TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from AK in the TaxQuips Forum, who is trying to understand. “My wife and I have 1 child who is 3 years old. We recently received our W2’s and I started the process through Turbotax online. With just my income, it looked like we were going to receive the Earned Income Credit (EIC). Once I entered my wife’s W2, the EIC dropped quite a bit. I started digging through the deductions and credits, and discovered that we are about a $1000 over the qualifying income to receive the EIC with 1 child. However, if either my wife, or I claim our daughter as a dependent, and file separate tax returns, we would qualify for it. My question is: What are the major pro’s and con’s of filing separately with a child in the mix – and is that even an option?”   Dear AK, The major ‘con’ of this is 1) When you file as married filing separately, the EIC is not available at all. 2) If either of you file as single or head of household, that would be tax fraud. Aside from penalties, you would lose the right to claim the EIC at all for up to 10 years. I know, you didn’t realize that. So, I am sure this news to you. The ‘pros’? I can’t think of a single one. You are not in a financial bracket or situation where filing separately will give you any benefits. You would only lose benefits. Good try though. And remember, you can find answers to all kinds of questions about refundable tax 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 .

Today TaxMama® hears from Stephanie who is getting asked these questions by her team of writers and websites. “Who should be sending out 1099s? And what do we do about those 1099-Ks?”   Dear Stephanie, These are good questions. First, who should be sending out 1099MISCs – and to whom? Anyone whose business pays $600 or more to another person or business for a service should be issuing 1099MISCs. You must send them to the recipient by January 31st –but you may wait until March 31st to file them with the IRS, if you file electronically. (DO hold off until at least the end of February, so you can get corrected addresses, etc. before filing.) Generally, you only send them to people who are not incorporated, except for attorneys and medical service providers. However, when someone is an LLC, it can get confusing. You can clear up the confusion by having each payee fill out a Form W-9 when you hire them or contract with them – before issuing the first payment. There is a box for LLCs – and a space to enter a C, S, or P for the way the LLC reports their taxes. If they enter P for partnership, issue them a 1099-MISC. Note: If you pay someone (like all your affiliates) via PayPal or through their merchant account, do NOT issue the 1099MISC. They will get a 1099-K from their bank or payment system. Now, what about those dreaded 1099-Ks? Unless you are credit card issuer, PayPal or other bank-like entity, you will not be issuing those. However, your business is apt to be receiving 1099-Ks if you are selling online. You will get the 1099-K if you accept credit cards or PayPal, Amazon Merchant, Google Merchant and other online payment services. The problem you will face is duplication. You might get both a 1099-K from your bank and a 1099-MISC from your client for the same dollars. The reconciliations will be complicated. But if you don’t handle the reporting properly, you will overpay your taxes. TaxMama may just hold a webinar for all you business-owners on how to reconcile the mess of 1099s you receive this year. Stay tuned. We’ll probably do this in February, before you file your business tax return. And remember, you can find answers to all kinds of questions about 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 Roger in the TaxQuips Forum who is frustrated with the concept. “I guess my question would be, what is different about what I’m doing and, say, a general contractor ICing a plumber regularly to plumb houses he is building? Or a magazine that subs out to a freelance writer? These guys all own and service their own equipment, trucks and tools, buy their own gas and supplies, hire their own employees. I just don’t see how they could consider that my employee. What is the distinguishing factor that says one is or is not an employee? Is this even something I should worry about?” Dear Roger, The big difference? The general contractor is working with licensed CONTRACTORS. For instance, in the state of California, in the construction industry, if a contractor hires workers, they must all be on payroll unless they are licensed contractors. Period. There is no gray area. In fact, someone I know hired day laborers to work on his own lawn. A neighbor called the state and he was fined, on the spot, for not putting them on payroll. (I never did understand that one.) It’s a complex issue. And I could devote about 8-10 hours explaining all the regulations, Tax Court cases etc. And it’s one I enjoy playing around with. But…for now…just follow the above guidelines and ensure they have licenses. Don’t guess. Get copies for your file. Also, get a new Form W-9 signed by them each year. The fact that they have employees working for them helps to define that they are in business. What are the specific guidelines? Well, read the instructions to IRS Form SS-8 and look at the form in detail. This is the questionnaire that the IRS uses to make a specific determination of whether someone is an employee or not. To read the rest of the comments – and the problem that often arises…read today’s TaxQuip. And remember, you can find answers to all kinds of questions about employees vs independent contractors 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 John in the TaxQuips Forum with a sensible question. “Are garage sales reportable? I have never heard of anyone reporting garage sales. I assume everyone guesses their basis exceeds the gross proceeds and personal losses are disallowed.”   