TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from Thom in the TaxQuips Forum with a question I used to wonder about. “I started collecting Social Security benefits at 62. I just started working a few hours a week part time. Why are they still deducting SS from my paycheck, since I am collecting benefits?”   Dear Thom, As long as you work, or have a business with a profit, you will be paying into the Social Security system for the rest of your life. That’s how they add funds to pay people who are collecting. The good news is, if you start earning more than you ever did before, your benefits could increase. The bad news is, you are under age 66 and you are collecting Social Security early. If you earn more than the annual allowable limit, (2015 is $15,720) you will have to pay back some or all of your SS benefits. Watch your earnings carefully so you don’t have to repay your benefits – or stop receiving them until you are no longer collecting early. Sorry about that. Your Congressfolk write these laws. And remember, you can find answers to all kinds of questions about paying into Social Security 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 folks in the TaxQuips Forum and elsewhere with another common problem. “I filed my tax return and then got another W-2, 1099, or a corrected 1099 from my brokers. What should I do now?” Dear Friends, I get lots of questions from folks who leave something off a tax return, then realize it immediately afterwards. Don’t panic. Here’s what you do: Wait about a week or so for the federal return to process. If you have a refund coming – when you receive the refund, you know the IRS is done with your return. Then go ahead and amend your Form 1040. Print out the revised form, not just the 1040X (for your files and to go with the state returns). For people who have state tax returns that are affected, do the same thing if you have already filed it. If you haven’t yet filed the state return or multiple state returns, use the amended 1040 (not the 1040X) as your starting point and companion to your state return(s). See how simple that is? And remember, you can find answers to all kinds of questions about filing errors 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 folks in the TaxQuips Forum and elsewhere with this common problem. “My client moved to a different state while working for the same company. His W-2 shows withholding for the former state, but none for the state he lived in. His employer won’t correct the W-2. What should we do?”   Dear Friends, This problem is more common than you might expect. Let’s look at how this can be avoided for employees – and tax pros’ clients. 1) Understand this concept. It is not the employer’s fault or problem. The EMPLOYEES must review their paychecks when moving to a new location. You must be the one to take responsibility to ensure you have withholding for the correct state. If you do this from the very beginning, you won’t have a problem at the end of the year. 2) Tax professionals – when you work with a client who has moved before your tax appointment, ask to see a recent paystub and help ensure your clients are getting the correct state withholding. 3) Employees – file a change of address form with the IRS (Form 8822) and your former state, as well as the USPS. This will help ensure that you get all notices and checks to avoid potential problems and misunderstandings. 4) And to avoid identity theft, check your credit report regularly, starting about 2 months after you move to make sure the new people living at your old address are not accepting your terrific credit card offers and opening up new accounts. And remember, you can find answers to all kinds of questions about moving issues 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 Sharonda in the TaxQuips Forum with this fun topic, let me re-phrase. “I have a new client that home schools her children. What tax breaks are available to her?” Dear Sharonda, That’s an excellent question. IRS Pub 529 talks about Educator Expenses . Alas, qualified education expenses for teachers do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education. Here’s a good article about this topic. It refers to states that have tax credits… http://a2zhomeschooling.com is a generally good site for people who home school. TaxGirl offers an interesting analysis...but still ends up with my same conclusion. Here’s something to think about. If this woman is home schooling, she probably knows other who are as well. They might be able to form a local organization where, perhaps there is a way to pool resources, cut costs, and share the teaching duties for the various subjects – as each parent may have an area of expertise to offer. By creating a school, they might be able to generate deductions. And remember, you can find answers to all kinds of questions about home schooling 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 Josh in the TaxQuips Forum with this interesting question, let me re-phrase. “I want to raise money for a family member who is ill, using crowd-funding. What’s the best way to do this with