DALLAS CPA

TAX CREDITS-Too many of them

2011-12-07T05:01:00.001-06:00

The real reason taxes are complicated is not due to the calculation of the
tax once the taxable income is determined. The real problem is with all the
deductions and credits. Many of these deductions and credits are designed
to encourage things presumed beneficial to society. But now there are so
many of these deductions and credits that it has led to a tax code that is
overly complicated.

TAX CREDITS may encourage something useful, but is it right for someone who
produces something beneficial to the environment and, by doing so, makes
several million dollars, to pay little or no tax due to his qualifying for a
lot of tax credits?

Obviously anyone should be able to deduct the cost of operating his business
rather than be taxed on his gross receipts, but a business that makes a high
profit net of all expenses should not escape tax by taking a lot of tax
credits.

Here are some of the forms to be filed for some of these many credits:

Schedule R-credit for the elderly and disabled, Form 1116 Foreign tax
credit, Form 4136 Fuel tax credit, Form 3468, Investment tax credit, Form
3800 General Business Credit, Form 5405 First time home buyer credit, Form
5695 Residential energy credit, Form 5884 Work Opportunity Credit,
Form5884-B, New Hire Retention Credit, Form 6478 Alcohol Fuel Credit, Form
6765 Research Activities credit, Form 8396, Mortgage Interest Credit, Form
8582CR, Passive Activity Credit Limits, Form 8609 Low Income Housing Credit
Allocation, Form 8801 Credit for Prior year Alternate Minimum Tax, 8812
Additional Child Tax Credit/Combat Pay, Form 8820 Orphan Drug Credit, Form
8826 Disabled Access Credit, Form 8834, Qualified Electric Vehicle Credit,
Form 8835 Renewable Electricity Production Credit, Form 8839 Qualified
Adoption Expense, Form 8844 Empowerment Zone Credit, Form 8845 Indian
Employment Credit, Form 8907 Nonconventional Fuel Production credit, Form
8808, Energy Efficient Home Credit, Form 8809 Energy efficient Appliance
Credit, Form 8810 Alternate Motor Vehicle Credit, Form 8811 Alternate Fuel
Vehicle Refueling Property Credit, Form 8912 Credit to Holders of Tax
Credit Bonds, Form 8936 Qualified Plug-in Electric Drive Motor Vehicle
Credit, Form 8941 Small Employer Health Insurance Credit.

There is nothing particularly bad about any single one of these credits.
The bad thing is that there are just too many of them. It would be better
to eliminate them all rather than to continue having all of them. The
benefits derived from those getting these credits are offset by the
necessity to either tax non-recipients more in order to grant these credits
or the necessity for the government to go deeper into debt or print more
money and reduce the purchasing power of the dollar.

AGGRESSIVE TAX RETURN APPROACH

2011-12-04T05:06:00.001-06:00

Would you rather be safe than sorry? Or are you willing to take an aggressive approach to reduce your taxes?
My policy is to let my client make the decision after I've explained the possibility of IRS challenging the aggressive approach.
There is one big risk that you need to avoid if you take an aggressive approach. If you try to sneak it in just hoping it may slip through, it can cost a lot more than if you lay your cards on the table instead of trying to sneak it through.
When taking an aggressive position, you should always include FORM 8275, Disclosure Statement, explaining what you have done and the Revenue Ruling or other basis for your position.

Of course, you should never take an aggressive approach unless there is something to support your position as reasonable even if is not accepted by the IRS or tax court.

Rental and later sale of former home

2011-09-05T16:54:00.001-05:00

If you have lived in a home for two of the last five years you can exclude all or part of any profit under §121.
The two years do not have to be the most recent two years.
Your profit, if any, is the sales price minus the cost after reducing the cost for any depreciation taken.
If you rented the house or used part of it as a home office the depreciation taken would reduce your cost for purposes of calculating profit.

Suppose you paid $ 200,000 for the house and took $ 10,000 depreciation so your basis would be $ 190,000. If you sold it for $ 220,000 Your profit would be $220,000 - $ 190,000 or $ 30,000.

However, due to §121 you would only have to pay tax on the $10,000 depreciation you had taken.

If you carry the mortgage on the sale, you could report it on the installment basis you would stretch out the tax on the profit over the life of the mortgage and only report 10,000/220,000 or 4.545% of the principal collected each year. By carrying the mortgage yourself, you would, of course, be collecting interest which would be fully taxable.

NOTE: The exclusion is not unlimited. A single taxpayer is limited to a $250,000 exclusion and if married filing jointly the exclusion is limited to $ 500,000.

Investing for dividends

2011-09-03T17:04:00.000-05:00

Before you invest in a high-dividend stock consider whether the dividend is sustanable.
If the dividend per share is a very high percent of the earnings per share, it may be cut.
Some stocks pay dividends that exceed their earnings which cannot continue unless earnings improve.
Also, look at earnings growth. Are earnings per share increasing or decreasing?

A good way to begin your search is to google "dividend aristocrats" and "dogs of the dow"
Then check for earnings growth.

REFUND ANTICIPATION LOANS

2010-08-11T11:09:00.000-05:00

Many of the "Tax Shacks" offer high-interest Refund Anticipation Loans (RALs) sometimes called Rapid Refunds. The people who obtain these loans are usually low-income people who are so impatient to receive their money that they will pay almost anything to get it a few days sooner.

If someone wants to pay an enormous amount of interest to obtain a loan, that's their business, but having the IRS aid and abet such a rip-off is where I take exception. Apparently, the IRS has begun to realize the error of its ways and will no longer provide the banks which provide these loans a "debt indicator" so if the refund is denied by the IRS the bank would be left holding the bag.

One other feature of these loans were that the bank deducted the tax preparer's fee as well as their fees from the refund. Since some people could not otherwise pay a tax preparer, the IRS is now considering allowing the tax preparation fee to go direct to the preparer and the balance to the taxpayer. This would eliminate one other justification for RALs.

The only remaining incentive for anyone to take the RAL would be to get the money as soon as the return was prepared rather than waiting for a few more days. After waiting 365 days for the refund, some people just can't wait another ten days! So RALs may not entirely disappear but the banks will have to take a much bigger risk without the debt indicator, so this will greatly decrease this sort of fleecing the poor.

Investment advice

2010-03-28T20:30:00.002-05:00

Normally I avoid discussing any advice regarding buying or selling of stocks, but I felt this is important enough to share and warn you since this explosive situation might prove to be yet another ENRON. Please review any holdings you might have in the following stocks:

American Can
Interstate Water
National Gas Company
Northern Tissue Company

Due to uncertain market conditions, I advise you to sit tight on your American Can, hold your Water, and let go of your Gas. You may be interested to know that Northern Tissue touched a new bottom today, and millions were wiped clean. It's a tough market out there. Be careful!

LLC vs LLP

2010-03-11T15:51:00.000-06:00

Recently I spent a lot of unnecessary research time before I received the K-1 from an LLP partner. I had assumed that it was an LLC which opened the door to possibly reducing the impact of self-employment tax. If you are an employee the most you pay is 7.65% of your salary, but the employer pays the matching half, so the total could be 15.3% altogether.
If you are self-employed or a partner you pay both halves--social security of 12.4% up to the maximum amount taxed and medicare of 2.9% on 100% even if you are above the SS max.

If my client had been an LLC member, the self-employment tax might have been limited to an equivalent of a reasonable salary. My client's salary the year before had been about $35,000 less than his partnership share of profits, so that might have saved a little. It could also have been contended that a "reasonable" salary could have been less than the previous salary.

Unfortunately the K-1 was for an LLP (Limited Liability PARTNERSHIP) and the K-1 clearly stated that it was all subject to self-employment tax. The only redeeming feature was that "unreimbursed partnership expense" was fully deductible--for income tax, but not for self-employment tax). As an employee, an employee's unreimbursed business expense is only deductible to the extent that it exceeds 2% of Adjusted Gross Income.

Tax credits and social engineering

2010-02-19T11:34:00.000-06:00

There are an ever-growing number of tax credits. People who get those credits like them, but people who don't get them have to pay more tax in order to provide the credits to the recipients. It's a clear-cut case of robbing Peter to pay Paul. You can always count on Paul's support for these benefits. Everyone has heard of the "Peter principle" but not everyone is familiar with the "Paul principle" but you can rest assured that your congressman is well-versed on the vote-getting benefits of giving Paul these breaks.

The credits along with a lot of other deductions and rules are social engineering efforts to encourage or discourage certain behavior. Mortgage interest deductions encourage home ownership. To encourage it even more, those no-income-verification loans with no down payment created a lot of new homeowners, but it also lead to the recession we are still experiencing.

In my opinion the government should concern itself with making taxation fair and uncomplicated and avoid social engineering as part of the tax code. Ideally the government would operate the way a prudent individual would. In good times, take in more than you spend an save for a rainy day. Then if there is a recession, the government could step in to tide us over until the economy improved--without deficit spending and without mortgaging the future of our grandchildren for our debts.

Researching Tax Questions

2010-02-14T12:46:00.000-06:00

Sometimes readers of this blog have questions regarding items discussed in the blog. Obviously this blog cannot cover the waterfront, so it won't answer all questions related to a subject discussed. In that case, you would need to do further research. A lot of your questions may be answered by looking at IRS publications which are available at www.irs.gov. Also, if you are near a large public library, you could take a look at the CCH publications.

If you need professional assistance, there are CPAs and other tax professionals available almost anywhere you may live. If you need personal assistance, CPAs, including myself, charge for their services. Unfortunately the tax laws are so complicated that the majority of the population has to pay someone to prepare their returns.

In the past, I've had people e-mail me with questions and I've sometimes responded, and some people have continued with a whole series of questions which I just don't have the time to research and respond. If someone submits a question of general interest, I will try to cover it in a future blog, but I may not address all such questions.

UPTOWN DALLAS: IRS e-mail FRAUD

2010-02-13T19:48:00.000-06:00

UPTOWN DALLAS: IRS e-mail FRAUD

TAX CREDITS

2010-02-13T19:16:00.003-06:00

Tax Credits are usually better than tax deductions because a dollar's worth of credit can reduce your tax a dollar, instead of just a dollar multiplied by your tax rate. Some credits are "refundable" which means that if you owe no tax or less tax than the credit, you can get a refund.
A non-refundable credit will reduce your tax to zero, but will not get you a refund. So if your tax was $ 1000 and you had a $ 2000 credit, you would get a $ 1000 refund if the credit was refundable, but if it were non-refundable, it would only wipe out the $1000 tax due.

Some credits and the forms you need to file to support the credit are:
Schedule R, Credit for the elderly
Form 1116- Foreign tax credit
Form 4136 -Fuel tax credit
form 3468- Investment tax credit
Form 5405- First-time homebuyer credit
Form 8396- Mortgage Interest Credit
Form 8834- Qualified Electric Vehicle Credit
Form 8863- Education Credit
Form 8880- Retirement Saving Credit
Forms 8908 and 8909 - Efficient Energy Credits
Schedule - EIC Earned Income Credit
Schedule - M Making Work Pay Credit

Required IRA withdrawal

2010-02-11T11:00:00.000-06:00

It is easy to get confused with the Required Minimum withdrawal rules. If you are age 75 12-31-2009, it would seem that you would use your account balance as of that date and also use your age (75) as of that date.

However, here is what the Tax Book says:
Required minimum distribution calculation. The RMD for
each year equals the IRA account balance as of December 31 of
the preceding year, divided by the applicable distribution period,
or life expectancy, for the taxpayer’s age in the current tax year.

RENTAL and other Unallowed passive losses

2010-02-11T05:37:00.004-06:00

As a rule for many taxpayers, you can deduct up to $ 25,000 in rental losses. However if your "modified" adjusted gross income is $ 150,000 or more you get nothing. If your MAGI is less than $ 150,000, you will get all or part of the $25,000 maximum deduction. I won't go into the difference between MAGI and regular AGI. That's a whole 'nother story.