Dear John, Technically? Yes, all sales are reportable, since they are income. Real garage sales DO tend to be people selling they stuff they bought (or were given) years ago and are now selling for pennies on the dollar. And if you do report these sales…the basis will be reported as the same amount as the sales price, since you cannot take a loss on the sale of personal assets. However, some people make a business of holding weekly or monthly garage sales (kind of like eBay, or even pre-dating the eBay concept). They buy up stuff cheaply (often buying up an entire garage sale in bulk) and sell at a profit. That IS reportable. Just like any business. And remember, you can find answers to all kinds of questions about selling personal property 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 Larry in the TaxQuips Forum with a quick question. “If an employee pays for his family’s health insurance through payroll withholding, is the amount he pays free from taxes? My clients paid $6,000 in 2012 through payroll withholding and his W-2 gross income in block 1 (and blocks 3 & 5) show only the reduced amount. I know that his coverage paid by the employer is not taxable but I have a problem with this treatment.” Dear Larry, When a company has a POP (Premium Only Plan), then, yes, the full amount of the health insurance premiums paid by the employee come right off the top of their wages – without being taxed for anything. No FICA, no Medicare, no income taxes at all. In fact, the employer’s own share of these taxes are waived as well. Their workers compensation and other costs based on wages are also reduced. It’s a terrific win-win arrangement. This is an inexpensive plan to implement for an employer. Most payroll services offer it - talk to PayChex for details on how to set it up – or to your favorite payroll tax company. The administrative costs are more than offset by the tax savings. And remember, you can find answers to all kinds of questions about health insurance 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 Mahakavi in the TaxQuips Forum with a couple of questions – but we’ll only answer one of them here today. “TaxMama® keeps telling us to attach a statement to the tax return. How do you attach statements when you’re using commercial software?”   Dear Mahakavi, 1) You can print out the return and file on paper, mailing the paper tax return to the IRS and state. Remember how we used to do it before working with the ‘cloud’? 2) Let your software provider know you want to use a Form 8453 to attach the details of your stock transactions. That allows you to efile the return. But you must send in your attachments within three days after your efile has been accepted. That means, you can attach your worksheets for Schedule D (or Form 8949) to explain how you arrived at your profits and losses. You can actually use Form 8453 to send attachments and explanations for a variety of specific forms. Unfortunately, there is no “other” option. So if the form is not listed, you must file on paper when you need to send in attachments. And remember, you can find answers to all kinds of questions about clarifying your tax positions 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 Craig in the TaxQuips Forum with this question. “In 2012 we received two class action settlements – one for our primary residence [~$3500]; and one for our rental [~$2700], both in the same development. These were for mold/painting deficiencies. The question is: are they taxable or non-taxable? Dear Craig, Did you use the money to make repairs? Or did you make the repairs previously and were being reimbursed? Either way, these funds are not income. Put the information into the permanent file related to your home. The mold repairs that you made (or are making) get added to the cost (tax basis) of your home. These reimbursements will reduce the basis. HOWEVER, if you get a 1099-MISC, be sure to report it on Line 21 of your tax return AND deduct it out on the same line with a note: “See Statement Attached” and explain. It’s not much money. But…it’s something. And remember, you can find answers to all kinds of questions about lawsuits 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 bvmite in the TaxQuips Forum with a good question. “After filing 2011 return electronically, I noted that I did not report all IRA and pension rollovers on line 16a. Line 16b, AGI and taxes owed are not affected. Form 1040X, line 1 starts with a change in AGI; and in my case there is none. Should I just write to IRS and explain? Or is there another way to inform IRS?” Dear bvmite, Paul Clausen, an Enrolled Agent in Minneapolis, MN provides this guidance. He says, at this point, you could just wait a few months and see if you receive a notice from the IRS. Presumably, you have a form 1099-R for each rollover. Even though the 1099-R would likely have a distribution code of “G” to indicate that the distribution was a rollover, and therefore not included in taxable income, the IRS would still look for the gross income on the 1099-R (box 1) to be reported (on line 16a). Since the IRS has just started generating income matching letters for tax year 2011, called a CP2000 notice, you may receive one. If you wait until you receive such a notice, you can then follow the steps to respond, and in your reply, include your explanation of your error. That explanation, possibly including some supporting documents to substantiate the completion of the rollover, should be all that is necessary. When the IRS accepts your explanation, you can consider the issue resolved. TaxMama® adds these suggestions – If you don’t get the notice within 18 months after you filed the original tax return, DO file an amended return. You’re talking about a significant amount of money, and it could keep your tax return open for 6 years instead of 3. How do you prepare this amended return? You prepare the amended return just as you would any other. Yes, the overall totals won’t change. BUT, there is a comment area. That’s where you explain about the rollover and attach proof of funds out and the funds going back to the new account. That’s all there is to it. You can even say, “See statement attached” and explain in more detail. Still, include the proof that the distributions were rolled over. 