TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from Ed in the TaxQuips Forum, who is concerned “I was a beneficiary of my father’s IRA in 2009, after he died. I took out the entire amount at that time and paid the taxes due. Everything I read on the web indicates that I do not owe an early distribution penalty. However my enrolled agent seems to think I do. Can someone please advise if there are circumstances of which I am unaware?” more-> Dear Ed, Do you mean that you took out all the money at the time you inherited it, several years ago – perhaps in 2009? And you paid taxes at the time, but no early withdrawal penalties? That would be correct. At the time of the draw, the distribution code in box 7 of your Form 1099-R would have been a 4. That means the distribution was taken as a result of a death. Those distributions are not subject to early withdrawal penalties. So you are correct. Please read what the IRS says about inherited IRAs. (Or you may already have read it.) Is your EA saying that you still owe a penalty for 2009? Please ask him to explain why. It’s not clear to me. And remember, you can find answers to all kinds of questions about IRAs 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 Asal in the TaxQuips Forum, who asks a simple question. “Did you know how many people in the United States owe back taxes?” Yes Asal, I do. While I wait for Asal to expand on his question – or tell us what he really wants to know, let me tell you how to find fun information like that. At least, statistically speaking. IRS has a nifty Data Book, where they record all kinds of interesting data – a year or 5 behind. You just click on “Enforcement: Collections, Penalties, and Criminal Investigation” to find out about delinquent taxpayers. That takes you to Table 16 – Delinquent Collections Activities. And voila! You can find data for years from 1994 – 2011. In fiscal year 2011, which ended on 06/30/2012, we learn: 1) Over 10.8 million taxpayers filed tax returns with unpaid balances that were still unpaid at the end of the fiscal year – up from nearly 10.4 million the year before. 2) There were nearly 3.9 million investigations of taxpayers with delinquent tax returns – up from 3.7 million the year before. 3) While over $28 billion was outstanding, the IRS collected nearly $2 billion worth of delinquent accounts Naturally, if you spend time with this report, you can mine even more information from it. And if you delve into the full Data Book, you can immerse yourself in luscious tax statistics, data, reports and analyses. Who knows, if you really learn to understand it – perhaps YOU could be the one to save our country’s finances! And remember, you can find answers to all kinds of questions about tax statistics 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 Monica in the TaxQuips Forum, who needs to make a decision. “My tax status is single, no dependents. I plan to undergo $10,000 out-of-pocket medical procedure. Please consider these scenarios. If done in 2012 with an adjusted gross income (AGI) of approximately $50,000, $10,000 will be paid after-tax. If done in 2013 with an AGI of approximately $60,000, $2,500 will be pre-tax and $7,500 after-tax. When I take the deduction for non-reimbursed medical expenses, which year would see the greatest tax benefit?”   Dear Monica, First, we want to thank Eliezer Appleton for the analysis he did on the itemized deductions. That saved me time. Now, let’s look at some additional numbers. You live in Virginia with a state tax rate of about 5% (actually, it’s 5.75%). In 2012 that adds about $2,500 of state tax deductions to the medical expenses and raises itemized deductions to about $2,800 in excess of the standard deduction you would have anyway. That’s worth about $700 of Federal income taxes + very little in state savings (since states don’t generally give you a deduction for their own state taxes). In 2013, the $2,500 in state taxes + $1,500 in deductible medical expenses won’t be enough to itemize. But the $2,500 payroll reduction via the Flexible Spending Account savings is worth – 7.65% SS/Medi + 25% IRS taxes + 5.75% VA taxes = 38.4% x 2,500 = $960. So….despite not being able to itemize in 2013, by getting to avoid all levels of taxes via the FSA, Monica, you get three benefits. 1) You get to pay the money later. (And if you’re smart, you’ll use a credit card and get the rewards points – then pay it right off.) 2) You get to plan the timing of the medical procedure with less pressure. 3) You get a bit of an extra tax savings, as well. And remember, you can find answers to all kinds of questions about tax 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 .