Here are some examples:

EXAMPLE # 1: Your MAGI is $ 140,000. $150,000 - $ 140,000 = $ 10,000. You can take half of the $ 10,000, not to exceed your actual loss. So if you lost $4000, you could take it all. If you lost $ 6000, you could only take $ 1000 and carry the loss forward to next year's tax return.

EXAMPLE # 2: Your MAGI is 90,000. $ 150,000-$90000 = $60,000. Half is $30,000, but you can't take more than the $ 25,000 maximum. You can carry forward any loss in excess of $ 25,000. If the loss is $25000 or less, then you can take it all in the year of the loss.

If you sell the property in some future year, you can then take all of the losses you carried forward in the year of the sale. So if you always made over $ 150,000 and had losses every year, then you would finally get a big deduction in the year of the sale.

SEVERAL RENTALS CHANGE THINGS SOMEWHAT:
If you have several properties and sell one of them, you only get the unallowed loss attributable to that one property in the year of the sale. Unallowed losses are allocated among all properties each year. If you have four properties and lose $ 20000 on three of them and make a profit of $ 4000 on one of them, you could offset the $ 4000 gain so it would not be taxed, but would reduce your loss carry-forward to $ 16,000.
Later you sell one of the properties. You would have needed to allocate the $ 20,000 to the three properties. Assume $6000 for one, $5000 for another and $9000 for the other one.
The unallowed loss would be split proportionately 16/20 (or 80%) X 5000 for the first one, etc.
So if you sold the one with the $9000 loss you would have $7200 carried forward and deductible in the year of the sale.

If you have losses and gains every year with multiple properties, you will need to keep a running total of any unallowed losses on a property-by-property basis. Some years you may have some gains which absorb part of the prior losses. This means that there is a very good chance of a miscalculation.

You probably should find a CPA to do all this for you. Those of us who do a number of tax returns have tax software programs that do all of these calculations and determine the carryforward amounts on a cumulative basis. For us, the allocations and MAGI calculation is no problem since the computer knows how to do it. What is important is to know how to feed the figures into the computer to get the right results and create the proper forms. My computer program automatically creates the Form 8582, Passive Activity Loss Limitations, which must be filed with Form 1040 if you have unallowed losses of this type.

NOTE: There are other types of passive losses besides rental losses. For example if you are a passive investor in a partnership or S-corporation that has losses, they are passive and cannot always be taken. Once I had a client with losses in about 20 partnerships and S-Corporations that were carried forward until one year he had a big profit and was able to offset a lot of the profit with the losses that were carried over from the prior years.

PARTNERSHIP ACCOUNTING

2010-02-10T21:50:00.002-06:00

Here is an interesting partnership situation.
Two people own 50% of the partnership, and get 50% of gross income, but pay a different share of the expenses. One guy pays 60% of the expenses and the other guy pays 40%. This calls for a little "creative accounting."
Here is one way to handle it:
Do everything as if expenses were shared equally (using 50% ownership for each).
Then give the one who was allocated too little expense a 'guaranteed payment' to make it come out correctly.
For example: Gross income = $100,000
Partner A's expense = 20000 and his share of gross is $50000) net due is $ 30000
Partner B's expense = 30000--also has $50000 share of gross net due is 20000
Each 50% partner would normally get a K-1 showing $25,000
To correct this give A a guaranteed payment for the difference (30000-20000)= 10000
So now the $100,000 has been reduced to 90,000 to spit equally
Subtract $ 50000 expenses from the $ 90000
Split the remaining $ 40000 equally. ($ 20000 each
Add the Guaranteed payment to A's share giving him $ 30000 which is the same as if he had only been allocated $ 20000 of expense.
Partner B would get $ 20000 and no guaranteed payment.

Home Office deduction

2010-02-09T10:57:00.002-06:00

Several years ago I decided to leave the office I had been renting and start working from my home.
There were advantages and disadvantages.
On the plus side, I saved the rent, used an office space available in my home and was able to deduct a portion of my mortgage interest, real estate tax, utilities and other home expenses as a business expense. The deduction is based on square feet used; e.g. if you use 400 sq feet of a 4000 sq ft home for an office, 10% of all relevant expenses are deductible. You can also take a deduction for depreciation of 10% of the home cost or other basis (excluding land value). Another big advantage is that I save car expense and I don't have to hang around an office when I'm not busy--I can watch TV unless something comes up.
The main disadvantage is that I don't get as many new clients, since I live in a residential area and I can't hang out a sign.
It's a pretty good trade-off.

To deduct the home office you must use it exclusively as a business office. Having a TV in the office could disqualify it on the grounds that it is not exclusively used for business.

Gambling winnings and Losses

2010-02-08T16:39:00.005-06:00

Generally when you have gambling winnings you must report all winnings on page one of your tax return, then deduct your losses, not to exceed your gains, as an itemized deduction.

If you could just report the net winnings on page 1, it would reduce your adjusted gross income on page one of Form 1040 which is usually better than deducting it on page two as an itemized deduction--especially if you would be better off using the standard deduction if you didn't have the gambling loss deduction.

RS Chief Counsel has issued guidance recently that DOES allow netting of gains and losses for a casual gambler using the slot machines. This netting is allowed apparently on a daily basis only.

If you go to the IRS website, search for AM 2008-011 and you can read the document. Taxpayers must keep records and I stress that this netting is only for a specific fact pattern.

Deductionf for Emloyee Business Expense

2010-02-07T14:56:00.000-06:00

Employee Business Expenses

Unreimbursed employee business expenses are deductible to the extent that they—plus other “miscellaneous deductions” exceed 2% of your Adjusted Gross Income. For example, if you made $ 50,000 and your employee business expenses were $ 1200, you would have $1200-$1000=$200.

To that you could add other miscellaneous deductions such as tax preparation fees and Investment expenses such as IRA fees paid to the custodian (but not if the custodian deducts them from your IRA account).

Some employee business expenses include:

· Car expense (actual expense or standard mileage allowance) The standard mileage allowance for 2009 is 55¢ per mile.

· Hotels and motels when away from home overnight.

· Meals while away from home overnight.

· Education expense related to present occupation

· Job search fees.

· Occupational license fees

· Home office expenses (several rules apply)

· Professional dues, union dues

· Protective clothing, safety equipment, uniforms required for job

· Tools and supplies used in your work.

The biggest problem with these are the 2% of Adj Gross income by which they must be reduced.

They must be required by the job and a number of rules apply which must be followed in determining the amount to be deducted. You can obtain more information from IRS Publication 17 and other information available at www.irs.gov

IRS THEME SONG

2010-02-07T13:15:00.001-06:00

Tax his cow, Tax his goat;
Tax his pants, Tax his coat;
Tax his crop, Tax his work;
Tax his ties, Tax his shirt;
Tax his chew, Tax his smoke
Teach him taxing is no joke.
Tax his tractor, Tax his mule;
Tell him, Taxing is the rule.
Tax his oil, Tax his gas
Tax his notes, Tax his cash
Tax him good and let him know,
That after taxes, he has no dough.
If he hollers, Tax him more;
Tax him till he's good and sore.
Tax his coffin, Tax his grave,
Tax his sod in which he's laid.
Put these words upon his tomb,
"Taxes drove him to his doom."
After he's gone, we won't relax.
We'll still collect inheritance tax.

Deductions you may overlook

2010-02-07T05:16:00.002-06:00

If you take the standard deduction, you can't deduct your real estate taxes or your sales tax, right?
WRONG. Sometimes you can. If you pay real estate tax or buy a new car and pay sales tax you could get an increased standard deduction. To get this increase to your standard deduction, you will need to include a Schedule L with your return.

There are a couple of new tax forms that sound like an advertisement for L&M cigarettes--the Schedule L and the Schedule M. I've posted a previous blog about Schedule M.

You can see these forms at www.irs.gov.

Fly-by-night tax preparers

2010-02-04T07:49:00.002-06:00

Although there are many unlicensed tax preparers who are competent, there are a lot of people with questionable abilities and ethics preparing returns. The IRS plans to implement a requirement that anyone who prepares more than 10 returns pass a test and register with the IRS.

This will provide a minimum level of confidence but even someone who has the ability to pass the CPA test or the EA test cannot be tested for honesty. As a CPA, I'm required to take courses in ethics on regular intervals. This may be of some benefit in resolving some grey areas, but even Al Capone could probably pass a test in ethics if he studied the right material--but that would not guarantee that he would behave in an ethical manner thereafter.

Here is a recent IRS comment:
The IRS has proposed a number of actions to increase oversight of federal tax return preparers, as outlined in the Return Preparer Review issued on Jan. 4.

The RFP lists a tentative introduction date for an on-line registration system of Sept. 1, 2010. Sept. 1, 2010, is the current target date for an on-line registration system. Final determination of an on-line registration system availability date will not be possible until multiple factors are considered including the evaluation of proposals submitted by vendors.

The IRS will maintain full oversight of the registration process and registered preparers.

GET RICH QUICK SPAM

2010-02-02T14:52:00.003-06:00

I had not been moderating the comments on this blog, but recently spammers have started sending 'get-rich-quick comments, so I have started moderating and rejecting such comments.

People will do almost anything to get free advertising, and generally it is probably worth about what they pay for it.

Any messages that attempt to advertise will be rejected and will no longer be published on this blog.

Education Credits -2009 Tax Return

2010-01-25T08:17:00.002-06:00

There are several significant changes to education credits.
• American Opportunity Credit (AOC) – This credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Taxpayers may be able to take a credit of up to $2,500 for qualified education expenses paid for each student who qualifies for the American opportunity credit. Additionally, up to 40% of this credit may be refundable.
• Hope Credit – The Hope Credit is for the payment of the first two years of tuition and related expenses for an eligible student. This credit may be more advantageous only if at least one student attended an educational institution located in the Midwestern disaster area. For qualifying education institutions located in a Midwestern disaster area there is an expanded definition of qualifying expense and a credit of up to $3,600. However, both the American Opportunity Credit and Hope Credit cannot be claimed on the same tax return. If claiming the Hope credit for one student that attended an educational institution in a Midwestern disaster area, the Hope Credit must be claimed for all students that qualify.
• Lifetime Learning Credit – For the tax year, taxpayers may be able to claim a lifetime learning credit of up to $2,000 ($4,000 for students in Midwestern disaster areas) for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim the Hope, American Opportunity and the Lifetime Learning credit for the same student in one year.
For more information on these credits, visit
https://www.irs.gov/newsroom/article/0,,id=213044,00.html

Contribute in 2010 and Deduct on 2009 Return

2010-01-23T06:23:00.001-06:00

Congress has passed legislation—H.R. 4462-- to allow 2010 charitable contributions for Haiti relief to be deducted on your 2009 return . The President is expected to sign it into law

The deduction is allowed on the 2009 return if
[1] it was made after Jan 11, 2010 and March 1, 2010,
[2] It was a cash contribution, not food, clothing, etc.,
[3] It is for earthquake victims, and [4] It was made to a qualified
charitable organization.

You must have records to support the deduction.
If you have a telephone bill showing the qualified organization’s name, date contributed and the amount that will take care of it.
A check or credit card payment would also be acceptable.

MAKING WORK PAY CREDIT

2010-01-21T06:10:00.003-06:00

MAKING WORK PAY CREDIT.
This is a very confusing credit.
If you are employed, you got the credit in the form of the reduced withholding, so that would lead you to think you won’t get it again as a credit on your income tax return—RIGHT? WRONG!

