, you need to report all the income, including the reimbursements for your test purchases, if they add that to your 1099-MISC. Then, just deduct the purchases. And remember, you can find answers to all kinds of questions about interesting occupations 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 RG in the TaxQuips Forum with an oxymoron. “Can an irrevocable living trust be changed by the person that created it?” Hi RG, Well….do you know what irrevocable means? It means you cannot revoke the trust. It generally also means that you cannot change the trust without getting the written permission of the beneficiary. Can you change any of the terms? I don’t know. You’d have to ask the attorney who created the trust. Or if you created the trust yourself, using boilerplate software… READ THE TERMS OF THE TRUST! This is one of those RTI (read the instructions) questions. If your trust contains a provision that allows you change any (or some) of the terms, then yes. If not, no. (Incidentally, just curious…are you sure you have an IRrevocable LIVING trust? I thought all living trusts were revocable.) And remember, you can find answers to all kinds of questions about trusts 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 Kyong in the TaxQuips Forum with a sad question. “Nov 15, 2011 was the last day to file a tax court petition. The Tax Court petition was filed using Fedex Saver, which is not one of the designated private delivery services listed under IRC sec. 7502. I have a proof of receipt from Fedex showing the date they received it was Nov. 15, 2011. The tax petition was received by the Tax Court on Nov. 17, 2011. Tax Court has filed a motion to dismiss, claiming that the petition was not filed timely. Even though Fedex Saver is not listed as a designated private delivery service under sec. 7502, will the proof of receipt from Fedex be sufficient to show that the petition was filed timely?” Dear Kyong, When I read this case in Forbes about a week ago, I wondered. Why would anyone be so foolish as to try to save a few measly dollars, when they had many thousands of dollars at stake? Also, if you are that frugal, why wait until the very last day to file your Tax Court petition? After all, you knew you would be filing it, didn’t you? Well, FedEx Saver is not one of the acceptable private delivery services. And the Tax Court has, in fact, denied a petition as a result. (Read Scaggs v Commissioner.) The one argument in your favor is – the file arrived within 2 days. In the case reference in the Forbes article, it arrived in 5 days. Perhaps you can argue that the Court would have accepted FedEx 2 Day service – and it did arrive within 2 days. If not, what does this mean to you? It means having to pay the tax FIRST, then contesting it in one of the Federal Courts – Federal District Court or the U.S. Court of Federal Claims. The advantage of Tax Court is – you don’t have to pay the IRS first. Big expensive difference! And remember, you can find answers to all kinds of questions about Tax Court petitions 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 Grace in the TaxQuips Forum with an interesting question. “I understand that if you rent/lease your home for production filming for 14 days or less, then that income you earn is “exempt” from California and Federal taxes. Although a 1099 will still be issued by the filming company, on our taxes we deduct that amount with explanation. The question I have is, if this same exclusion applies to commercial property we own?” Hi Grace, This doesn’t have anything to do with filming companies. This rule is about leasing your home to ANYONE or anything for a TOTAL of 14 days or less in a year. (it’s actually written as “less than 15 days.”) The rule only applies to your dwelling or vacation property. Commercial property is already rental property – all the income is taxable. The whole point of commercial property IS to rent it all the time. (But, you actually had me researching to see if there WAS an exclusion. Silly me!) And yes, when you get the 1099-MISC, you do need to report the income. After all, IRS doesn’t know that you’ve only rented it for 10 or 12 days until you tell them, do they? This is a terrific thing to do if your town or area hosts big special events once a year that you don’t attend – like Comicon, or the Sturgis Harley rally, or the annual Grand-prix. You can rent your home to the eager attendees at a premium and use the money to escape the noisy, crowded town and go on a luxury vacation with those funds. Ahhh, but there’s an additional special BONUS when working with filing companies. To learn about the bonus value, you’ll have to log into the TaxQuips Forum to see that information. And remember, you can find answers to all kinds of questions about tax-exempt 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 Gina in the TaxQuips Forum who’s going around in circles. “I have not been able to get in contact with my tax guy for months. I’m afraid he may be ill, dead or out of business – and I live too far away to go to his office. I sent my daughter’s tax info to him and she never got a refund from the IRS. When I call the IRS they want to know how much her refund is. I have no idea as I never got anything back from my tax guy. How can I find out where her refund is, if I can’t get thru to the IRS? The response is always – call back when you have the amount of the refund.”   Hi Gina, It’s easier than you think. Do this. File a Form 4506-T requesting a transcript of the tax return. There is a no charge. Also on that form, request a record of account and a copy/transcript of all the third party documents (W-2, 1099s, etc.)*- just check ALL the boxes on the form and enter the year you want. If a tax return was filed, you’ll get the transcript. The record of account will tell you what happened to the refund, if it was issued. If there was no tax return filed, you’ll know that too. *You’ll have the information you need to file the return. You’ll also have all the information you need to have a conversation with the IRS. Now, in order to have that conversation with the IRS, as Paul Clausen, a Minnesota Enrolled Agent, points out, you need to have a signed power of attorney (Form 2848) from your daughter. And that’s all there is to it! And remember, you can find answers to all kinds of questions about getting what you need from the IRS 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 Andrea in the TaxQuips Forum who needs help. “My husband and I are trying to set up a turnkey small business and need a virtual terminal to run credit card information. Because of our bad credit history we are being rejected with our current SSNs. Do you think if we were to form a general partnership and get a tax ID# for the general partnership we might have better luck?” Hi Andrea, That’s a good question. And I don’t know the answer. Why? Because even if you give them a GP’s or a corporation’s employer ID #, they are still going to ask for yours as well. I know that the folks selling corporations and LLCs all say that if you incorporate, you can improve your credit. It may be true…in some personal fashion. But when it comes to allowing you to accept credit cards? The banks are wary. They stand to lose a lot of money. Have you tried to open up a PayPal account to use them to have your clients/customers pay you? Perhaps you can do that for a year or so. Open up a personal PayPal account. Establish a history with them. Then open up a merchant account with PayPal. It doesn’t cost anything for the personal account. You only pay the fees directly related to your transactions. And remember, you can find answers to all kinds of questions about getting paid online 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 Lee in the TaxQuips Forum who wants clarification. “Are property taxes lower when a house is in a trust?” Dear Lee, No. The property tax is based on whatever the general rule is in your area. In California, if you’re in this state (you must have been listening to KFWB last week), the property taxes are limited to 1% of the sales price of the property due to Proposition 13, oh so long ago. (The real rate looks more like around 1.25% because there are additional fees that aren’t really taxes – and, technically are not deductible as property taxes.) What Valerie Faltas was talking about on the show is a special trick you can use with trusts. Let’s say you have a property you bought for $600,000 in 2006. Today, that property’s market value would be about $300,000 or so. Normally, you could get a temporary reduction in your property taxes if you file a claim with the County Assessor’s office. But as you property’s value started going up, your assessment would rise, until the value was back up to $600,000 again. Valerie’s trick was to arrange for a PERMANENT reduction in value for assessment purposes. How? By transferring the property to another owner. The living trust would be another owner. You can force the re-assessment at the current market value, as if it were a sale. The Prop 13 property tax would drop to the $300,000 value permanently. You have to dot the i’s and cross your t’s – but that’s essentially how it works. You can read the details in Valerie’s book, National Property Tax Little Black Book: Former Assessor Teaches You How to Save! It’s not the trust that makes the difference; it’s the transfer to another owner. Using a living trust, YOU still own and control the property. And remember, you can find answers to all kinds of questions about reducing property taxes and other tax 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 .