Today TaxMama® hears from Hamed in the TaxQuips Forum, who is quite annoyed. “I sent a change of address form to my IRS auditors with my response to the audit. They ignored the change of address and sent their response to my response to the old address. I also mentioned the change of address in my cover letter. What does it take to make IRS understand that my address has changed?” Dear Hamed, You are responding to an IRS notice that went to your old address. By the time you got the notice, it’s probably past the response deadline. So the computer will already have sent the next letter in the series before receiving your response. I know this sound counter-intuitive; but it’s in your best interests to notify the IRS and your state tax agency about your change of address when you move. Use Form 8822 for the IRS and whatever form number your state uses. Doing this ensures that you get notified when something is just a question or minor problem. It can be resolved quickly and easily – before it turns into a huge, complex problem, resulting from not responding on time. Sure, it helps to send the change of address at the time of the audit. If you sent a timely response, someone should have seen it before replying. However, what you don’t understand is that the IRS is so ridiculously understaffed that mailed-in audit responses must be scanned and entered into the system manually – and the IRS is about 2-4 months behind in getting those responses posted. To address the problem right now, call the phone number on the letter. Don’t call on a Monday or Friday morning. Try calling after 2:00 pm in your time zone on a mid-week afternoon. Ask them to update your address while you’re on the phone – and let them know that you sent a change of address form recently. And remember, you can find answers to all kinds of questions about IRS communications 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 this question. “How do we deduct interest on a reverse mortgage?” Dear David. You don’t. In a reverse mortgage, the homeowner isn’t paying any interest. They are receiving loan draws on a monthly basis. All the interest is deducted at the end, when the mortgage is paid off. Remember, a cash-basis taxpayer only gets deductions when s/he PAYS a bill. Here is how the IRS explains it. When I see all those beloved old actors doing commercials for reverse mortgage lenders, it chills my heart. These loans are not a benign and helpful as they seem to be. They can cost the senior borrower their home, if they are not careful – even though the big print says they can stay in the home until they die. It’s not exactly true. And if you’re a couple, make sure the title to the home AND the mortgage is in both names. Otherwise, after the owner on title dies – the other spouse might get kicked out. Please, do your research before signing up for one of these deceptively helpful loans. Better yet, get a nice, healthy, low interest line of credit against the house and use that when you need money, even to pay mortgage payments. You have more control of the funds – especially in an emergency. And remember, you can find answers to all kinds of questions about reverse mortgages 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® reads the Tax Prof Blog’s notes about who benefits from the mortgage deduction. According to an analysis reported in the NY Times, only 30% of Americans really benefit from this deduction. They are essentially in the “upper-middle and upper-income households.” Doesn’t that make you feel rich? What is the reality? Dear Family, I want you to look at your own tax returns. Are you getting the full benefit of a mortgage interest deduction? Over the years, most of my clients have become homeowners over time. That mortgage interest deduction helped them buy a home worth about 30% more than they could otherwise have bought – due to the benefit from the deductions. How about today? These days, you can get a mortgage loan (new or refinanced) with a rate of 5% or less. Based on the average home prices around the country, such a low rate barely even makes it possible for a couple to itemize anymore. Couples will have a standard deduction of $12,200 next year. Their 5% mortgage interest on $250,000 (forhomes in the West and Northwest) would be worth $12,500. At $150,000 (in the mid-west), the interest would only be $7,500. It’s still a big help to single filers whose standard deduction will be $6,100. Of course, with the mortgage interest as a base, you can add in property taxes, state income taxes, contributions and other expenses. Then, even couples end up with benefits from itemizing. Being able to start with the mortgage interest deduction, enables you to use another $5,000 or more worth of expenses over your standard deduction. So who are they kidding? Now does this make you feel particularly wealthy? Or are you still struggling to make ends meet? I’m not quite ready to see it go – are you? And remember, you can find answers to all kinds of questions about what tax benefits are really worth 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 with this naïve question. “I have been mulling about this idea for a long time. I want to start a tax prep and services business. I have been doing returns for friends and associates for the past 2 years and want to