TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from BBall in the TaxQuips Forum, with a common issue. He is trying to understand whether he should claim zero or 1 on his W-4 – and what affect that will have on his paycheck. Dear BBall, Ah yes, the mystery of the wages. That can be confusing. Add to that the effect of being claimed as a dependent on someone else’s tax return – and the waters are further muddied. There are any number of exemption or withholding calculators out there. The IRS has one, as does TurboTax, as does H&R Block, as does Kiplinger etc. You can certainly play around with those to help you determine your potential total liability and the number of exemptions to claim. Or, you can go directly to the source – IRS Publication 15 – the Employer’s Tax Guide. Look at the right tax table that relates to your payment frequency for SINGLE or MARRIED taxpayers. (It could be weekly, monthly, semi-monthly, etc.) That will tell you exactly how much each of those exemption selections will deduct from your paychecks. Of course, if your wages are higher than the maximum amount in the tax tables, you’ll have to go to the tax rate charts. Those are not nearly as easy to figure out. But, at least that means you’re earning enough to have someone help you! And remember, you can find answers to all kinds of questions about withholding 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 BigDog in the TaxQuips Forum, with an odd occurrence. “I received a 1099 for 2006 on 04/01/2013. This 1099 is from an old employer, who has in the past accused me of receiving more money than I earned. However I did file a 2006 tax return. Is there a statute of limitations, and should I just ignore the 1099? It was done by hand with his Social Security number not his employer ID number. It also was whited out and written over.”   Dear Dog, You filed your 2006 tax return in 2007. You showed a substantial amount of income. If you reported all your income, the IRS can re-open that year until 2010. That is long gone. But, save that 1099. Just the look of it shows that that is utter nonsense – and probably fraudulent. I have no idea what woke up that dope after all these years, but I wouldn’t do a thing with it – as far as filing goes. If he’s being audited, it’s his problem. However, there’s just one warning – if you did not report all your income, if you left out more than 25% of your income, the IRS has 6 years to re-open your tax return for audit. So, that time may have passed…or there may still be time if you used an extension for 2006. And remember, you can find answers to all kinds of questions about bizarre 1099s 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 Stan in the TaxQuips Forum, with a valid question. “In October 2011, an amended Estate Tax return was filed. The IRS did not complete their review until the beginning of April 2013. However, they are only showing interest payable for 53 days.”   Dear Stan, Bill Porter, our EA from the Twin Cities, MN asks, why did it take over 18 months for the IRS to process it? IRM 20.2.4.3(2) states: “Interest on payments made on or after the return due date is allowed from the received date of the payment, delinquent return received date or return processible date, whichever is later.” If it took over 18 months, I suspect that the amended return was not ‘processible’ for most of that time period. The interest payable for 53 days was for after it became ‘processible’. On the other hand, the IRS is known to make mistakes when it comes to interest and penalty computations. So, if it wasn’t a matter of your having filed an incomplete return that needed more clarification, follow some of the steps TaxMama® provided in her reply. And remember, you can find answers to all kinds of questions about interest on 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 4775wsk in the TaxQuips Forum, with a quick question. “What are the tax breaks of home ownership?”   Dear WSK,   Laura, our Aumakua in Hawaii and Mike Reed our EA in California chime in with answers. Laura lists the main benefits – You get to deduct your mortgage interest and property tax; also mortgage insurance if the home was purchased after a specific date. Mike adds that on a new home you may deduct the points paid in connection with obtaining a new loan. For more information, see Pub 530. Then there’s one other important benefit. You can sell the house after two years or more without paying taxes on the profits – up to $250,000 for an individual – double for a couple. For folks who don’t mind moving every few years, and fixing up a home – this is a terrific way to build a relatively tax-free lifestyle. And if you’re still trying to decide whether owning or renting is better, there are some things to consider in a recent MarketWatch article. And remember, you can find answers to all kinds of questions about owning a 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 Ben in the TaxQuips Forum, with a question that raises another common issue. Let me summarize the issue. “Quite often when two people become partners, one of them ends up doing more work for the business than the other. How can you split the partnership income so each person still gets their fair share, when the profit split is 50/50?”   