At first glance, it looks like you are double-dipping if you get it both as a withholding reduction and again when you file your taxes.
Here’s how it works. If it hadn’t been for the credit your tax withholding would have been, for example, $5000, but only $ 4600 was withheld due to the $400 credit (assuming you are single).

Now you file your taxes. The tax tables were NOT adjusted to take into account the credit, so your tax, before credits and payments, is $ 5000. You get the $400 credit on the tax return which now reduces the balance due to $ 4600. Your employer wilthheld $ 4600, so now you owe nothing.

Why didn’t they just change the tax tables you might ask. The reason is that not all income qualifies you for the credit. It only applies to EARNED income, not to dividends, interest, rent, royalty or winning the lottery.

One more fly in the ointment: if you make too much money there is a phase-out. For a single person, the credit is reduced by 2% of all adjusted gross income in excess of $75,000. So if your AGI was $100,000, the 2% would be greater than the $ 400 credit and you would get no credit and your withholding would have been reduced as if you were getting the credit.

HOW TO CLAIM THE CREDIT:
To claim the credit, you should prepare Schedule M and include the credit on your Form 1040.

IGNORE ANY COMMENTS BELOW REGARDING GET-RICH-QUICK SCHEMES

First-time Homebuyer-Q & A

2009-12-20T19:10:00.000-06:00

New legislation signed on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts. The new law:

* extends deadlines for purchasing and closing on a home
* authorizes the credit for long-time homeowners buying a replacement principal residence
* raises the income limitations for homeowners claiming the credit

Q. I bought my home in 2009 (early) and filed my 2008 tax return claiming the $7,500 first-time homebuyer credit that has to be repaid. Now the expanded law provides for an $8,000 credit that doesn’t have to be repaid. What do I need to do to get the $8,000 credit that doesn’t have to be paid back?

A. You can file an amended return.

Q. If I purchase a home in June 2009, and have already filed my 2008 tax return, can I amend my 2008 return or will I have to claim it on my 2009 return?

A. You can either file an amended return to claim it on your 2008 return or claim it on your 2009 return.

Q. I am in the process of buying a home. Can I claim the first-time homebuyer credit now? That would allow me to use the refund for a down payment.

A. No. You may not claim the credit in anticipation of a purchase that has yet to happen. Until you have finalized the purchase of your home, which for most purchasers occurs at the time of the closing, you do not qualify for the credit. IRS news release 2009-27, First-Time Homebuyers Have Several Options to Maximize New Tax Credit, contains details for filing options if the home is purchased after April 15, 2009.

Q: When must I pay back the credit for the home I purchased in 2009?

A: Generally, there is no requirement to pay back the credit for a principal residence purchased in 2009 or early 2010. The obligation to repay the credit arises only if the home ceases to be your principal residence within 36 months from the date of purchase. The full amount of the credit received becomes due on the return for the year the home ceased being your principal residence.

Q. If I claim the first-time homebuyer credit for a purchase in 2009 or early 2010 and stop using the property as my principal residence before the 36 month period expires after I purchase, how is the credit repaid and how long would I have to repay it?

A. If, within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full amount of the credit is due at the time the income tax return for the year the home ceased to be your principal residence is due. The full amount of the credit is reflected as additional tax on that year's tax return. Form 5405 and its instructions will be revised for tax year 2009 to include information about repayment of the credit.

Q: I’m already a homeowner. If I buy another home after Nov. 6, 2009, to use as my principal residence, do I have to sell my home to qualify for the homebuyer tax credit?

A: No. If you meet all of the requirements for the credit, the law does not require you to sell or otherwise dispose of your current principal residence to qualify for a credit of up to $6,500 when you buy a replacement home to use as your principal residence. The requirements are that you must buy, or enter into a binding contract to buy, the replacement principal residence after Nov. 6, 2009, and on or before April 30, 2010, and close on the home by June 30, 2010. Additionally, you must have lived in the same principal residence for any five-consecutive-year period during the eight-year period that ended on the date the replacement home is purchased. For example, if you bought a home on Nov. 30, 2009, the eight-year period would run from Dec. 1, 2001, through Nov. 30, 2009. (11/17/09)
Married and Co-Purchasing Homebuyers

Q. I am a long-time resident (have owned and used my current home as a principal residence for five consecutive years out of the eight-year period ending on the date of purchase of the new residence) but my spouse has lived there for only three years. Can we qualify for the long-time resident homebuyer credit if we purchase a new principal residence?

A. No. Both spouses must have owned and used the same previous principal residence for five consecutive years out of the 8-year period ending on the date of purchase of the new principal residence to qualify for the credit. (12/14/09)

Q. I am a long-time resident and current homeowner and my spouse is a first-time homebuyer (has had no ownership interest in a principal residence during the three-year period ending on the date of purchase of a new principal residence) and we purchased a new principal residence. Can we qualify for either the first-time homebuyer credit or the long-time resident homebuyer credit if we purchase a new principal residence?

A. No. Both you and your spouse must be first-time homebuyers in order to qualify for the first-time homebuyer tax credit. Since you had an ownership interest in a principal residence during the three-year period ending on the date of purchase, neither you nor your spouse qualifies for the credit. Similarly, both you and your spouse must be long-time homeowners of the same previous principal residence in order to qualify for the long-time resident homebuyer credit. Since your spouse is not a long-time homeowner of your current principal residence, neither of you qualify for the credit. (12/14/09)

Q. I am a long-time homeowner of a principal residence and my spouse is a long-time homeowner of a different principal residence. Can we qualify for the long-time resident homebuyer credit if we purchase a new principal residence?

A. No. Both spouses must have owned and used the same previous principal residence for five consecutive years out of the eight-year period ending on the date of purchase of the new principal residence to be eligible for the credit. Since you and your spouse owned and used different principal residences, neither of you qualify. (12/14/09)

Q. How does the allocation provision work when unmarried taxpayers purchase a home together and both qualify for the first-time homebuyer credit under different tests?

A. Co-purchasers who are not married may allocate the credit using a reasonable method. A reasonable method is any method that does not allocate any portion of the credit to a taxpayer who is not eligible for that portion of the credit. The maximum credit for a taxpayer who qualifies under the long-time resident test is $6,500, and the maximum credit for a taxpayer who qualifies under the first-time homebuyer test is $8,000. One example of a reasonable method is to allocate $6,500 to the long-time resident homebuyer and $1,500 to the first-time homebuyer. (12/14/09)
Home Construction

Q. I plan to build a home and occupy it in 2009 or early 2010. Can I claim the first-time homebuyer credit now and use the funds toward the down payment or other ongoing construction costs?

A. No. To qualify for the first time home buyer credit, the residence must be purchased. By statute, a residence which is constructed by the taxpayer is treated as purchased on the date the taxpayer first occupies the residence. (05/06/09)

Q. I entered into a written home construction contract with a homebuilder before May 1, 2010, and the contract provides for completion of the home before July 1, 2010. Can I take the credit for the construction costs?

A. Your home construction contract qualifies as a binding contract, entered into on or before April 30, 2010, to close on the purchase of a principal residence on or before June 30, 2010. If you occupy the home on or before June 30, 2010, and meet the other requirements, you can take the credit. (12/17/09)
Q. I entered into a written home construction contract with a homebuilder before May 1, 2010, and the contract provides for completion of the home before September 1, 2010. Can I take the credit for the construction costs?

A. Your home construction contract does not qualify as a binding contract to close on the purchase of a principal residence on or before June 30, 2010. Therefore, you do not qualify for the two-month extension of the deadline for completing the purchase in the case of a binding contract. However, if you occupy the home on or before April 30, 2010, and meet the other requirements, you can take the credit. If you do not occupy the home on or before June 30, 2010, you cannot take the credit. (12/17/09)

First-time homebuyer $8,000 credit

2009-12-20T06:17:00.001-06:00

First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and on or before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. A limited exception exists for certain contract for deed purchases and installment sale purchases.

To claim the credit, you cannot file electronically. You should attach a copy of Form HUD-1 (Settlement Statement) to your return. Also, before filing, it would be a good idea to submit Form 8822 to the IRS to show that you now reside in the new home. There has been a lot of fraudulent claims for this credit so the IRS may ask for a lot of additional information if it decides to get tough. One tax preparer reported that his client signed a statement saying that she had never owned a home before and provided the HUD form, then the IRS requested:

A copy of her driver's license

A copy of her latest pay stub.

A copy of her bank statement and

A copy of the receipt for latest mortgage payment.

I would recommend that you attach as much evidence as possible to the return to head off further demands for proof by the IRS.
NOTE: If you don’t qualify for the first-time homebuyer credit, you MAY qualify for a $ 6,500 credit if you buy a new home. There are several qualifications that must be met for this $ 6,500 credit.

Section 1031 Exchange

2009-08-15T11:45:00.000-05:00

1031 Exchange:
If you sell certain property and have a taxable gain, you can defer taxes if you structure it as a Section 1031 exchange. Equipment used in a business could qualify, but if old equipment is traded in on new equipment, it is not necessary to use a Sec. 1031 intermediary. In the case of a rent house, however, you are not likely to trade in an old house on a new house. You are more likely to sell the old house, then, after a delay, buy a new rent house which gives rise to the possible need to use the provisions of Section 1031.

The following example illustrates the process:

Day 1: Sell rent house FOR $ 110,000 with funds going to a qualified intermediary.
The house cost $ 100,000 and is fully depreciated so the basis for
gain/loss is zero. If there is no section 1031 exchange, then the entire $110000 would be taxable as ordinary income.

Day 45 (or earlier): [1] Identify the Replacement property ( new rent house) which
will cost of $ 200,000—consisting of $110000 down payment derived from the sale of the old house and a mortgage for $ 90,000.

[2]Complete the “identification of Replacement
Property” and give it to the qualified intermediary. NOTE: this can be
done before the 45th day if the replacement property is identified earlier.

Day 180: This is the deadline. The replacement property must be
acquired by the 180th day.
There will be a deferred gain of $ 110,000 on the old house.
The new house will have a depreciation basis of $ 90,000 ($200,000
minus the deferred gain). NOTE: The $ 90,000 basis assumes NO
value for the land. If the land was worth $25,000 then the depreciable
value would be reduced to $ 65,000.

File your tax return even if you can't pay

2009-04-11T05:38:00.000-05:00

File your tax return even if you can’t pay. If you can’t file, request an extension and pay what you think you owe—or at least part of it.

Here is what the IRS says:

Taxpayers who owe taxes and don’t file their tax return by the deadline may face interest on the unpaid taxes and a failure-to-file penalty. Interest and penalties add to the total amount a taxpayer owes. Filing by the deadline allows taxpayers to avoid the failure-to-file penalty, even if they can’t pay all or some of their taxes by the deadline. Taxpayers who can’t file their return by the deadline can request an extension of time to file. However, an extension of time to file is not an extension of time to pay.

Unclaimeed refunds

2009-03-03T12:11:00.001-06:00

IRS Has $1.3 Billion for People Who Have Not Filed a 2005 Tax Return

Unclaimed refunds totaling approximately $1.3 billion are awaiting over a million people who did not file a federal income tax return for 2005, the Internal Revenue Service announced today. However, to collect the money, a return for 2005 must be filed with the IRS no later than Wednesday, April 15, 2009.

Especially in these tough economic times, people should not lose out on money that is rightfully theirs," said IRS Commissioner Doug Shulman. “People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets."

NEW 2009 TAX PROVISIONS

2009-02-28T04:40:00.000-06:00

The American Recovery and Reinvestment Act of 2009 was signed into law on February 17, 2009, and contains the following provisions:

New economic recovery payments designed to give taxpayers cash benefits during 2009 to help stimulate the economy.

A new Making Work Pay tax credit designed to give working families up to $400 ($800 MFJ) when filing their 2009 tax return.