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 Angel in the TaxQuips Forum with an interesting issue. “My client is a United Nations employee. Last year she earned [a modest sum] while working at the UN in New York City; then took a posting in Spain with the UN where she earned [well over the foreign earned income exclusion amount]. The UN does not withhold income taxes or FICA in either case. For the NY income we file a Schedule C and Schedule SE in order to ensure Social Security and Medicare are charged correctly. However, is the foreign earned income from Spain liable for FICA? Or should the foreign earned income be listed as other income on the 1040? Although Spain is listed as one of 24 countries with reciprocal agreements, I believe the UN is a completely separate government by itself.” Dear Angel, That’s an excellent observation. It’s a special issue. When working in an embassy for a foreign government, the US employee must pay all the self-employment taxes on those earnings. But, they are still considered an employee and can only deduct job-related expenses on Schedule A, not on Schedule C. (The IRS made this clear back in 2006-2007 and offered an amnesty program at the time.) If she were working for a business in Spain, there would be no question. And you would not be asking me. Her income would be subject to the foreign earned income exclusion. And as an employee of the business, she would be exempt from self-employment taxes. You’re right. The UN is a different matter. I searched the Tax Court database for references to the United Nations. All the cases I found were for people working for the UN in the US. The search didn’t turn up anything about a UN worker outside the US. But I know I have seen at least two cases a couple of years ago. So…I recommend that you search the Tax Court database for “Form 2555” and see if you can find any relevant cases. There were too many results for me have time to look them up for you. But you’re pretty smart. You’ll find the right citations. Incidentally, I just stumbled across this information as I was posting this TaxQuip – and it seems that the IRS changed their position on wages from certain embassies and international organizations. The wages may, in fact, be exempt, if the employee and the job meets certain qualifications. Do some reading and get some more details about this! And remember, you can find answers to all kinds of questions about international 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 Morri in the TaxQuips Forum with a rare question. “My son became emancipated in September. He has had his full time job since he graduated in June. He still lives with his mother and I paid my support until he became emancipated. Since I paid my support until this time and it is my year to claim him on taxes, do I get to claim him or is he on his own now?” Dear Morri, Your son will be filing his own tax return, claiming his own exemption. As a result, you will not be able to claim him as your dependent. Since he is old enough to be emancipated, I doubt that he is young enough to qualify for any child-related credits. Except perhaps education credits. If you paid his medical expenses, you may probably claim those. Though now that the exclusion is so much higher, I doubt you’ll get any benefit. Sorry, I know this is not the answer you wanted. But, at least you’re off the hook for child support! And remember, you can find answers to all kinds of questions about dependents 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 bhusler28 in the TaxQuips Forum with a good question. “I recently got divorced. Right now the deed is in my name, but the loan is in both my ex-husband’s name and my name. When we file our taxes, we are unsure as to who gets to claim the taxes from the property, school and what not. I have been paying on the house myself since February 2012.” Dear B. Congratulations on your divorce. I hope this opens you up to some wonderful experiences. As to who gets to take the deductions? ONLY the person who has been making the payments. So, if you have been paying everything since February, you get all those payments. If he made the payment in January, he gets that payment. If the January payments were made from joint funds, you each get half. This applies to the mortgage interest, property taxes and PMI (if applicable). The PMI (private mortgage insurance) deduction was restored retroactively to January 1st of 2012 in the recently passed legislation. And remember, you can find answers to all kinds of questions about deduction splits 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 Dok0619 in the TaxQuips Forum with the eternal problem. “I am separated from my wife and she has our two kids. She left August of 2012. In November our lawyers made a temporary custody agreement for us and I have been voluntarily paying her child support until we finally go to court. It was signed by a judge in December. She says that I cannot claim our kids on my return because she is the “custodial parent” (I have filed for divorce and also filed for custody of our kids.) My question is, can I still claim my children for the 8 months of 2012 that we still lived together or not at all like she says?” Dear Dok, This year, your wife will have been the custodial parent for the whole year. Most likely, if it comes down to a fight, she would win in 2013 unless you get custody. Last year in 2012, the children lived in your home for more than half the year. You have a valid claim for 2012. However, the fight can be costly and is guaranteed to get the IRS and state