the least tax impact?” Dear Josh, That is very kind of you. But the way you describe will hold YOU responsible for the income. You will get no deduction for the ‘donation’ to the family member. Have this person open up a new bank account specifically to receive these funds. It must be in their own name and Social Security number. You may be co-signer on the account. You may not use the funds for your own benefit. Be very careful about that. Medical crowdfunding sites specify that the donors will NOT get a deduction for these donations. They are purely voluntary, as gifts. Your family member will not have to pay taxes on the funds. Be sure that nothing is promised to the donors – no kinds of rewards or anything for their donations – or this could be turned into ‘sales’. Instead, as incentive, let them know that you, or the individual, will be posting updates and photos about his/her condition, mood, etc. And let them know where to find the updates – FaceBook, a WordPress site, Blogger, etc. (all of them are free). FaceBook requires a login to use. The others don’t. This is an interesting way for people to get help. And while the donations are not deductible, it’s a great way to help people you care about. And remember, you can find answers to all kinds of questions about crowdfunding 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 Bingo1 in the TaxQuips Forum, with this disturbing question. “On the w4 form I believe the amount for line 5 is 2 because my husband is the only one working and I don’t work. I have two kids. Is that correct? My CPA told me I should use 1 on line 5. But I believe that is wrong. Please let me know.”   Dear Bingo and Friends, There are three issues I want to cover today: 1) This IS the time to file new W-4s with your employers to instruct them on what to withhold from your paychecks for 2015. 2) If you are already working with a CPA or Enrolled Agent who has given you guidance on what to enter the Form W-4, why would you doubt them? If you really believe they don’t know what they are talking about – don’t work with them. But if they are competent, why second-guess them? 3) The IRS instructions for the Form W-4 are so confusing that it took a tax pro 25 pages to explain them. Don’t waste your time trying to follow them. The size of your family is meaningless. What matters is the joint income and the allowable deductions or standard deductions, your tax credits and the net tax liability that results. This means, to get the withholding right, you must do a projection of your expected tax liability for the year. Then you can follow a really old TaxMama® strategy with only 5 simple steps (from a 2005 TaxQuip). 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 GADS in the TaxQuips Forum, with this issue that I probably should not make public: “A 2 family house has been rented for the last 5 years. Both units are rented. The owner stopped paying the mortgage 18 months ago. He still is collecting rents and reporting them on Schedule E. Since he has not paid any property taxes or mortgage interest those items cannot be deducted. The bank is starting foreclosure proceedings. T Add Mediahe question is: Can he still take depreciation?”   Dear GADS, What a genius. Or a jerk. Yes, he must report all the income. He may only claim expenses that he has actually paid. Yes, he may claim the depreciation. And…when the bank forecloses and reports the balance of the debt that has been cancelled, they will include the amount of the accrued interest in that balance. So when you report the cancellation of debt, you will also get to deduct the interest that they have not paid, and probably also the property tax that the bank paid to protect their interest in the property – and added to the balance of the loan. See…pure genius. And remember, you can find answers to all kinds of questions about fiscal irresponsibility 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 JNaveen in the TaxQuips Forum, with this disturbing problem. “I regularly file my tax through TaxAct. This year I filed on time both federal and state. With lot of issues at home, I forgot to monitor whether they actually submitted or not. Looks like they didn’t submit state tax for whatever reason. I found it only today when I got mail from the MO DOR with amount I owe.” Dear JNaveen and Friends, I selected this question because it’s a mistake that’s easy to make. I hear about problems like this all the time. Whenever you file a tax return using an online service or a storefront-type office please follow-up to make sure your tax return is actually filed. When you have a relationship with your own personal tax professional, you will hear from them if there’s a problem. But when you’re an online filer, or walk in off the street to chain tax outfit, we keep hearing that people do not always receive notice if their efiled return was rejected. (Either you didn’t notice the email, or missed the call from them, thinking it was a solicitation.) One way to know for sure is, naturally, if you get your refund. But not all of us have refunds. Seeing that your payment clears