TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from KP in the TaxQuips Forum, with this question. “My sister-in-law received a 1099-Misc with an amount in box 6 for medical health care payments for providing care for her husband, a veteran receiving VA benefits. I know the amount is taxable to the federal government, but is it subject to social security tax?” Dear KP and Family, After answering the question, I got this interesting note from a friend at the IRS: He pointed to this article about payments coming from “a state, a political subdivision of a state, or a certified Medicaid provider under a Medicaid waiver program to an individual care provider for nonmedical support services provided under a plan of care to an individual (whether related or unrelated) living in the individual care provider’s home.” These payments might not be taxable at all !!! This might apply to many people. And remember, you can find answers to all kinds of questions about earnings, 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® wants to help you with last minute issues on Tax Day 2014   Dear Family, While most of the population has probably already filed their tax returns, there are people still needing to file – something. That usually includes those people who owe money, have businesses, complex investments, are dealing with disputes, and just plain procrastinators. My first bit of advice is – don’t stress. It’s going to be all right. Whatever it is. Next – don’t file your tax return today. Trying to finish up under pressure is a bad idea. You make mistakes; your tax pro might make mistakes. Most importantly, if there is something your tax pros could do to help you reduce your taxes, they will be too rushed to think about it. So you’re doing yourself a major disservice by filing at the last minute. What to do instead? Get an extension, of course. This Equifax blog post will tell you how to get one for people. When it comes to partnerships, certain LLCs, and a variety of estates and trusts, use Form 7004. You don’t need to explain why you need it. You will get automatic approval. You can find corresponding tax forms for your state here. Since you may need to pay a whole assortment of taxes today (IRS & State 2013, estimated taxes for 2014, IRA contributions, etc.), This MarketWatch article will explain what to do if you can’t afford to pay it all today. These two articles will help you de-stress today and buy you enough time to get everything done correctly. But now that you’ve put it all of this off for so long, perhaps it is time to start really looking at your data and getting organized, so you can resolve the 2013 tax year by June, don’t you think? Have a less taxing Tax Day – and go out and celebrate this afternoon. And remember, you can find answers to all kinds of questions about last minute filing tips 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 a couple of people in the TaxQuips Forum, with this problem this week. They have sold real estate on an installment sale. They have been the mortgage-holder. And after a while, the buyer defaulted and they had to repossess the property. Let’s look at the problems arising when carrying a mortgage. Dear Family, With bank and CD rates of return being so low, it is tempting to make investments that provide a seemingly safe, secure, rate of return – guaranteed for several years – and secured by real estate. So here you are, renting out your house. The tenant has been paying rent diligently for years. They want to buy the house. And you’re ready to sell. What a great deal! No real estate commissions; no need to worry about those pesky escrow fees. Let’s just do a quickie sale, with a fixed interest rate and pull some loan docs off the Internet – and awaaaaay we go! (Don’t bother with the credit check, or employment check, informing the underlying lender that there’s a new buyer, or ensuring there is enough of a down payment so it hurts if they walk away from the property.) Oops. Suddenly, they are not paying. To avoid getting foreclosed by the underlying mortgage (oh yes, there’s still one of those), you have to start covering the mortgage payments. They make the random payment…or not. You have no choice. You try to evict them and repossess the house. Can you imagine? They get mad at you. And they utterly vandalize the house. (Yes, that’s one of this week’s situations.) By the time you get the house back, you will have paid out 3-10 times what they paid you – just to get the house back in some order. Perhaps you would have been better off letting it go to foreclosure. Some brief tips: 1) As much as you love and trust them, do a complete credit check – and speak directly to their employer to ensure they will still have a job (that they are not flakes). 2) Don’t carry paper with anyone who is self-employed. If they don’t feel like running their business anymore, it’s really hard for you to collect money from them. 3) Handle the sale through the proper channels, escrow, title, etc. 4) If they are going to assume (or pay your mortgage), make sure you notify the lender and that the lender approves and puts them on the loan instead of you. Otherwise, there goes your credit! 