New withholding tables designed to increase an employee's take-home pay during 2009 as a result of the new Making Work Pay credit.

An increase in the Earned Income Credit for families with 3 or more qualifying children.

An increase in the refundable portion of the Child Tax Credit.

A new and improved Hope Scholarship Credit renamed the American Opportunity Education Tax Credit.

A new provision to allow students to treat the purchase of computers as qualified education expenses under Section 529 plans.

An extension of the First-Time Home Buyer Credit and the elimination of the recapture rules for homes that are held more than 3 years.

A new sales tax deduction for non-itemizers who purchase a vehicle.

A new exclusion for unemployment benefits received.

AMT relief for 26 million families.

An extension of the Special Depreciation Allowance.

An extension of the increased Section 179 deduction limits.

Net Operating Loss provisions affecting 2008 tax year NOLs.

The ability for certain businesses to spread cancellation of debt income over 10 years.

New targeted groups for the Work Opportunity Tax Credit.

New Section 1202 small business stock rules.

New safe harbor rules for estimated tax payments.

New S corporation built-in gains tax rules.

Extension and new provisions for the various energy tax credits.

New provision affecting transportation fringe benefits.

New COBRA continuation coverage rules.

and more…

IRS data base - Up to date?

2009-02-26T09:24:00.003-06:00

The IRS database must not be up to date for fiduciary name controls.

I recently obtained an EIN for a decedent's Fiduciary return, then e-filed the return which was rejected due to mismatching the EIN to the "Name control" in the IRS database.

I checked the name control which is described as the first four letters of the last name of the decedent or similar name in a trust. I used the first four letters exactly right, but it was still rejected as a mismatch.

Yesterday I e-filed another Form 1041 for a Trust which has been in existence for several years. Today I got an acceptance and I had followed the exact same procedure, using the first four letters in the last name of the person for whom the trust was established.

After pursuing this further, I found that you should not try to use a newly-established EIN for electronic filing for up to two weeks since it takes up to that long to get it in the data base.

INCREASING OR DECREASING WITHHOLDING

2009-02-25T10:45:00.004-06:00

If you have too much or too little withheld from your pay check, you can increase or decrease the number of exemptions so that your withholding will be more in line with your tax situation. If you have some large itemized deductions and you are single, you can claim more than just one exemption. Likewise if married filing jointly or head of household

To calculate extra exemptions, go to:

http://www.payroll-taxes.com/calculators.htm

Select item # 1 (Payroll Calculator) which takes you to the next screen

Select the your state of residence

Enter filing status

Enter your annual salary. (I entered 124800)

Enter pay frequencey (I entered 'weekly')

Enter Federal allowances (first I used 5, then recalculated using 6)

Using 5, I got $442 per week for withholding

Using 6, I got $ 422 per week for withholding

You might first try it using the same figures I used first to make sure you are doing it the same way.

Then, if your pay period is NOT weekly, change that part of the calculation and change the salary to the amount of your own salary..

If you have too little withheld, you can drop some of your exemptions, or you can just submit a new W-4 form to your employer and specify that you want a specified extra amount withheld.

Incorporate or Form LLC?

2009-02-24T09:03:00.000-06:00

When you start a new business, you will need to decide what type of business entity you will select. If you are a sole proprietor, you can file as such or you could form a single-member Limited Liability Company. Another choice would be to form a corporation and whether to operate as a C-Corporation or an S-Corporation.

Here is a link comparing the various type entities I obtained from a local law firm.

http://docs.google.com/fileview?id=F.0b861824-da33-4d38-897b-8b849b6e96e4&hl=en

One exception I would take is the statement that LLC members do not pay self-employment tax. Amounts paid as "guaranteed payments" are generally considered to be subject to self-employment tax and such payments should be the equivalent of a 'reasonable salary.' The LLC member's share of profits in excess of his 'guaranteed payment' would not be subject to self-employment tax.

It is highly likely that a greater amount of such income may later be subjected to self-employment tax.

The "Making Work Pay" Act

2009-02-23T18:13:00.001-06:00

Maybe it pays to work after all. This new credit would wipe part of your social security tax if you make under $ 150,000 (MFJ).

For 2009 and 2010, the Making Work Pay provision of the American
Recovery and Reinvestment Act will provide a refundable tax credit of
up to $400 for working individuals and $800 for married taxpayers
filing joint returns.

This tax credit will be calculated at a rate of 6.2% of earned income
and will phase out for taxpayers with adjusted gross income in excess
of $75,000, or $150,000 for married couples filing jointly.

For people who receive a paycheck and are subject to withholding, the
credit will typically be handled by their employers through automated
withholding changes in early spring. These changes may result in an
increase in take-home pay. The amount of the credit must be reported
on the employee's 2009 income tax return filed in 2010. Taxpayers who
do not have taxes withheld by an employer during the year can also
claim the credit on their 2009 tax return.

S-Corp Accumulated Adjustment Account

2009-02-23T15:22:00.001-06:00

Retained Earnings may not agree with the Accumulated Adjustment Account.

In most of the examples I have seen illustrating the Accumulated Adjustment Account (AAA) for an S-Corporation show it as being identical in amount with the Retained Earnings Account. This would be possible if the books and the tax returns used exactly the same method of depreciation and the shareholder does not make withdrawals in excess of his stock basis. If different depreciation methods are used, the AAA is not reduced for tax deductions in excess of book deductions.

Many S-Corporations do not use the same method for recording depreciation on the books as they use for income tax. When you depreciate an an asset, the tax method can produce larger deductions in the earlier years, then later produce smaller deductions than the Generally Accepted Accounting Procedures that are used for bookkeeping purposes. However, any method that ultimately fully depreciates the asset results in the same total deductions by the time an asset is fully depreciated.

Some assets may be written off completely or up to a maximum allowable amount under Section 179 in the year purchased. In such cases, it would be best to write the same amount off on the books to avoid confusion. However if they are written off on the tax return and not fully deducted on the books, then a timing difference would again exist just as if different methods of depreciation were used.

In any case, the AAA and Retained Earnings will vary due to timing differences. Over time, unless new assets are continually added, the two would come back into agreement (provided that the owner(s) do not withdraw more than their stock basis.

If shareholders DO withdraw more than their stock basis, they cannot reduce the AAA below zero. Withdrawals in excess of the owner's stock basis are taxable as capital gains.

LIMITED LIABILITY COMPANIES

2009-02-21T11:09:00.002-06:00

Limited Liability Companies are subject to several unique tax angles.
A single-member LLC is a ‘disregarded entity’ for Federal tax purposes, so you would report it as if the business was a sole proprietorship. It would be reported on Schedule C, E, or F or possibly Form 4835.

An LLC can elect to be taxed as a corporation by filing Form 8832. It can further elect to be taxed as an S-Corporation, in which case, the income or losses would flow through to the owner and no corporation tax would have to be paid. If the S-Corporation election were not made, then any gain would be subject to corporation tax and any loss could only be used to offset past or future gains by the corporation.

If the LLC is a multi-member LLC, and does not elect to be taxed as a corporation, then it will file its taxes on Form 1065 as a partnership. Any gains or losses will flow through to the LLC members. Gains and losses will be reported by the LLC members on their Form 1040 as either ordinary gains or losses , capital gains or losses, or passive gains and losses.

There is no official guidance on the subject of whether the same self-employment tax rules apply to an LLC as the rules for a partnership. The prevailing opinion is that self-employment tax is due on an amount equal to a “reasonable salary” in an S-Corporation. LLC members do not receive a salary per se, but the equivalent of a salary is called a “guaranteed payment.” So self-employment tax should be paid on the guaranteed payment the LLC member receives. Some accountants have expressed the idea that half of the LLC member’s income from the LLC should be reported as a ‘guaranteed payment’. Another thought is that it should be the wage you would need to pay someone else to perform the same work.
http://www.1040.com/taxxcpa/

INCOME TAX CHECKLIST

2009-02-20T08:50:00.002-06:00

INCOME TAX CHECKLIST
DEDUCTIONS: Contributions -Cash contributions, Non-Cash contributions of clothes, furniture, etc.
Medical and Dental Expense including insurance, glasses, other devices due to illness or disability

Mortgage Interest (Form 1098 or Statement from Mortgage Company)

Property Tax paid from Escrow or from Statement from Tax Collector.
State income tax including withholding on gambling income?
Suspended prior-year Rental losses –If loss Exceeds [ $150,000 – Your Adj Gross Income) X 50% ] ~ ~ For example ($ 150,000 - $125,000)=$25000 Loss of more than $12,500 could be suspended.
IRA Contributions unless it is to a non-deductible IRA
Job related expenses if more than 2% of Income: Mileage, Air Fare, Motel, Parking, meals (50%), --telephone bills, Job-related education and publications, travel to seminars, Tools, Union Dues Tax return preparation, safe deposit boxes, IRA custodial fees (if paid from non-IRA acct), Investment advice. Health insurance for self-employed person not covered by any employer-sponsored plan

MISCELLANEOUS Unemployment Income – Form 1099-G from TX Workforce Commission or check stubs Social Security from BOX 5 of Form SSA 1099 (this is Gross amount minus amt repaid to the SSA) Jury duty pay, Gambling winnings (For W-2G) Form 1099 for prizes/awards, Scholarships certain use) IRA withdrawals, State tax refunds of tax paid in prior year
OTHER ITEMS TO BE CONSIDERED: If you paid any quarterly estimated tax or had last year’s refund applied toward current year tax, you need to deduct it from your current year’s tax If you paid sales tax on a big purchase like a car or boat, you can add this tax to the standard allowance. Did you buy an energy saving car or certain other qualified energy-saving items ? Get married, divorced, have new dependent (SSNs?), drop prior dependent, move to new address? Are you 65 years old? --Was your 65th birthday this year (or in any prior year)
NEW THIS YEAR – Even if you don’t itemize your deductions, you can get an increased standard deduction for real estate tax.
http://www.1040.com/taxxcpa/

IRS Theme Song

2009-02-19T22:13:00.000-06:00

HOW TO ANNOY THE IRS

2009-02-19T12:24:00.000-06:00

How to annoy the IRS
1. Always put extra paper clips on your forms. Any foreign fasteners or the like have to be removed and put away.

2. Always put staples in the right hand corner. Go ahead and put them down the whole right side. The extractors who remove the mail from the envelopes have to take out any staples on the right side.

3. If you send two checks, they'll have to staple your unsightly envelope to your half destroyed form.

4. If you're very unfortunate and have to pay taxes, send two or three party check. On top of paying with a third party check, pay one of the dollars you owe in cash. When an extractor receives cash, no matter how small an amount, he has to take it to a special desk and fill out of few nasty forms.

5. Line the bottom of your envelope with Elmer's glue and let it dry before you put in you forms, so that the automated opener doesn't open it and the extractor has to open it by hand.

6. Never arrange paperwork in the right order, or even facing the right way. Put a few upside down and backwards. That way they have to remove all your staples, rearrange your paperwork and re-staple it (on the left side).

7. Sign your name in ink on every page. Any signature has to be verified and then date stamped. These are just a few of the fun and exciting things you can do with the IRS. These methods are ONLY recommended when you OWE money.

8. When you mail it, mail it in a big envelope (even if its just a single EZ form). Big envelopes have to be torn and sorted differently than regular business size ones. An added bonus to the big envelope is that they take priority over other mail, so the workers can hurry up and deal with your mess.

9. Write a little letter of appreciation. Any letter received has to be read and stamped regardless of what it is or what it's on.