is no guarantee that the tax return was received. Payments go to a different address. When you have a balance due, it’s especially critical to make sure your tax return was properly filed. Otherwise, the late payment penalties are pretty high. To see if a balance due return was filed, log back into your online account a week after you filed. Or drop by your chain store office to get a printout confirming your efile was accepted. It’s YOUR responsibility to make sure your tax return was filed on time. So, please, take care of yourself. And remember, you can find answers to all kinds of questions about late filings 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 interesting question. “A self-employed father has found himself having to cover thousands of dollars of uninsured medical expenses for his 21-year old daughter. He does not claim her as a dependent. The father has paid these expenses directly to the providers – and now, to their collection agencies. Also, may he deduct her insurance as part of his self-employed health insurance deduction?”   Hi Robert Let’s see if we can address Dad’s issues. I will give you links to the relevant laws and information. Starting with the Health Insurance. If Dad paid for daughter’s health insurance and she is under age 27, it certainly seems to me that he can deduct that health insurance as part of his self-employed health insurance costs. See IRC 162(l) .   Now, on to the medical expenses. Yes, you are allowed to claim the medical expenses of someone who would have qualified as a dependent, if not for their income. (note: I updated the amounts to reflect 2014 tax law in the citation I used in the TaxQuips Forum.) And remember, you can find answers to all kinds of questions about medical expenses and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Mike in the TaxQuips Forum, who has a common type of question. “I work in sales as an employee. May I itemize my clothing expenses and Mileage?” Dear Mike, First, let’s take the easy part of the question. Clothing. You need to wear clothing in this society. We are not legally permitted to go around naked – much as we might like to. Besides, nudity might cost you sales. So, since you need to wear clothing anyway, there is no deduction for that. Now, let’s look at mileage. The first thing you must do is to look at your company’s reimbursement policy for your mileage. If they reimburse salespeople, then you are required to submit your expense report to your company on a timely basis and get reimbursed. If your expenses are higher than the company’s allowable reimbursements, track all your expenses. Track ALL your miles driven – total miles and business miles – and keep evidence of the mileage. (Note: Commuting miles are not deductible. That means, driving from home to office and back.) Then you may use Form 2106 to report ALL your expenses. Deduct the reimbursements you receive from your company on line 7 of Form 2106. Before you go to all this work to document and track your expenses, see if you can use itemized deductions in the first place. Typically, unless your unreimbursed expenses are over $10,000, and/or you own a home and pay mortgage interest…you might not have enough expenses to itemize. I know, it’s a shame, when it costs you so much to do your job. Just in case, please read IRS Publication 463 for more details on business expenses you can use, how to use them, and how to document the expenses. And remember, you can find answers to all kinds of questions about job-related expenses and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® wants to take a moment to remind you about two key June deadlines. Today – estimated taxes are due. June 30th – the FBAR filing. Dear Family, Today, June 16th, your second quarter estimated tax payment is due. If you’re running late and haven’t had time to address this yet, I have good news for you. The IRS has a new Direct Pay system. It allows you to make the payment directly from your checking account – with no fees. So you don’t have to run down to the bank, or to the post office, or…Nor must you pay about 3% to an online payment service and use your credit card. If you don’t know how much to pay, here are two simple rules of thumb: 1) Self-Employed – pay the IRS at least 30% of your profits for the quarter (April and May). This will cover your 15.3% self-employment taxes and 15% tax bracket. If you’re in a 25% tax bracket – pay the IRS 40%. Pay the state, their tax rate. 2) Income is from investments and pensions – pay the IRS 15% – 25% of your income, depending on your tax bracket. If you’re in a 15% bracket and all your income is from dividends and capital gains, you might not need to pay any estimated taxes. The next deadline is the FBAR – to report the balance and location of your offshore accounts. This report must REACH the U.S. Treasury by June 30th. It must be filed online. There is need to send any money with this report. But if you don’t file it – and should have, the minimum penalty is $10,000 and goes up from there. Some people don’t realize they need to file. So, please, read today’s MarketWatch article to see if you are affected. And remember, you can find answers to all kinds of questions about June 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 .