Dear Ben, Rita Lewis, EA in the CT/NY area provides a simple solution. Read about Guaranteed Payments to a partner (it’s the partnership version of a “salary”) in IRS Publication 541. That may be what you’re looking for to compensate the partner that is more active in the partnership. The guaranteed payments will reduce the partnership’s profits, so you can still split the net income 50/50. Both the guaranteed payment and profit split will get reported on your partner’s K-1. He’ll report more income overall, including higher self-employment income. General Partners are not required to have withholding, as you would for wages to an employee. So all the income tax and self-employment taxes will be reported on his Form 1040 Schedule SE. Although, the partnership is welcome to take withholding and submit the payments to the IRS on behalf of the partners. Do not issue a 1099-MISC for the guaranteed payment. A partner (even a member of an LLC filing as a partnership) gets a Form K-1 to report all types of income and deductions. Of course, you can change your profit percentage each year, if you like. But that gets much more complicated. Rita’s solution is the most logical approach. And remember, you can find answers to all kinds of questions about running an LLC 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 G in the TaxQuips Forum, with a question that raises a common issue. Let me rephrase the issue. “I used a subcontractor (or paid for parts) on a job for a customer. I only got to keep a part of the income. The rest went to pay the sub or for the materials. Why does the 1099 show the full amount?” Dear G, The question you ask is one of the most common kinds of questions from people who run businesses where sales of (or reimbursement for) parts and supplies or subcontractors are an integral part of the payment you receive. Folks running these businesses have a very difficult time understanding the concept that 100% of the money you receive is taxable. ALL of it. Even the reimbursements. I have seen some very scary, violent and aggressive behavior from folks who get 1099s for the full amount they’ve been paid by a customer or client (a 1099 which includes parts or reimbursements). To avoid paying taxes on money you didn’t get to keep, you file a tax return. You include 100% of the money you receive as income. You deduct your expenditures for parts, supplies and other things for which you were reimbursed. Those are part of your business expenses. Incidentally, if you do want your business to succeed, I urge you to do one of two things: 1) Either learn about bookkeeping, so you understand your obligations with respect to your business accounting and tax reporting. You can find an easy, fun, free course here. or 2) Hire a competent bookkeeper with experience in your industry. Things will go much more smoothly for you – and your profits will increase. And remember, you can find answers to all kinds of questions about running 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 Jennie in the TaxQuips Forum, with a good question. “I took out a mortgage from a private party 4 years ago. They have never sent me a mortgage interest statement. Therefore, I have never included it on my taxes. I realized that is a HUGE mistake as I would most likely benefit financially from including this. I am wondering how many years I can go back to retroactively include the mortgage interest on my taxes?”   Dear Jennie, Do you have a loan contract with the private party? And can you prove you made the payments? If the answer is yes, you can go back up to three years. If you file the amended return for 2009 before April 15th, you can still catch that year – otherwise you lose it. When you file the 1040X to deduct the mortgage interest, it will be like a mini audit. Include all the documents that prove the existence of the mortgage, the interest amount, and the proofs of payment. Include an amortization schedule that shows how much of your payment was interest and principal each year, to support the amount of your interest deduction. If you don’t include all the details, it will take 6 months or more to get your refund instead of 2 or 3 months. The IRS will have to waste time corresponding with you and asking questions you could have answered in the first place. So get to this quickly and file for 2009 this week. 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 Jeb in the TaxQuips Forum, with a long, complicated issue. Let me summarize. “We want to close down our 3-member LLC, but there are outstanding issues. The CPA says we all need to file extensions, but one member has a big refund and wants it now. What can we do?”   Dear Jeb, Sure, that partner can file a tax return by April 15th without including the K-1 from the partnership – especially since we can expect that K-1 to provide losses. Once the K-1 is prepared later on, s/he can file an amended return. On the other hand, since your LLC is most likely a cash-basis LLC, these unresolved expenses should make no difference. The LLC should prepare the tax return based on income and PAID expenses through 12/31/2012. So I don’t really see the problem. The rent litigation should affect the 2013 tax return. The LLC cannot be terminated until this debt issue is resolved, because no one wants to dissolve the LLC and accept full responsibility for all debt. But that’s just my opinion. You may get other perspectives from members with a lot of experience, too. And remember, you can find answers to all kinds of questions about dissolving