10. Write your letter on something misshapen and unconventional. Like on the back of a supermarket sack.

11. If they owe you money, being nice helps.
http://www.1040.com/taxxcpa/

Suspended Rental Losses

2009-02-14T04:47:00.001-06:00

YOUR RENTAL LOSSES MAY BE LIMITED unless you are a real estate professional. If your adjusted gross income (AGI) is $ 150,000 or more ALL of the rental loss is suspended. It can be carried forward and can be used in future years if your income declines sufficiently, or can be taken in the year you dispose of the rental property even if your income exceeds $ 150,000 in the year of the sale.

IF YOU MAKE LESS THAN $ 150,000, you may still lose part of the rental loss. Here is the way the allowable loss is calculated: [$150,000 minus AGI] X 50%. For example, if you made $125,000: [$150,000 - $125,00] X 50% =$12500. If you lost more than $ 12500, only $12500 would be allowed.

If your AGI was $ 40000, you would only have a suspended loss if your rental loss exceeded $ 55000.
If your AGI was MORE than $ 150,000 and stays above that level in future years, you can only take the loss when you dispose of the property.

The only exception is if you are a “real estate professional” the losses are fully allowable.
http://www.1040.com/taxxcpa/

Sharper is better than faster

2009-02-12T18:06:00.002-06:00

Sometimes you need to work sharper, not faster, especially someone who does tax returns.
There were two CPAs having a contest, who could chop the most trees down by April 15th. One worked furiously, every day, all day without stopping. The other would stop for a few minutes every half hour. When April 15th came, the person who would stop had cut down more trees. The other person said "I don't understand, I kept working while he did not!" The winner said " The reason I kept stopping was to sharpen my saw blades".
http://www.1040.com/taxxcpa/

Sales tax deduction for home repairs

2009-02-11T15:55:00.000-06:00

If you spend a lot of money for repairing your home, would the sales tax on the materials be deductible if it exceeded your state income tax?
If a contractor buys the materials tax free and "resells' them to the customer and charges the customer the tax on the resale price, it might work. Contractors, in the past, always billed lump-sum unless their customer was an exempt organization, in which case they broke out the materials, obtained an exemption certificate from the customer and issued a resale certificate to their supply source.

If insurance reimbursed the customer for the materials, then the tax on the materials attributable to the reimbursement would not, in my opinion, be deductible.
http://www.1040.com/taxxcpa/

IRAs

2009-02-11T04:29:00.000-06:00

Contributions -- IRA contributions are limited to $5,000 for the 2008 tax year if you're younger than 50. If you're 50 or older, you can contribute as much as $6,000 for the 2008 tax year. The limits are the same for 2009. Contributions are classified as either tax deductible or nondeductible.
Deductible or nondeductible -- Contributions to a traditional IRA are tax-deductible if you are not covered by your employer's retirement plan. Even if you do participate in a company pension or 401(k) plan, you still may be able to deduct contributions to a traditional IRA depending on your income and filing status. Contributions to a Roth IRA are not deductible but future withdrawals may be tax-free.
Contributions and Withdrawals You may contribute up to $5,000 in 2008. Or, if you're 50 or older, you can put aside up to $6,000 for that tax year. But your contributions can't exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59½. Take money out before then and you will usually get hit with a 10-percent penalty unless you meet certain specified requirements.
Modified adjusted gross income If you are covered by an employer’s 401K or similar plan, your contribution could be limited or completely phased out based on your modified gross income. Generally, this will be the line on your taxes that says 'adjusted gross income,' but for some people it has to be modified. Some modifiers include foreign-earned income, housing costs of U.S. citizens or residents living abroad and income from sources within Puerto Rico, Guam or American Samoa.
Required minimum distribution -- Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70½. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren't subject to minimum distribution requirements until after the Roth owner dies.
Rollover -- This is the term used when transferring assets from one tax-deferred retirement plan to another. It is usually best to have it transferred from one custodian to another custodian to avoid having tax withheld.
Roth IRA -- The advantage of a Roth IRA is that withdrawals are tax-free if the account has been open for at least five years and you're at least 59½ when you start to withdraw money. Contributions to a Roth are not tax-deductible. You can withdraw your contributions anytime you want, no penalty or taxes. You can also withdraw earnings for a qualifying event if the account is at least 5 years old. Qualifying events include: death or disability of the account holder and a first-home purchase.
http://www.1040.com/taxxcpa/

Income from Foreign Sources

2009-02-10T10:38:00.000-06:00

If you receive income from foreign sources, you still have to pay tax on it. A U.S. citizen or resident alien generally has to pay tax on his worldwide income. However, if you actually work for an extended period in another country you may be able to exclude a significant portion of your income—for 2008 the exclusion is for $ 87,600. To claim the exclusion you would need to file Form 2555.
http://www.1040.com/taxxcpa/

Tax Forms may be late this year

2009-02-09T07:13:00.000-06:00

YOUR TAX FORMS MAY BE LATE THIS YEAR
Many investors will receive their year-end tax statements later than in past years, but these forms are likely to be more accurate, according to the Internal Revenue Service.
A new law, enacted last fall, changed the deadline from Jan. 31 to Feb. 15, when brokers, including brokerage firms, mutual fund companies and barter exchanges, must furnish year-end Forms 1099-B to their customers. Where a broker furnishes these forms by mail, this means that the forms must be mailed, not received by that date.
Because Feb. 15 falls on Sunday in 2009, and Monday, Feb. 16 is a federal holiday, the deadline is Feb. 17 this year. In addition, the IRS said earlier this month that for calendar-year 2008 reporting, the Feb. 17 deadline also applies to other tax information that brokers report to their customers, including such items as interest and dividends, on a combined year-end statement.
This change is designed to make it easier for brokers to provide investors with accurate year-end statements on stock sales and other transactions. Inaccurate year-end statements that have to be corrected later often force investors to file amended individual returns.
http://www.1040.com/taxxcpa/

Give your Tax Man a break and save on fees

2009-02-08T18:21:00.000-06:00

Instead of bringing a bushel of receipts, it would be better if you could add your medical expenses and give the accountant a single figure or a breakdown by categories such as doctor’s, medicine, and medical insurance-- Same for other items that need to be totaled. If you bring all the receipts and the accountant has to sort through them and add them, you could be paying $ 150 per hour or more for low-level clerical work and he will not know what some of the receipts represent—they could be tax deductible items or they could be your grocery bills.
The main reason to have your tax return done by a CPA is because you expect him to know what needs to be reported and where to enter it in his computer so that it prints in the right places. His fees are based on his knowledge and experience in tax and accounting, not based on his speed with a calculator.
http://www.1040.com/taxxcpa/

Loss on inherited house

2009-02-07T06:51:00.001-06:00

Question:
Three siblings inherited 1/3 interest in their parents home. One sibling lived in the home for two years after the inheritance, the others did not. The house had a substantial decrease in value since the date of death and has been sold at a loss.

Is the loss deductible to the siblings that did not utilize the home as a residence?

My opinion:
The two who did not live in the house could probably take a capital loss, but the one who lived there could not. However, before I would take this kind of loss on a tax return I would do more research. I have not encountered this situation, but another accountant raised the question and most of the people responding made the same interpretation I did.

I have always taken a loss on inherited property when it is sold for less than the tax assessor's appraisal. Often, if they had an independent appraisal from a licensed appraiser, they might claim a bigger loss.

I recently got my tax appraisal lowered, but later had an independent appraisal which came up with a much higher figure than the tax appraisal board did.

http://www.1040.com/taxxcpa/

Income from Cruises and trips

2009-02-06T15:41:00.002-06:00

If you win a trip or even if you get a cut-rate deal on a cruise, you could owe tax for the difference between your cost and the fair market value of the cruise.

I had a client call me just before I was ready to electronically file his return and he had received a form 1099 for the value of the cruise (minus what it cost him). He had mailed me the authorization form for electronically filing it, but, fortunately, I had not received it so I was able to add the additional income item to his return.

He is still getting over # 4,000 refund.

http://www.1040.com/taxxcpa/

Sales tax deduction vs State Income Tax Deduction

2009-02-06T15:40:00.000-06:00

SALES TAX DEDUCTION
You can still deduct sales tax instead of state income tax. You can elect to deduct whichever on gives you the biggest deduction.

http://www.1040.com/taxxcpa/

IRA - Required Minimum Distribution

2009-02-05T15:50:00.000-06:00

Don't assume that your IRA custodian will automatically mail you a check for the required minimum withdrawal if you are over the age of 70½. Since you could have several IRAs, the custodian is not the one to make the decision as to where to withdraw the required amount.

The custodian may indicate how much you should withdraw on the assumption that you only have one IRA, but the custodian will NOT automatically send the check unless you have made some sort of arrangement for the custodian to do so.

Also, if your spouse draws more than the required amount, you still must withdraw your required minimum distribution.

If you have more than one IRA, you can withdraw the required amount from any one IRA or combination. For example, if you have three $ 50000 IRAs and you are required to withdraw 5%, you can take $ 7500 from one of them and nothing from the others, or you could take $3750 out of two of them and nothing from the third one.

http://www.1040.com/taxxcpa/

RESIDENTIAL ENERGY CREDIT

2009-02-04T11:19:00.002-06:00

All of the Residential Energy Credits will NOT be available for 2008. They were available in 2006 and 2007. They will be available again for 2009. There are still some energy credits available for 2008, but not the more common ones that were dropped from the 2008 tax year.

http://www.1040.com/taxxcpa/

Is it Rent or Royalty?

2009-02-04T05:39:00.000-06:00

Income from Oil and gas companies could be royalty income and the royalty owner could take 15% of gross as a depletion allowance.
However, these companies often pay a rental fee for the 'right' to drill and produce.

If there is actual production, there would be royalty payments. Also there would be statements showing deductions for expenses of getting it from the well to the buyer's meter. These would include compression, operation of gathering lines and any other cost incurred before delivery to the buyer. There would also be deductions for state severance tax (7½ % of the wellhead value in Texas). You should get statements with this information.

If all you get is a Form 1099 for a round figure that has nothing to do with actual production, you should report it as rent and take no deduction for depletion.

In either case it goes on Schedule E of Form 1040.
http://www.1040.com/taxxcpa/

Don't anticipate tax changes

2009-02-03T11:35:00.000-06:00

President Barack Obama has promised federal tax changes, but don't rearrange your finances to reduce your 2009 tax burden just yet, financial advisers say. Financial advisers and tax planners don't expect Obama to make tax changes this year because he must revive the economy first. In December, Obama unveiled a plan to cut taxes by up to $1,000 for middle-income families, extend credits for tuition and mortgage interest, and eliminate income taxes for some seniors.

http://www.1040.com/taxxcpa/

Electronic Filing

2009-02-02T07:08:00.002-06:00

You can now file your tax return online at

http://www.1040.com/taxxcpa/

There is no charge if you do not finalize the return, so there is no risk if you want to see if you can do it.

If you want to print the finalized version and file it electronically, it only costs $ 9.95 for Form 1040EZ or Form 1040A. If you are filing a form 1040, the cost is $ 19.95. There is no extra fee for electronic filing.

If you buy off-the-shelf tax software, you have to pay for it even if you give up on it and do not file.

If you have a complex return, I do not recommend doing it yourself, but if all you have is a W-2, a little interest and dividend income, a mortgage interest deduction and some real estate tax, you might give this a try. It costs nothing if you decide not to print and file it.

http://www.1040.com/taxxcpa/

Lower Capital Gains and Dividend Rates

2009-02-02T06:28:00.004-06:00

If you are in the 15% or lower bracket, the capital gains tax rate is zero.
If you are in the 25% or higher bracket, the capital gains rate is 15% for 2008.
Similar reduced rates also apply to “qualified” dividends.
For low-cost electronic filing: http://www.1040.com/taxxcpa/

DELAYED BROKERAGE STATEMENTS

2009-01-30T19:41:00.003-06:00

Many investors will receive their year-end tax statements later than in past years, but these forms are likely to be more accurate, according to the Internal Revenue Service.