incorporate. What is my first step? And then the next one? I have read your articles regarding PTIN and such. Whatever advice you might have would be appreciated.” Hi John, There’s certainly room for you in the profession. But just doing friends’ tax returns isn’t enough experience – or expertise – to build an entire tax practice around. Without education or training, there’s no way to do an adequate job for strangers, people you don’t know anything about, when they bring you their information. You have no basis to understand their lifestyle, what are reasonable earnings for their profession or job – or very much, really. These days, tax professionals, at all levels, are required to be (a form of) tax police. The IRS expects us to catch (and eliminate or prevent) tax fraud. That takes experience and/or training. So, depending on when you want to become a tax pro, I recommend that you start by getting experience. Either get a job – full or part-time – or do volunteer work for VITA or AARP’s Tax-Aide. Then, consider getting some additional training so you can pass the IRS’ RTRP exam after tax season. OR, if you want to reach for the ring and get some higher-level training, you can study for the EA Exam. THAT training and passing that exam will make a big difference in your skills as a preparer, taxpayer representative (- and even as an IRS tax fraud catcher). Once you’ve got the licenses, THEN you will know whether to incorporate or what. Then you will know how to target your marketing and on what area of taxation you want to focus. So those are the first steps that I recommend. And remember, you can find answers to all kinds of questions about becoming a tax professional, 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 Don with this intriguing question. “My homeowner’s association had a lawn vendor that didn’t charge sales tax for several years. He charged us all at once. Now that the payment is made, what is the correct account to which to charge the payment?” Hi Don, Hmm, I am not sure that I understand the question. What is a lawn vendor? Does he sell sod to lay down on the dirt? Or is he your gardener? What do you normally charge his expenses to – landscaping or gardening? The sales tax goes into the same category as his normal expenses. It should have been part of his routine bill. Does this make any sense? And remember, you can find answers to all kinds of questions about odd payments, 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 Michael with this earth-shattering question. “I received a small class action settlement ($3.50) from a class action against Classmates.com . Is this settlement taxable for IRS purposes?” Dear Michael, Sure, isn’t everything? Please be sure to remember to enter that income on Line 21 of your tax return. What happens if you don’t? Nothing. Really, it’s too small to even remember. Uh…why didn’t I get any money? I paid them for a membership for a while. And remember, you can find answers to all kinds of questions about settlements, 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 Kevin with an idea others have had. “Recently our investment property is actually turning into a little bit of income property. If I hire out a job to be done, I usually write off the expense, including labor. If I do the work myself, is there any way that I can write off my own labor?” Dear Kevin, No. Sorry. When you write off the expenses for labor, it’s because you pay someone to do it. You can only claim deductions for money you spend. The only way to write off your own labor? 1) Invoice the property. 2) Pay the bill. 3) Pick up the income as self-employment income and pay income taxes and self-employment taxes on that income. (Schedule C) 4) Deduct the bill on Schedule E, without getting the benefit of reducing your self-employment income. Uh…is that really where you want to go? You do save a bunch of money doing the work yourself. But are you missing out on important (or even enjoyable) experiences with your wife? I often wish my husband would hire out some of the handyman work, too. (But, since he doesn’t, that leaves me more time to work….) And remember, you can find answers to all kinds of questions about the value of your own labor, 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 with this concern. “At age 64, I am still working full time. My hours and pay rate have been reduced so that I now have a $ 600 + per month deficit. My mortgage payment is $700 per month. (My wife is a full time student and my son is in high school.) I have enough money in my traditional IRA to pay off the mortgage. Would this be a good idea or are there other options?” Hi Larry, That’s a tough break. That’s got to be hard to budget around, after all this time. Have you looked at refinancing your mortgage? Interest rates are very low right now. The reason I ask is, even though you’re old enough to draw the money from your IRA without the early withdrawal penalty, you will pay federal and state income taxes on that money. Another alternative is, instead of paying off the mortgage, how about drawing just enough money from the IRA to make the mortgage payments for the year? That way, you won’t pay as much in taxes as if you draw all the money at one time. Drawing all the money is apt to put you into a higher tax bracket. Play around with