entities 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 Ellen in the TaxQuips Forum, who is getting conflicting information. “I had no idea, when we decided to be responsible parents to my son and the son of a family friend, that we’d have such a headache at tax time when we decided to start charging “rent” after they graduated from college! My question is this: You indicate in other posts that I can add a portion of the common areas square feet (bath, kitchen, laundry, living etc.) to the dedicated rental square feet (i.e. bedroom) – can you point me to the IRS documentation or other source that allows that? I think it is a very reasonable and logical approach (otherwise the rental would get no depreciation on the kitchen, bath, and laundry but they contribute to the wear and tear, significantly!). The reason I ask is I received an opinion from a CPA that the only “reasonable” method for our situation is to use the bedroom square feet only.” Dear Ellen, Aumakua, our tax pro in Hawaii says: The IRS doesn’t have to be reasonable and frequently are not. I don’t include common areas because they are not exclusive to the tenant. To my knowledge, and with 20 yrs experience, I know of no IRS allowance for common areas. The CPA and Laura are right. However, if you are feeling aggressive and keep very good records, and can prove their use of all the common areas (note: put that into the written lease), with photos, etc. you have a strong case in the event of an audit. It is an aggressive position. But it is a winnable one. The key is the documentation. Incidentally, when I had roommates, I didn’t want to hassle with who must clean what, when. So I built in the cost of maid service into the lease. They had to pay their share of a weekly housekeeper. That way, the place was always tidy and clean and I didn’t have to stress. Consider building that into the lease, or modifying the lease fee to reduce it a bit and add the cost of a cleaning service. And remember, you can find answers to all kinds of questions about renting rooms 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 Grandma in the TaxQuips Forum, who tells us. “We have a rental, which was left to us in a trust. It only brings in $500.00 a mo which is $6,000 a year. It is very old and has quite a few repairs each year. We have always filed under the trusts name. We got to thinking, maybe we are not required to file, since it generates so little?   Dear Grandma, ALWAYS file a tax return, personally. As to the trust, I have no answer for you. Take the trust documents to a tax professional who understands inheritances and trusts. The nature of the trust, the wording of the document, the will and other such things will determine what needs to be filed at the trust level. It will also determine things like depreciation, property tax deductions, legal fees etc., that might reduce the taxable income of the trust. The trust should not be PAYING the taxes. The income should flow through to the heirs who are in a lower bracket, via a K-1, if the trust document allows for this. A good tax pro can go back and amend the last three years and get you refunds if you’ve been doing it incorrectly. BUT only if they amend the oldest year before April 15th. Otherwise, you’ll only get 2 years of refunds. So RUN. 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 KH in the TaxQuips Forum, with this question. “My parents are willing to give me a rental property they own. The house is in their name and they currently claim it on their taxes. There is a mortgage on the property as well. We are currently trying to refi the house to get the interest rate down. Is there a way to do the refi, keep it in their name, but then allow me to claim it during tax time?   Dear KH, How long ago did your parents buy the property? A property bought 20 years ago has appreciated in value substantially. By signing it over to you, you keep their tax cost (basis) in the property. You can buy the property from them at fair market value using the new mortgage. Once you have owned it for more than two years, you get to use the new purchase price as the basis. OR…you can lease the property from them, long-term. The lease will need to specify that you are permitted to refinance the property. You pay them an annual lease fee and keep all the rents about that. Note: That annual lease fee could be the amount needed to cover the mortgage. Talk to a tax attorney who is familiar with real estate and contracts. We’ll probably have some other tax gurus jump in with ideas, too. Have fun. And remember, you can find answers to all kinds of questions about real estate, 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 Janet in the TaxQuips Forum, with this question. “Is an LLC registered in NV and doing business in CA required to pay California’s $800 LLC taxes?”   Dear Janet, YUP. In fact, you may be subject to CA’s Gross Receipts Tax, too, depending on how the LLC reports its income. And you need to register it in CA as a foreign LLC, too. Why did you register in NV? Were you planning to move out of state? Just before the corporate filing deadline on March 15th, one of my clients told us that he had set up, not just one, but TWO corporations during 2012. Both were set up out of state. One, a holding company for an asset, he had arranged by himself. The other, his attorney had handled. BAD NEWS! You don’t put appreciating assets into a corporation. When you sell it, you pay tax twice – once on the profit; again on the dividends when you distribute the profit. The other was an online retail store shipping from CA. I can’t understand why a CA attorney doesn’t know the company still needs to register in CA. Makes me crazy. We will be talking to that attorney – and SOON! Meanwhile, for you. If you’re operating a business in your own state and/or in your own home – register it IN your state. You will save a ton of money and headaches. Believe me. And remember, you can find answers to all kinds of questions about setting up entities in tax-free states and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