A new law, enacted last fall, changed the deadline from Jan. 31 to Feb. 15, when brokers, including brokerage firms, mutual fund companies and barter exchanges, must furnish year-end Forms 1099-B to their customers. Where a broker furnishes these forms by mail, this means that the forms must be mailed, not received by that date.

http://www.1040.com/taxxcpa/

Earned income credit

2009-01-30T14:17:00.002-06:00

The Internal Revenue Service and community partners nationwide today kicked off EITC Awareness Day to promote a tax credit that could be a critical financial lifeline to many Americans this year.

The agency also announced many of its Taxpayer Assistance Centers will be open on some Saturdays in February to help taxpayers who are eligible for the Earned Income Tax Credit. Last year, nearly 24 million taxpayers received approximately $48 billion from EITC. The average EITC amount was $2,000.

Difficult economic times may mean more people are eligible for EITC because of reductions in their income last year. The amount of the EITC, the government’s largest tax benefit program for working families and individuals, is determined by earned income and family size.

WHAT ABOUT US POOR TAXPAYERS WHO FUND THESE HANDOUTS? The EITC gives 'refunds' to people who do not even pay tax.
http://www.1040.com/taxxcpa/

Recovery Rebate Credit

2009-01-30T06:54:00.006-06:00

If you did not receive your Recovery Rebate Credit last year, you can still get it this year.
If circumstances changed that would increase the payment such as the birth of a child, you can receive a supplemental payment this year.
http://www.1040.com/taxxcpa

Real Estate tax deduction for non-itemizers

2009-01-29T16:51:00.004-06:00

If you don't itemize your deductions, you can take an increased standard deduction if you pay real estate taxes on your home.

To take the deduction:
On form 1040 it goes on line 40
and to the left of line 40 there is a box shown as line 39c which you need to fill in with an "X"
If you want to do your tax online at a low cost (as low as $ 9.95) , go to:
http://www.1040.com/taxxcpa/ (no cost if you do not finalize the return)

New mileage allowances for 2009

2008-11-25T15:58:00.000-06:00

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

55 cents per mile for business miles driven

24 cents per mile driven for medical or moving purposes

14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

New Form 1040 for 2008 taxes

2008-11-10T15:41:00.003-06:00

Here is a link to the new Form 1040 which has been proposed by the IRS.
http://www.irs.gov/pub/irs-dft/f1040--dft.pdf

Note Line 70 on page 2 is for people who filed too late to receive their tax rebate when they filed their 2007 tax return.

Property taxes

2008-11-01T09:10:00.002-05:00

It pays to protest your property taxes if you have grounds to believe you are over-assessed.
I bought a lot and the tax was assessed at about twice what I paid. I protested and got it reduced to what I paid.

I built a house on it and again, they assessed it at more than I paid. I protested and got it lowered to my cost. Then I moved to a condo and rented the house. My condo unit was assessed at much higher than one on the floor above mine with an identical floor plan. When I protested, they didn't want to reduce it, so I went before the appraisal board.

The appraisal board reduced it to a few dollars less than the identical one on the floor above me. Also, since property values had declined in the area where my rent house was located, they lowered that one without me having to go before the appraisal board.

I've saved thousands of dollars by protesting my property taxes. It is time well spent.

I've received advertisements from people who want to do your protesting for you, but you can do it yourself just as effectively. Just bring something to support your argument. Not everything works. I knew a man who had a store in Dallas and one in Ft. Worth. He tried to argue that his Dallas tax should be reduced because it was more than the store in Ft. Worth. That didn't work. You can't compare apples to oranges.

HOW TO ABOLISH ALL TAXES

2008-10-29T16:06:00.002-05:00

Nobody likes taxes. The government doesn't even like them enough to collect as much as they spend. So, why not go one step further? Get rid of all taxes and run the government on deficit spending.

Sounds crazy, but it is only a matter of degrees. If we use deficit spending for half of our expenses, why not use it for all? It's just like someone who quits his job and lives off his home equity loans. It beats working for a living. Just go deeper in debt and forget about the future.

All we have to do is keep borrowing the money from China. The interest on the national debt can be paid by printing more and more dollars. We borrow a dollar that buys a dollar's worth of groceries, then print some more dollars that will only buy 50 cents worth of groceries and pay the bonds when they mature. Of course those crafty Chinese might want us to pay interest rates of 50% on the money we borrow to offset the inflationary effect of our deficit spending.

All we need to do is to keep those printing presses busy churning out all that money. And it can last a long time since there is no shortage of ink.

What do we do when the interest on the national debt exceeds our Gross National Product?

Why do I have a sneaking suspicion that this plan might have some drawbacks?

FIRST-TIME HOME BUYER CREDIT

2008-10-14T13:20:00.002-05:00

First-time home buyers can receive a 'refundable' credit of up to $ 7,500 on their 2008 tax return. By 'refundable' it means that even if your tax is zero, you get a check for $ 7,500, so what is the catch?

The credit is 'recaptured' over the next 15 years. That means you will have to keep dealing with it for the next 15 years beginning in 2010. Of course it is an interest-free loan, but it is like having your mortgage payment increased by $500-per-year.

The credit may be less than $ 7,500 depending on the price of the house and your filing status, and you would have to fit the IRS's definition of a 'first-time' home buyer.

Like a lot of tax legislation it is a form of social engineering to encourage home ownership, stimulate the mortgage business and the home-building business.

On the flip side, it means that either everyone except first-time home buyers pay more tax for 2008 or the IRS collects less tax plus giving those 'refunds' to people with zero tax. Of course, there is always that old standby, deficit spending, to make up the difference.

Electronic Filing

2008-10-13T11:21:00.002-05:00

Usually the only time I file a return electronically is when the taxpayer has a refund coming, but the other day I finally decided to do it with a balance-due return. It was a multi-page return that would not fit into a regular envelope and it was near the deadline for extensions.

I suggested filing it electronically since it would, when accepted, be proof that it was filed on time and avoid the risk of it being lost in the mail. Also, it could be paid by mailing in a voucher which would only require postage for one ounce.

I also saved me the trouble of printing copies for both the IRS and the taxpayer.

I am just now beginning to trust electronic filing although I've been doing it for years. Several years ago, the IRS would sometimes mistakenly reject valid returns when filed electronically. It did not happen frequently, but even once or twice a year is too much.

Capital Gain tax

2008-10-12T16:22:00.000-05:00

Will there ever be capital gains again?

I am looking for the Dow Jones to go down about 50% from the 14,000 level to the 7,000 level as it did in the 1973-74 decline. However it could even be worse. The one thing that may limit it somewhat is all the bailout proposals and government intervention which provide a short-term solution which we will pay for in the long run when the federal deficit bankrupts us.

Employer ID available online

2007-09-26T15:20:00.000-05:00

The IRS now has an online application available which will speed up the process for obtaining an employer ID number which is required if you hire anyone to work for you in a sole proprietor. It is also required even if you have no employees and operate a partnership, corporation on LLC and is required for fiduciaries, estates and trusts.

http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

Extension Requests for taxes otherwise due Apr 17

2007-04-11T15:34:00.000-05:00

You can get an extension on your tax return until October 15 by filing Form 4868.

However, it will be void if you do not send in a payment with the extension and you owe a significant amount. If you have paid in most of what you owe through withholding and by other payments including the payment, if any, with the extension request, the extension will prevent the assessment of a LATE FILING penalty. It will NOT prevent the assessment of a late payment penalty for the amount you still owe after filing the extension.

The thing to keep in mind is that if you only are late on just a small part of the tax, the extra cost will be minimal.

If you aren't sure and send in more than you end up owing, you can get it refunded after you file your return.

A Fair Tax?

2007-03-29T05:06:00.000-05:00

Is there any such thing as a FAIR tax? Generally a fair tax is one you pay and an unfair tax is one I pay. The present system is a graduated tax based on income, but with a hodgepodge of deductions, credits, penalties which boggles the mind.

One proposal is the 'flat' tax. A truly flat tax would tax you at the same percentage whether you made $ 1 million a year or $ 1000 a year. Most fair tax proposals modify the concept somewhat by allowing some deductions, credits and penalties--just not as many as the present system.

Another idea would be to retain a graduated scale based on income, but reduce the percentage rate and eliminate most deductions. In my opinion this method could allow an amount for exemptions up to a maximum similar to the way the military pays allowances for dependents which does not keep increasing if you have ten kids. Also a standard deduction to cover normal living expenses could be added. Further deductions might be allowed for uncontrollable expenses which might arise such as major medical costs. Deductions for interest and taxes on million-dollar homes should be part of the standard deduction since living in a million-dollar home is a discretionary cost.

Another thing which would be necessary would be to allow all costs which are necessary to produce the income. A grocery store may only make a profit of 2% on gross receipts while someone like me who has very little business expense might make a profit of 90% of gross receipts. An employee should be treated no different than a self-employed person and should be allowed to deduct 100% of employee business expense without deducting the 2% of Adjusted Gross income which is the case in the current system.

I believe a greatly simplified system would be in the best interest of both the public and the government. The reduced cost of administration would offset the reduction in taxes which would result.

Opting out of partnership filing

2007-03-08T19:22:00.000-06:00

I just recently discovered that Partners can elect to be excluded from Subchapter K, which means that a partnership or LLC can report their share separately after all agree to this election and notify the IRS in the proper way. Thereafter they would take their percentage of income and expense and report it on their Schedule C, E or F.

This reminds me of Joint Venture operations in the Oil and Gas business. The production from a lease or unit may have several working interest owners such as Exxon, BP, Conoco-Phillips and some lesser-known producers. One owner pays the bills, and bills each other owner his share of expenses and charges an agreed fee for administration. Revenue is handled separately since each owner may decide to sell to a different buyer or may let the operator collect and disburse the money. Joint Interest Agreements invariably state that this DOES NOT create a partnership.

LINKS and References – go to
IRS References
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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

This had me stumped

2007-02-26T09:29:00.000-06:00

It is becoming more difficult finding time for blogging now that the tax season is moving into high gear.

To make things more difficult, I’ve had two never-before-encountered tax situations arise for two of my clients.

DROUGHT-RELATED SALE OF LIVESTOCK
One client bought a half interest in a cattle business and they formed a new Limited Liability Company. A few months afterward there was a drought and they had to sell off a large part of the herd. This caused a recovery of my client’s investment, but created a potential taxable gain. There is a provision, however, that, under certain conditions, a drought-related sale of livestock qualifies as an involuntary conversion and enables the sellers to avoid paying tax on all or part of the the gain if they reinvest in replacement livestock within a specified time. A lot of research was necessary for this situation.

CANADIAN FORM NR4 INCOME FROM ESTATE
Another client had a Canadian Form NR4 which baffled me. I finally consulted with a Canadian accountant who explained that one line represented Canadian Taxable Income and Canadian Tax withheld. Another line represented U.S. Income and U.S. tax withheld. I decided that it should go on Schedule E, page 2 as Income from a Trust or Estate, but assumed that there would be a problem since a Canadian Estate would not have a U.S. ID number. The Canadian accountant said they probably did have a U.S. ID.

Later when I was looking at the Form again, I discovered a nine-digit number just below the address of the company that issued the form—so that solved my dilemma.

LINKS and References – go to
IRS References
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FOREIGN INCOME

2007-02-20T06:45:00.000-06:00

U S Citizens often invest in foreign securities from Canada, South Africa, Europe and other nations. Some U S citizens take overseas jobs in foreign countries. This type of income has tax implications. For example Canada withholds 15% tax from dividends paid to U S investors. You may be able to deduct this tax on line 47 of your form 1040 but you may need to complete Form 1116 in order to determine if all or what part can be deducted. If you don't deduct it on line 47 of your 1040, you can deduct it as an itemized deduction.