tax agencies involved. Clear this up in advance – before either of you file a tax return. Have your wife sign a Form 8332, giving up her right to claim the children for 2012. Even if she does not, you would still be entitled to claim head of household status for 2012. And if you don’t both claim the same credits, you might be entitled to some of those. Sort them out. You can get more information on other tax-related divorce issues in this course, here. Believe me this will be a good investment of two hours of your time. And remember, you can find answers to all kinds of questions about child custody 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 Spidell Publishing Inc. at www.caltax.com with the latest news on the fiscal cliff legislation. Spidell sent out this summary at midnight News Years Day after a long, combative session in the House of Representatives. According the Los Angeles Times, we almost ended up with no legislation. These are some of the provisions included in The American Taxpayer Relief Act of 2012, which the President is expected to sign. Tax rates beginning January 1, 2013 A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, and $450,000 for married filing joint. 2% Social Security reduction gone AMT permanently patched A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012. Dividends and capital gains The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, or $450,000 depending on filing status, as noted above). Itemized deduction and personal exemption phase-outs The Pease itemized deduction phase-out is reinstated, and personal exemption phase-out will be reinstated, but with different AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, and $250,000 for single. Estate tax The estate tax regime will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but will be applied at a higher 40% rate (up from 35% in 2012). Personal tax credits The $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017. Other personal deductions and exclusions The following deductions and exclusions are extended through 2013: Discharge of qualified principal residence exclusion; $250 above-the-line teacher deduction; Mortgage insurance premiums treated as residence interest; Deduction for state and local taxes; Above-the-line deduction for tuition; and IRA-to-charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012). And remember, you can find answers to all kinds of questions about tax legislation 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 Yazminia in the TaxQuips Forum with an apt question (rephrased). “I am over age 59 ½ and want to transfer money from my IRA to my Roth IRA tax-free. Based on my income level, how much may I transfer without generating taxes?” The reason I wanted to bring this to your attention is – I first stumbled across this issue several years ago when a tax pro’s client was being audited for his very high medical expenses. This man was paying for 24-hour in-home care for his mother, and for in-home care for himself to the tune of $50,000. This resulted in a huge loss on his tax return. Meanwhile, Wally was sitting on over half a million dollars in a 401k plan from which he could have been drawing approximately $40,000 per year, tax-free for at least the last 4 years before I met him. We started him on that program immediately. I would like each of you who is over age 59 ½, sitting on IRAs and/or retirement accounts, and filing tax returns with very low income, or losses, to look at your tax situation before year-end. It is quite possible that you can move $5,000 or more to a Roth IRA – or even to your own bank account without paying a dime in taxes. Or…to draw out a little more money with only a 10% tax rate. With tax rates rising next year, this may be one of the wisest moves you can make. Wally died about two years later with over $300,000 still sitting in his 401k. 100% of that money was taxable to his heirs. Let’s not have that happen to your family. OK? 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. Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Hernandez in the TaxQuips Forum with good question. “I am one of two partners in a architecture service partnership. We are considering using life insurance, specifically whole life, as a way to save excess cash and lower our taxes. Are payments for insurance considered business expenses for a partnership? What is the limit of cash that I can stash away into a whole life insurance policy? If not a business expense can it be deducted on my personal tax return?” Dear Hernandez, That’s always a nice position to be in. Alas, life insurance for the owners of a business is rarely a deductible expense. The only time it IS deductible at all is in a C corporation. Even then, the limit is – the premiums on up to $50,000 worth of coverage per person. So, while the whole life insurance might be a good long-term investment (especially if it’s key man insurance to buy out a partner’s heirs in the event of a death), there is no tax benefit whatsoever. I did a little further digging to see if key man life insurance would be deductible to the business. There’s a private letter ruling about this issue, asked by a corporation in 2003. Essentially, the IRS still says this isn’t deductible. However, the payments won’t be considered constructive dividends to the shareholders or their heirs. Contributions to a SEP-IRA or a defined benefit plan would give you each substantial personal tax deductions. It won’t reduce your self-employment taxes. The only things that reduce your self-employment taxes as well as your income taxes are direct business-related expenses – new equipment, advertising, wages and bonuses to employees… stuff like that. Sorry this isn’t the answer you wanted. But congratulations on your profits. And remember, you can find answers to all kinds of questions about business decisions 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 .