5) Be sure you have the willingness to start foreclosure proceedings when they miss two payments. If you can’t be bothered with all the right details – and can’t harden your heart? Help them arrange for financing and get your money – and run. You are not equipped to carry a loan. True, this doesn’t happen often. But when two different people in two different parts of the country bring this to me on the same day…it makes you take notice. And remember, you can find answers to all kinds of questions about selling on installment, repossessions 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 Hollie in the TaxQuips Forum, with this concern. “My husband had to go to an assisted living facility (following hospital and skilled nursing stays) and I understand the nursing portion of his assisted living monthly fee is a tax deductible expense. When I asked the administrator of his assisted living facility (run by Americare) what percent of his monthly fee was attributable to nursing, I was told 66%. But she would not give it to me in a simple written statement. She said if the IRS has any questions, have them call her, which I realize is not a reasonable reply. My question is do I have to have a written statement from the facility before I can add this to my medical deductions?” Dear Hollie, Mike Reed, our Enrolled Agent in California’s San Jose area has provided an excellent response and resource – from the Elder Law Answers website: I refer you to this article which explains some of the possible deductions – be aware that if your husband is there primarily for medical care, room & board may also be deductible. I’m really surprised the assisted living facility does not have a form letter ready for you. We do lots of these, and never have a problem getting medical substantiation. Maybe asking someone in admittance or marketing might get you a better answer. TaxMama adds this tip – To ensure you and your husband don’t lose the deduction, please get a written order/letter/prescription from his physician specifying that he needs to move to a care facility – and why. Try to get a new letter every year. 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 Inteph in the TaxQuips Forum, who made a new discovery. “A young lady made about $15,000 in 2012. The employer (a city in California) withheld income tax and Medicare tax but not SS tax. Boxes are 3 and 4 are blank. What do I tell her and how do I prepare her return? How does she pay SS tax that was not withheld?” Dear Inteph, Explain it to her this way. Typically, people who work for schools and governments don’t pay into Social Security. Their employers generally offer other retirement systems. You must manually enter zeroes into the SS and Medicare wages fields when you enter the W-2 information into the tax software. You can’t fix this and have her pay into the system for those quarters. But she’s young. She’ll have other jobs where she will be able to build up 40 quarters worth of credits in Social Security. And remember, you can find answers to all kinds of questions about 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 Asdfgh in the TaxQuips Forum, who tells us. “My daughter plays piano for school choir. Doesn’t ask for money. She gets “thank you” from school PTO in form of flower bouquet and check for a few hundred dollars. Is that taxable income?” Dear Asdfgh, Sounds like you have a talented daughter. How delightful. Anytime someone earns a total of $400 or more in a year, they must pay self-employment taxes on those earnings. So if your daughter earns less than that during the year – no worries. More than $400…? She needs to file a Schedule C to report the income on her own tax return. If she spends any of that money on her piano-related expenses, she can deduct those costs. If you spend the money…perhaps she can deduct the costs – if you gift her the funds and let her pay the expenses. (for future reference.) This is good practice for adult life, I suppose. And remember, you can find answers to all kinds of questions about stipends 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 Stevenson in the TaxQuips Forum, with this question. “If you are unemployed, can the penalty to withdraw money from your IRA be waived when filing taxes? However, the taxes will still need to be paid since I am not 59 1/2. Is this correct? What form or forms would I file if I worked 6 months last year and was not working the other 6 months of last year? Dear Stevenson, Unfortunately, you don’t have a blank check to draw money out of your IRA without penalty just because you’re unemployed. I have proposed this change to the IRS and to the Taxpayer Advocate (who makes suggestions to Congress), since SO many people have now become unemployed in the last few years, often due to the really bad legislation and oversight of Congress. Like, you, many folks have had no choice but to tap into their retirement accounts to survive. Alas, this legislation has not happened. So, the only tax penalty avoidance you have are the following (See instructions to Form 5329 page 3): #7 – IRA distributions made to unemployed individuals for health insurance premiums. #5 – Qualified retirement plan distributions up to (1) the amount you paid for unreimbursed medical expenses during the year minus (2) 10% (7.5% if over 65) of your adjusted gross income for the year. Naturally, if you cannot afford to pay the taxes, you can get an installment agreement to pay them over time, or you might qualify for an offer in compromise. Incidentally, you must always pay taxes on the regular IRA withdrawals – even after age 59 1/2. It’s only the penalties you get to avoid. And remember, you can find answers to all kinds of questions about IRA early withdrawal penalties 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 NutShell in the TaxQuips Forum, with this brilliant observation. (let me summarize) “I just figured out that if I have capital gains income, I am taxed by both the IRS and the state. If I live in an income tax-free state or overseas, should I sell my stocks before moving into a taxable state, like, say, NJ?”        