the numbers and see what amount of draw gives you the best result AND the lowest taxes. Another thing, dare I say this? Discuss the situation with your family. Make sure they understand what’s going on. They may have some ideas that don’t involve depleting your retirement savings. And remember, you can find answers to all kinds of questions about drawing money from IRAs, 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 Tasha with a disturbing problem. “My girlfriend is thinking of filing for an education tax credit even though she is not enrolled in school at the moment. She says the person doing her taxes can issue a 1098T form if and when the IRS was to ask for proof, which will show she was enrolled in school. My concern is this can come back to bite her, hard.” Hi Tasha, I don’t know if this is a common scam. But it IS illegal. The IRS will not be looking for the phony copy of the Form 1098-T that this person prepares. The IRS computers will be cross-referencing for a real one, issued by a school. (Besides, how much do you want to bet this tax person won’t be around to provide the fake 1098-T when your friend needs it?) Your young friend doesn’t need this kind of grief so early in life. Your friend should not be working with a tax professional who behaves this way. In fact,

Today TaxMama® hears from Rando with a question that has become more and more common in today’s economy. “What is the maximum income my son can earn, who lived with us all year, and still be declared as a dependent on my tax return?” Dear Rando, It depends. If your son is under age 18, or a full-time student under age 24, his income makes no difference. By law, he qualifies as your dependent – unless he fully supports himself. However, if neither of those two conditions exist, once he earns more than the personal exemption amount, he is no longer your dependent. For 2012 that amount is $3800. 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 LiveMusic, with this interesting question. “I have expenses related to “studying the competition” so as to (hopefully) improve my own business profits. How would I categorize that?” Dear LiveMusic, If the expenses are legitimate, you would categorize the expenses as ‘Research.” To ensure that they are deductible, read on. Be sure you can document that those costs were specifically for studying the competition. For instance, if you have concert expenses, you must also have detailed notes on what you learned about the competition and how that can be related to your business or business practices, etc. If all you did was go to a concert or a film and you think IRS is letting you write off your entertainment expenses…you will be facing quite a surprise in an audit. I have worked with a lot of entertainment industry folks and others. We have gotten most, or all of the expenses approved under audit – when they did their homework – when they really did keep logs and pictures and notes. Some of those people had well-thumbed binders filled with their notes, details, photos, clippings, reviews, samples, examples, etc. – from their honest-to-goodness research of films, locations, (restaurants – a restaurant architect), etc. In fact, we even got over $7,000 worth of travel to the Orient and Hawaii sustained in an audit. The ones who didn’t do that? It’s a crap shoot. Some IRS auditors will grudgingly accept part of those costs. Some won’t accept any. And without any documentation, you can’t even fight it. So do your homework. And remember, you can find answers to all kinds of questions about converting personal entertainment to 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 is the last day of the tax season for filing 2011 returns. TaxMama® would like to give you some last minute tips. Dear Family, Time is up. Are you still sitting there waiting for someone to give you some promised numbers? Forget it. You’re not getting them in time. Are you still trying to figure out how to report income you’re not used to receiving, or losses that confuse you? Time to [you know what] or get off the pot. Yup. No more time for sweetness and light. Make decisions about how to file with whatever numbers and information you have. Whatever you do, file SOMETHING. Remember, you have 3 years to amend and make corrections once you have better information. If you are estimating or guessing, be sure to file a paper tax return and include an explanation about what you’re guessing at and how you arrived at your guess. Just sound credible and act in good faith, you’ll be fine. By filing SOMETHING, you will avoid the 5% per month non-filing penalties – and the road to becoming a non-filer. And if you cannot pay the taxes? Well, if you got one of those special extensions of time to pay last April – DO see if you can use a credit card of line of credit somewhere to pay those taxes. You will save a big chunk of penalties and the interest on the penalties. If you simply cannot pay…it’s not the end of the world. Just send a little bit of money in with the return. Wait for the bill to come; then set up an installment agreement. You’ll be fine. Really, the trick is, at this final deadline, to simply do something. So please, do! And remember, you can find answers to all kinds of questions about tax deadlines, 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 .