Today TaxMama® hears from Kresha in the TaxQuips Forum, with this problem. “My friend received a 1099-Misc for money from a life insurance company. They said they overpaid her when her husband died, but didn’t supply any proof; nor did she send any money back to them. Now she has received a 1099-Misc – box 7 non-employee compensation for the overpaid amount. This would cause her to not only pay tax, but self-employment tax as well. Neither she nor her deceased husband did any sort of work for this money.” Dear Kresha, Bill Porter, of Pride Tax Preparation in Minnesota provides detailed instructions about how to handle the reporting of this. You can read the details here. Most importantly, he says, “If she is positive that there was NO ‘overpayment’, she should try to talk to a supervisor at the insurance company to try to get it sorted out.” TaxMama adds this guidance. First, put the tax return on extension. Next, send a certified or registered letter to the insurance company, with copies to the supervisor and the president of the company. (You can generally find the president and address on the stockholder part of the website.) Politely, but firmly, request a detailed explanation of the computation of the payment – and why they believe there was an overpayment. Thirdly, if there was, in fact, an overpayment, it would be in the nature of investment income – dividends or interest. Not self-employment compensation. Request a corrected 1099-MISC. It will take them a couple of months to address this. But copying the president will speed up the matter. If you don’t get a reply by August, file your tax return. Keep all the correspondence and proof of delivery to the company in that year’s tax file, with a copy in your life insurance file, as well. Bill is right about another thing – it’s not likely that anything is taxable. Life insurance proceeds tend not to be taxable. And remember, you can find answers to all kinds of questions about odd 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 Michele in the TaxQuips Forum, with this question. “My client files MFJ with a son. The son made $1,237 on a W-2 and he received a K-1 with $137 in box one (business income) and $1,832 in the self-employment box. Does a K-1 qualify as investment income? Will the parents be able to claim him as a dependent?” Dear Michele, Good questions. Gets confusing, doesn’t it? Of course they can take their young child as a dependent. BUT…the child needs to file his/her own tax return. The child will not claim his/her exemption. The child will report the income on that return. Normally, you would use Form 8615 to report any investment income. It would be taxed at the parents’ highest tax rate – so you need the parents’ data to prepare the child’s return. However, this is business income and SE income. So… When it comes to a child? Anything that isn’t wages or self-employment income is investment income. (That includes scholarships, Social Security and other ridiculous sources of income – ALL investment income. It was a shocking discovery a couple of years ago.) Incidentally, how old is the child? And did s/he have anything to do with the operation of the business? I would say that if this is a minor child, not working in the business, then there should be no self-employment income at all. So, you may want to investigate that aspect of the K-1. I hope this makes some sense? And remember, you can find answers to all kinds of questions about children’s 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 Farmer in the TaxQuips Forum, with a reasonable question. “Can you take a deduction of Mutual Fund operating expenses (12b fees?) on Schedule A, subject to the two-percent floor?” Dear Farmer, Before we answer, it’s wise to look up the specific definition of the 12(b) fee. We can find that on the SEC’s website, here. They are fees that the fund managers draw from within the funds to cover their marketing and other expenses. Mike Reed, our EA in the San Francisco Bay area and Rita Lewis, our EA in CT and New York add some specifics about deductible and non-deductible fees. You can read the specifics here, from Mike. Essentially, it boils down to this concept from Rita: If you are billed a fee and pay it with funds from outside the fund, by writing them a personal check, or having the money drawn from your related brokerage account, then you have a deduction. If the fee is paid within the fund, being deducted before your dividends are computed, for example—then you have no deduction. You are reporting the income after deductions (no double dipping). And remember, you can find answers to all kinds of questions about investment 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 .