The following is from an IRS "Tax Tip."

INCOME FROM FOREIGN SOURCES

Many United States citizens earn money from foreign sources. These taxpayers must remember that they must report all such income on their tax return, unless it is exempt under federal law.

U.S. citizens are taxed on their worldwide income. This applies whether a person lives inside or outside the United States. The foreign income rule also applies regardless of whether or not the person receives a Form W-2, Wage and Tax Statement, or a Form 1099 (information return).

Foreign source income includes earned and unearned income, such as:

Wages and tips
Interest
Dividends
Capital Gains
Pensions
Rents
Royalties

An important point to remember is that citizens living outside the U.S. may be able to exclude up to $82,400 of their 2006 foreign source income if they meet certain requirements. However, the exclusion does not apply to payments made by the U.S. government to its civilian or military employees living outside the U.S.

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If you receive Dividends or Interest belonging to someone else.

2007-02-15T06:02:00.000-06:00

Reporting Dividends or Interest you receive for another person.

If a corporation reports dividends in your name that actually belong to someone else, this is dividends you received as a NOMINEE. You could also receive Interest as a nominee. In such cases, you should not pay tax on such income, but you must follow proper procedures to report the income to the person who actually receives the money from the dividends or interest.

You should prepare a Form 1099-DIV or 1099-INT and send them together with a Form 1096 transmittal to the IRS. You should give the actual owner of the dividends Copy B of the Form 1099. On these forms, list yourself as the Payer and list the actual owner as the Recipient.

Report dividends or interest received as a nominee on Schedule B of your Form 1040 just as you would any other dividends or interest. Then add all dividends or interest and put a subtotal on Schedule B a few lines below the last dividend or interest item you have entered.

Below this subtotal, enter “Nominee Distribution” and show the amount received as a nominee. Subtract the total of your nominee distributions from the subtotal. Enter the result on line 6 in the case of dividends. For interest you would subtract the nominee interest from the subtotal and enter the result on Line 2 of Schedule B.

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GAIN OR LOSS FROM SALE OF INHERITED REAL ESTATE

2007-02-14T14:05:00.000-06:00

-A sale of inherited Real Estate could create a deduction

- If you inherit a home or other real estate from a deceased relative, you may actually have a tax loss. Often the heirs inherit the home of the deceased and want to dispose of it as soon as possible to avoid paying ad valorem taxes on an empty house.

When they sell it, they may reduce the price for a quick sale and incur real estate commissions and other closing costs.

You should value your basis in the inherited property at its value on the date of death, which might be a greater value than you received for the sale of the property. A quick and easy way to check its value would be to look at its assessed value on the county tax rolls. If you can't find the tax receipts the values are usually available on the internet. It should be a safe assumption if you choose to value it as if that were your cost.

If you think the tax assessor undervalued it, you might need to get an independent appraisal.

When you report it on your tax return, it goes on Schedule D. Instead of entering the date acquired, enter “Inherited.” For the date sold, enter the actual date title was transferred to the purchaser. Even if you sold it a week after you inherited it, you would report it as a long-term capital gain or loss.

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Can you trust the IRS? (X-Rated)

2007-02-10T08:48:00.000-06:00

*X-RATED TAX INFOMATION*
I noticed something new this year on the first return I prepared for which the taxpayer wanted a check mailed to him instead of a direct deposit to his bank account. Lines 74a and 74b on page 2 of Form 1040 have a place to enter your bank routing number and account number. When I printed the tax return I noticed these lines were filled in with XXXXXXXX. At first I thought this must be a flaw in my tax software.

After making inquiries, someone suggested that it might be something the IRS asked tax software companies to add to these lines. But why? The reason suggested was that some unscrupulous IRS employees might fill in their own bank account numbers if these lines were left blank.

Has this actually happened? I don't know and the IRS isn't likely to admit that your confidential information isn't safe in their hands.

This brings some related risks to my mind.

Don't make your check out to 'IRS" Some female employee at the IRS might change the "I" in IRS to "M" then add 'rs' and the check would then be to Mrs. XXX.
Be cautious in selecting a tax preparer. I heard that some employee of a large tax-preparation company was caught after having using the clients' information such as credit card numbers and social security numbers in an identity theft scheme

Where there is a will, there is a way----to cheat.

LINKS and References – go to

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IRS-related phishing scams

2007-02-09T21:24:00.000-06:00

If the IRS doesn't get you, the scammers will (if they can).
Taxpayers should be on the lookout for bogus e-mails claiming to be from the tax IRS.

Scammers send e-mails, which are designed to trick the recipients into disclosing personal and financial information that could be used to steal the recipients’ identity and financial assets.

“The IRS does not send out unsolicited e-mails asking for personal information,” said IRS Commissioner Mark W. Everson. “Don’t be taken in by these criminals.”

The IRS has seen a recent increase in these scams. Since November, 99 different scams have been identified, with 20 of those coming in June – the most since 40 were identified in March during the height of the filing season.

Many of these schemes originate outside the United States. To date, investigations by the Treasury Inspector General for Tax Administration have identified sites hosting more than two dozen IRS-related phishing scams. These scam Web sites have been located in many different countries, including Argentina, Aruba, Australia, Austria, Canada, Chile, China, England, Germany, Indonesia, Italy, Japan, Korea, Malaysia, Mexico, Poland, Singapore and Slovakia, as well as the United States.

The current scams claim to come from the IRS, tell recipients that they are due a federal tax refund, and direct them to a Web site that appears to be a genuine IRS site. The bogus sites contain forms or interactive Web pages similar to IRS forms or Web pages but which have been modified to request detailed personal and financial information from the e-mail recipients. In addition, e-mail addresses ending with “.edu” — involving users in the education community — currently seem to be heavily targeted.

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TAX AVOIDANCE SCHEMES-Corporation Sole

2007-02-09T06:23:00.000-06:00

A few months ago someone asked me about doing business as a Corporation Sole to minimize his tax burden. He was skeptical since it sounded too good to be true. I checked with the IRS and here is what I found:

Taxpayers should be wary of promoters offering a tax evasion scheme that misuses “Corporation Sole” laws. Promoters of the scheme misrepresent state and federal laws intended only for bona-fide churches, religious institutions and church leaders.

"This scheme shamelessly tries to take advantage of special tax benefits available to legitimate religious groups and church leaders," said IRS Commissioner Mark W. Everson. "Unscrupulous tax promoters always look for ways to game the system and prey on unsuspecting victims. Taxpayers should be on the look-out for these and other scams."

Scheme promoters typically exploit legitimate laws to establish sham one-person, nonprofit religious corporations. Participants in the scam apply for incorporation under the pretext of being a “bishop” or “overseer” of the phony religious organization or society. The idea promoted is that the arrangement entitles the individual to exemption from federal income taxes as an organization described in Section 501(c)(3) laws.

The scheme is currently being marketed through seminars with fees of up to $1,000 or more per person. Would-be participants purportedly are told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts by hiding assets in a tax exempt entity.

While fraudulent Corporation Sole filings have happened sporadically for many years, the IRS has recently seen signs the scam could be starting to spread with multiple cases seen recently in states such as Utah and Washington. The IRS is concerned about this increase and is taking steps to pursue Corporation Sole promoters and participants.

Used as intended, Corporation Sole statutes enable religious leaders — typically bishops or parsons — to be incorporated for the purpose of insuring the continuation of ownership of property dedicated to the benefit of a legitimate religious organization. Generally, creditors of a Corporation Sole may not look to the assets of the individual holding the office nor may the creditors of the individual look to the assets held by the Corporation Sole. Currently, 16 states permit Corporation Sole incorporations. The IRS suggests that individuals considering becoming involved in any kind of tax avoidance arrangement obtain expert advice from a competent tax advisor not involved in selling the arrangement. Do not rely on legal opinions obtained or provided by the arrangement’s promoter. Start by asking the following questions:

Is the arrangement designed to hide income or assets?
Is the arrangement designed to evade income taxes?

Answering “yes,” or even “maybe,” to either of these questions should raise red flags for taxpayers.

Tax guidelines for churches and religious institutions can be found in Publication 1828, “Tax Guide for Churches and Religious Organizations”.

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Are you missing the point(s) ?

2007-02-08T08:34:00.000-06:00

If you bought a new house in 2006, you may be overlooking some tax deductions.
Take a look at your settlement statement (HUD Form).

Lines 801 and 802, Entitled Loan Origination Fee and Loan Discount - These are points charged to either the buyer or the seller - or both. The buyer can deduct these charges as interest on Line 11 or 12 of Schedule A (itemized deductions). Even the seller-paid points are deductible by the buyer, since, theoretically, the seller has priced the house high enough to cover these expenses.

However, you should check your Form 1098 to see if the Mortgage company lists the points. If it does show them, then the points go on line 11 and you don't get to deduct the same amount twice.
If the Form 1098 does NOT list the points, then you should enter them on line 12 of Schedule A.

Some other items listed on the settlement statement that are deductible by the buyer:

line 106 and 107 Taxes charged to the buyer to reimburse the seller for prepaid taxes
Line 901 Interest in buyer column. (not deductible if reported on Form 1098)

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MISSING OR LATE FORM 1099s

2007-02-05T07:59:00.000-06:00

MISSING A FORM 1099?

If you receive certain types of income, you may get a Form 1099 for use with your federal tax return. Form 1099 is an information return provided by the payer of the income. You should receive your Form 1099-series information returns by January 31, 2007. The payer deadline to mail Form 1099-series is January 31, 2007.

If you have not received an expected Form 1099 within a few days after that, contact the payer, to secure the missing information. If you still do not receive the form by February 15th, call the IRS for assistance at 800-829-1040.

In some cases, you may obtain the information that would be on the Form 1099 from other sources. For example, your bank may put a summary of the interest paid during the year on the December or January statement for your savings or checking account. If you are able to get the accurate information needed to complete your tax return, you do not have to wait for the Form 1099 to arrive.

Form 1099-series is not a required attachment to your return, except when you receive a Form 1099-R, or Form 1099-INT that shows federal income tax withheld. You will not usually attach a 1099-series form to your return, except when you receive a Form 1099-R that shows income tax withheld. You should keep a copy of all the 1099s that you receive with your tax records for the year. There are several different forms in this series, including:

Form 1099–B, Proceeds From Broker and Barter Exchange Transactions
Form 1099–DIV, Dividends and Distributions
Form 1099–INT, Interest Income
Form 1099–MISC, Miscellaneous Income
Form 1099–OID, Original Issue Discount
Form 1099–R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form SSA–1099, Social Security Benefit Statement

If you file your return and later receive a Form 1099 for income that you did not fully include on that return, you should report the income and take credit for any federal income tax withheld by filing Form 1040X, Amended U.S. Individual Income Tax Return. Form 1040X and instructions are available on the IRS Web site at http://www.irs.gov/ or by calling 800-TAX-FORM (800-829-3676). Form 1099 instructions are also available at the IRS web site.

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ENERGY SAVINGS TAX CREDITS-

2007-02-04T07:10:00.000-06:00

-TAX CREDIT FOR ENERGY-SAVING COSTS
-If you made your home more energy-efficient you may be entitled to a tax credit.
There are two categories that qualify for the credit:
1. Energy efficiency improvements
2. Residential energy property costs.
Energy efficiency improvements:
The first category includes
· Insulation that reduces heat loss
· Energy-saving exterior windows and doors
· Metal roofs pigmented with heat-reducing coatings.
Residential energy property costs:
The second category includes
· Qualified solar electric-generating equipment
· Solar water heating equipment
· Fuel cell equipment which converts a fuel into electricity by electrochemical means.

The energy efficiency credit is 10% of the cost subject to certain dollar limitations.
The Residential energy property costs credit is 30% of costs with dollar limitations.