Today TaxMama® hears from Sheronda in the TaxQuips Forum, with this common issue (edited). “Taxpayer paid off her student loan using a home equity line of credit (HELOC)? Is the interest still deductible?”   Dear Sheronda and family, This is a common question. These days, student loans get higher and higher as educational institutions keep raising their fees. It’s hard to get through college without going into debt. All too often, students default on those loans. When they do, the IRS can step in to grab the students’ tax refunds. And you cannot bankrupt student debt anymore. To make life easier, students and/or their families often take out home equity debt to pay the loan off. The advantages are a lower interest rate – and a longer pay-off period. The trade-off is that you lose the deduction for the student loan interest. But as Mike Reed, EA points out, the out of pocket cash savings from the lower interest rate far outweighs the tax benefit. In addition, if the HELOC is on the student’s own home, they might be able to deduct all the interest (on a loan of up to $100,000), instead of only the $2,500 deduction available for student loans. One more way to deal with student loans. There are a variety of government and exempt organization programs that will cancel the loan. This is a tax-free benefit students can get in exchange for providing health or educational services in a variety of off-the-beaten path areas. Think of Dr. Joel Fleishman stationed in Alaska in Northern Exposure. And remember, you can find answers to all kinds of questions about student loans 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 Hammed in the TaxQuips Forum, with this interesting question. “What is the income limit for married filing jointly to pay ZERO capital gains tax in 2014? Does the income include the social security benefits?”   Hi Hameed, Let give you a link to the IRS tax rates for 2014. In order to use the 0% tax rate on capital gains, your taxable income must be in the 10% tax bracket. As you can see, the limit for that is $18,150. (4% CA) On the other hand, the 15% capital gains rate goes all the way up to $73,800 (8% CA) and that’s also taxed at 0%. Nothing is simple. Yes, that does include the taxable part of Social Security. For married filing jointly, Social Security starts becoming taxable when HALF of the Social Security + your income exceeds $32,000 Once the overall income starts passing that limit, up to 85% of the SS income is added to the taxable income. Not only can it cause you to jump into a higher tax bracket, it can dramatically increase your overall taxes. So be careful to do some planning. If you’re trying to do some planning, consider this. Log into Turbo Tax or one of the other tax software tools. You can enter numbers and test out scenarios for free. Do not use their tax calculator tool. It’s not sensitive enough for what you’re trying to work out. And remember, you can find answers to all kinds of questions about capital gains 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 Rosemount in the TaxQuips Forum, with this excellent question. “What taxes would be due on municipal bond fund earnings if a Florida resident?”   Dear Rosemount,   As you probably know, Florida does not have any personal income taxes. Unlike states, like NH that claim not to have taxes, but that tax interest and dividends. So…let’s look at taxes from the IRS. Typically, the IRS does not assess income taxes on Municipal Bond income. However, if your income goes too high, you might face alternative minimum taxes. You can find some answers to such questions here at InvestinginBonds.com. They will give you some guidance before you start investing. Also, when you do select your municipal bonds, please be very careful to look up the financial status of community issuing the bonds. There have been some cities or communities around the country that have filed bankruptcy. The best way to avoid getting caught in that trap is to do your due diligence and read everything about the specific community or entity that is issuing the bond and how it plans to pay it back. And remember, you can find answers to all kinds of questions about tax-free 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 Nic in the TaxQuips Forum, with this common misconception. “Nic is disabled and withdrew his money from his retirement plan. Now he’s trying to figure out how to avoid paying taxes on this money.”   Dear Nic and Family, Mike Reed, EA and I tried to explain this to Nic very explicitly. Yet, he persisted in believing that his withdrawal should not be taxed. He is not alone in that belief. So, let me clarify this before you draw out your retirement, too. Yes, it is true that there is special tax treatment provided to those who must retire early due to a permanent disability. (Note: I said PERMANENT, not just something that will keep you helpless for a few months or a year.) (Also, there are