Dear NutShell, It’s nice to see someone doing some planning. Well done. Yes, normally, you do get taxed by both the IRS and the state when you sell capital assets at a profit. So, if you are now living in a tax-free state and deliberately plan to move to a state that does have taxes, you can save money on state taxes by selling off your profitable assets before you move. But continue testing the scenario in your tax software. What happens to your federal (IRS) tax when you sell your whole portfolio at a profit? Does it push you into a higher federal tax bracket? (You’d be surprised. It just might not…because for capital gains the tax rate should be your rate before the gains are taken into account.) Incidentally, if you are residing (or considering residing) overseas, and maintain a US mailing address – have that address be in a state that does not have an income tax. Otherwise, all the 1099s will show that state address and the state will be looking for tax returns. And remember, you can find answers to all kinds of questions about how to avoid double taxation 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 Durai in the TaxQuips Forum, with his frustration. “I forgot to keep track of my advance tax payments. Is it possible to get this information from IRS or should I just go ahead and file my tax return with the sure information I have and leave it to IRS to correct my error, if there was one?”          Hi Durai, See if you can try calling them and get them to answer you.  1-800-829-1040 (TAX 1040) If the wait is too long and your hair is starting to turn gray… try this. Use Form 4506-T and check box 6b. You’ll get the information in about 2 weeks. Just for the heck of it, also check box 8 on the form, to see if there any W-2s or 1099s you don’t know about. For this year, open up an IRS EFTPS account – go to www.eftps.gov . Make your quarterly estimated tax payments through there – you’ll get a receipt for each payment AND you’ll be able to look things up and get a printout to give to the IRS. And remember, you can find answers to all kinds of questions about estimated tax 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 Rogers in the TaxQuips Forum, with this question. “My 1099 DIV form shows that I received $2,345.60 in dividends from a typical domestic stock index fund. But what is unclear is, should the dividend be taxed at capitals gains rates, if it’s a qualified dividend? Or should it be taxed at regular income tax rate if they are just ordinary dividends? The $2,345.60 is in both column 1a and 1b. Which one is it – qualified or ordinary?”          Hi Rogers,  When the 1099-DIV shows an amount in box 1b, (qualified dividends) that’s good news. That means the amount in that box is taxed under capital gains rules. (Please follow the links in the reply to get more details about dividends and how they are taxed.) In your case, this means ALL your dividends are taxed as capital gains.  Well done! And yes, if there were a lower amount, or no amount in box 1b, then some, or all, of your dividends would be taxed as ordinary income – at your highest progressive tax rate. Note: I could complicate the issue by warning you about the effect of using an investment interest deduction. But, I won’t. You can read about that complication here. And remember, you can find answers to all kinds of questions about dividends 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 KDevo  in the TaxQuips Forum, with this complaint. “I recently called the IRS to get clarification on filing a 2012 1040-X (amended return), with a balance due. TurboTax® did not generate a voucher and I couldn’t find a 2012 voucher on the IRS website. The IRS recording (800-829-1040) stated they would no longer give phone advice and that I may want to search hundreds of pages of computer generated answers to questions. Where do I go for help when I need it? And DO I need a 2012 1040-V?”                                                                                  Hi KDevo, Gee, that’s an easy one. You’ve come to the right place! The IRS has a prior year forms database. When you know what you’re looking for, the form is easy to find. Ta Daaa! 2012 – 1040-V On the memo line of your check, make sure you write the following: 2012 1040X [your social security number AND, if married, your spouse’s SSN, too].   If you don’t do all that, when the check gets separated from the 1040-V (and it will),  they’ll apply it to 2013 or 2014 – or wherever they like. And remember, you can find answers to all kinds of questions about obscure forms 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 Mel  in the TaxQuips Forum, with this reasonable question.  “I have a client who sends their 5 year old to a private Christian school for pre-K. Can this be deductible like daycare? Is private school deductible at all in the upper grades?”                     Hi Mel,  The pre-K costs can be applied towards the Child and Dependent Care Credit. Yes. Once they are in kindergarten or above, the private school costs are no longer deductible. However, (see, there’s always an exception – or two) if part of the costs include after-school care, that is deductible for children under the age of 13. (See instructions to Form 2441) Also, religious school tuition often includes a donation component. Find out what that is by looking at the itemized invoices. Many, many, many years, in the distant mists of time, my brother was the treasurer for his children’s elementary school. They were audited. It seems that many of the parents were claiming their entire tuition payment as charitable contributions. That’s when I learned: a) You can’t do that. b) The school may include a certain amount of donation component – but not a major part of the tuition. And remember, you can find answers to all kinds of questions about child care 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 p0pp0p  in the TaxQuips Forum, with this question.  “I worked with my wife at a small company in NJ. I left the company in June of last year. I also have separated from my wife. My ex-employer gave my W-2 to my wife. Is this legal? How do I get another copy of my W-2?”                                                                              Dear p0pp0p, Your ex-employer probably didn’t GIVE the W-2 to anyone. They would have mailed it to the address on your employee file – unless they didn’t know your current address. Hmmm…on the other hand, since your wife was still working there…they might have given it to her. Did you give them a change of address when you moved? Is that legal? Good question. Do they know you’re separated and no longer living together? Since I get the impression that your wife won’t give you a copy, the easiest thing to do is to call them and ask them for a copy. Always consider trying the direct approach first. If that doesn’t work, come back and I’ll tell what else you can do, without causing you stress and conflict. And remember, you can find answers to all kinds of questions about missing W-2s 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 Wayne  in the TaxQuips Forum, with this question.  “I received a notice from the IRS that my 2011 tax return did not include a withdrawal from my 401k. So I had to pay roughly $3,500 in taxes and penalties for this omission by my tax preparer. Is this $3,500 payment deductible on my 2013 tax return?                                                                         Dear Wayne, So sorry to give you the bad news. Federal taxes are never deductible. And penalties are never deductible. When it comes to personal interest expenses? Those were fully phased out in 1990 with the Tax Reform Act of 1986. Now, as to the preparer being to blame for the taxes? You would have owed them on your 2011 tax return anyway. You would also have owed the 10% early withdrawal penalty from the 401k, along with the underpayment of taxes penalty. However, the additional underpayment of taxes penalty and the interest after April 15, 2012…now that…the preparer might have caused. But, did your preparer actually know about this withdrawal? And if so, did you ask why it wasn’t reported? It’s quite possible that there should not have been a tax or a penalty or interest – if you rolled the funds over into an IRA. If that’s the case, you might still be able to get your money back if you file a claim for refund within 2 years of your payment. And remember, you can find answers to all kinds of questions about deducting taxes and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Idlkotr  in the TaxQuips Forum, with a good question.  “I have the opportunity to be an independent contractor. I am an occupational therapist who will be working with disabled children in their home. Thus, a lot of driving. I will be doubling my income. I do not have a clue how to be an independent contractor and not go to jail for income tax fraud.” Dear Idlkotr,   Congratulations. That sounds like a wonderful opportunity. In the TaxQuips Forum you will find more detail. For this brief TaxQuip, I have outlined my reply: Make sure you have business licenses for all the towns where you will be working. Meanwhile, read IRS Publication 334 thoroughly.  It’s a free tax guide for small businesses. Get a bookkeeping program, to track your income and expenses – especially the out of pocket, cash expenses.  It wouldn’t hurt to get a scanner, for your receipts. Track your business AND personal mileage. I think FreshBooks and Outright contain a mileage tracker in addition to the bookkeeping element. Now, you have the ways to track things. If you want to know how to minimize your taxes, too, read Small Business Taxes Made Easy. It will include information the IRS will never tell you. One last thing. If you’re driving a lot, get a AAA membership. If you have any problems, just give them a call and they’ll get you home. 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 .