The above is only intended to provide a broad general discussion of the subject. For further details--if you have made any such improvements-- you should look at Form 5696 and the related instructions at http://www.irs.gov/

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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

Construction Contractor Taxes and Accounting

2007-02-03T12:16:00.000-06:00

*TAXATION OF CONSTRUCTION CONTRACTORS:

For construction costs you would report income and expense under either the Percentage-of-completion method or the Completed Contract method.
If you begin and complete a construction contract in the same tax year, you would report all income and expense on that year’s tax return. However if the construction period laps over two years, even if the total time is less than a year, you then use a different approach.

PERCENTAGE OF COMPLETION METHOD:
If you choose, or are required to use, the Percentage-of-completion method, you must calculate a percentage to be used in reporting income. The percent is determined by dividing the cost incurred during the year by the total estimated cost to be incurred for the entire contract. Suppose you had a contract to build something for $ 3 million. If you expect the total costs to be $2 million and have incurred $ 1 million in costs during the year, you would report half of the $ 3 million as income for the year. Your income would be $ 1.5 million and your expense would be the $ 1 million cost actually incurred and the profit would be $ 500,000 minus some overhead expense.

COMPLETED CONTRACT METHOD:
A small contractor can use the completed-contract method which seems less complicated. Under the completed contract method, you would report no income or expense until the contract was completed. You would report everything in the year it was completed.

PROGRESS PAYMENTS:
Generally a contractor receives progress payments based on percentage of completion regardless of how he reports his income. These payments would not be income. They would never exceed the total contract price, and would probably be less than the income reported if the percentage-of-completion method were used. If the completed contract method is used, any unused funds would be considered a loan from the buyer until the contract was completed.

A sole proprietor would usually use the completed contract method and have an accounting procedure that only listed income and related expense for each project, then report the completed project figures on his tax return. A corporation with either assets or gross receipts of $ 250,000 or more is requied to provide a balance sheet as well as an income statement, so double-entry accounting would be required. Some of the debits and credits that would be involved are shown below.

Accounting entries to record income and expense:
Percentage-of-Completion method

Debit Construction in Progress and Credit Cash or Accounts payable to record costs.
Debit Cash and credit 'Progress Billings' or some similar liability account to record progress payments received.
Debit Construction in Progress and Credit Income for profits recognized.
Debit 'Progress Payments' and credit 'Construction in Progress' when the contract is completed.

Completed-Contract Method:
The first two entries would be the same.
Upon completion, you would debit a Cost of Sales account and credit Construction in Progress and would Debit Progress Billings and Credit Income. If there were a final payment not included in progress billings, you would debit Cash and Credit the final payment to Income.

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TUITION AND FEES

2007-02-02T10:54:00.000-06:00

TUITION AND FEES - DEDUCTIONS AND CREDITS
There are several options. A professional tax-preparer can easily select the best option if his software works like mine does. I enter the amount of the education expenses and check a box to select the Hope credit and check the tax result. Then I deselect the Hope credit and check the box for the lifetime learning credit and see if that increased or decreased the tax. Finally, I check the box for the deduction and see what that does. I then select the one that reduces the tax the most. Sometimes one or more of these methods results in a zero amount due to the taxpayer’s income, the student does not qualify, or the expense does not qualify.

If you do it yourself, then you need information beyond the scope of this blog, and should download publication 970 from www.irs.gov Just type in 970 in the search box. Also, you should look at Forms and instructions for Form 1098-T, Form 8815, Form 8863. If you made an early withdrawal from an IRA look at the codes for penalty exclusions for Form 5329.

A Credit is not the same thing as a deduction.

There are several education-related tax provisions related to education expenses. Two arise frequently and can be confused with each other. One type is a credit and the other type is a deduction. A credit reduces your tax by the amount of the credit, but a deduction would only reduce your taxable income which only reduces it by a percent of the deduction.

Which should I take?

You may or may not qualify for all options .

Generally the credit is better than the deduction, but not always. There are two different credits, the Hope credit and the Lifetime learning credit. The credits have different income-related limitations than the deductions

Income limits for credits:
The credits are not available if your Adjusted Gross income (AGI) exceeds $ 110,000 on a Joint Return or $ 55,000 on other returns.

Income limits for the deductions:
Your AGI can be as high as $ 160,000 on a Joint return or $80,000 and still qualify for the deduction.

There are two different credits

The two credits are the Hope credit and the Lifetime learning credit. The Hope credit usually provides the best tax reduction, but the rules may prevent you from taking the Hope credit. The Hope credit is only available for the first two years of post-secondary education. The Lifetime learning credit does not have this limitation.

Rules That Apply to Both Credits and Qualified Education Expenses
Generally, qualified education expenses are amounts paid in
2006 for tuition and fees plus, in some cases, books, supplies and other costs as explained in Publication 970 .

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ELECTRONIC FEDERAL TAX PAYMENTS

2007-02-01T07:18:00.000-06:00

-You can save time and trouble by paying your taxes online. If you file estimated taxes through the mail, you have to fill out four quarterly Form 1040ESs, make sure you mail them before the due date and hope the mail arrives on time. Using the mail and Form 1040ES you are limited to making your payments quarterly. Some people prefer to pay monthly.

I like to pay as many bills as possible online so I don't have to worry about forgetting to put a stamp on the envelope or having it lost or delayed in the mail. Once I sent a credit card payment in before it was due, but it was delayed over a month in the mail. Then I was charged interest on the card. I thought it had been lost, so I added it to my next bill and ended up with a credit balance due to paying about $1000 more than the amount I owed.

The IRS prefers that you pay electronically. It is less work for them and less trouble for you.

You can enroll in the IRS Electronic Federal Tax Payment program, (EFTPS) and pay quarterly, monthly or however you choose. You can prearrange payments to be charged to your bank account when due. If you need to change the scheduled payments you can do so and you can send in an extra additional payment for unanticipated extra income (in case you win the lottery or something).

After you enroll in EFTPS, you will receive a confirmation package by mail. In a separate mailing you will receive an EFTPS Personal Identification Number (PIN) with instructions for activating your enrollment. Employers who apply for and receive a new Employer Identification Number and have a federal tax obligation are automatically enrolled in EFTPS Express Enrollment to make their Federal Tax Deposits.

For more information you can visit IRS.gov. Click on the e-file logo and look for "Electronic Payment Options" and the EFTPS logo. To enroll, visit EFTPS.gov or call EFTPS Customer Service at 800-555-4477.

Link: EFTPS Web Site

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TAX SIMPLIFICATION as we once knew it-

2007-01-31T12:23:00.000-06:00

-TAX SIMPLIFICATION (it started out pretty simple)

The 1913 Form 1040 was four pages long.

Page 1 summarized everything in 8 lines:

Gross Income
General Deductions
Net Income
Dividends and corporate-related income
Tax Withheld
Exemptions $ 3000-$4000)
Taxable Income
Tax (1% if your taxable income was $20,000-$50,000) If you made over $ 500,000 the tax was a whopping 6%. Soak the rich!

Page 2 was a summary of nine categories of income which were to be included in lines 1 and 4 of page 1.

Page 3 was a summary of “general deductions” consisting of six categories. One category was “a reasonable deduction” of depreciation. They didn’t even use the word depreciation, but called it an allowance for wear and tear.

Page 4 was the instructions.

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LATE AMENDED 1099s FROM BROKERS

2007-01-30T06:25:00.000-06:00

-Over the past couple of years, many brokerage companies send amended 1099 Form often after their clients have already prepared their tax returns based on the first 1099s.. Many investors receive as many as three amendments, with the latest ones being received well after the April 15 tax deadline.

MAY GET WORSE THIS YEAR
It will probably be worse this year since tax-exempt interest has to be reported on Forms 1099-INT and many brokers will be late adapting to this new requirement.

NOT JUST ONE OR TWO BROKERS
The problem is not with just one or two brokerage firms, but, I’ve been told that it is almost universal.

CAN’T MEET APRIL 15 DEADLINE
If you get amended 1099s, meeting the April 15 filing deadline may not be a realistic goal. But if you file late, you could be penalized for both late filing and late payment.

YOU CAN FILE AN EXTENSION REQUEST
You could calculate your tax based on the initial set of 1099s you receive, but instead of filing the return, you could request an extension with Form 4868 and send a payment with the extension request if you expect to owe. This would give you until October 15 to file.

IF YOU DON'T SUBMIT AN EXTENSION REQUEST AND FILE LATE
Even if you file late and don’t send the extension request, there is no penalty or interest if you do not owe any tax. But send in the extension request anyway in case you are are wrong and possibly do owe something--it only costs 39¢ to mail it.

YOU CAN FILE AN AMENDED RETURN
If you are substantially overpaid and want the refund, then you might file before April 15, then submit an amended return, Form 1040X, if late 1099s indicate changes are necessary.

PAYING MOST OF YOUR TAX NEAR YEAR-END COULD TRIGGER PENALTIES
Unless you indicate otherwise by filing Form 2210, the IRS assumes your income was received equally throughout the year. If your payments are skewed toward the end of the year, you could be penalized even if you paid a sufficient amount in total. However, if you request an extension and pay MORE than you owe, the IRS may send the refund without checking to see if you paid in equal installments.

YOU CAN PAY YOUR TAXES ONLINE
If you sign up for the Electronic Federal Tax Payment System (EFTPS), you can make your tax payments using the internet. To look into that option, go to http://www.eftps.gov/

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NONDEDUCTIBLE IRAs CAN CREATE CONFUSION

2007-01-29T12:07:00.000-06:00

-If you have nondeductible IRAs, the form you must prepare is not worded in a way that is easy to interpret. If you have made both deductible and nondeductible contributions to traditional IRAs, then part of your withdrawals are attributable to the nondeductible IRAs and can be withdrawn without paying tax again. But to make it complicated, you have to calculate the percent that can be withdrawn tax-free using Form 8606.. All withdrawals have to be allocated between taxable and nontaxable every year in which you make a withdrawal. You must also update your basis every year in which you make a contribution.

You must update your nondeductible IRA basis, using Form 8606, whether you made withdrawals or not.

NOTE: The allocation applies only to traditional IRAs, not Roth IRAs which do not enter into this calculation. Traditional IRAs are any IRA other than a Roth IRA.

The first line of Form 8606 seems self-explanatory. It asks for nondeductible contributions for the tax year, including those made through April 15 of the year after the tax year.

Line 2 is somewhat confusing.
It asks for your basis in traditional IRAs. The key word is basis. You only have a basis if you paid for it with after-tax money. If you deferred the tax by deducting an IRA contribution, your basis is zero.

So, ENTER just the value of your nondeductible IRAs on line 2

Line 6 asks for the value not basis of your traditional IRAs. The value is both the basis of your nondeductible IRAs plus the value of your deductible IRAs. This amount is the value of your IRAs as of December 31 of the tax year for which you are reporting.

Line 7 asks for distributions you received during the tax year. This amount is added back to the year-end value to get the total you would have had if there had been no withdrawals.

Line 8 asks for anything you converted to a Roth IRA. This is also to be added back to the year-end value since a conversion would be equivalent to a withdrawal.

Line 9 is the Total of Lines 6+7+8.

Line 10 is line 5 (nondeductible IRA basis) divided by line 9 (total value at year-end plus withdrawals and conversions) divided.

The rest of the form is used to calculate the taxable and nontaxable portion of your IRA withdrawals for the year and to calculate the remaining basis of your nondeductible IRAs which will become Line 2 on next year’s Form 8606.

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UNREIMBURSED PARTNERSHIP EXPENSES

2007-01-28T20:06:00.001-06:00

-If your partnership agreement requires you to pay expenses under the partnership agreement, you can deduct these items on page 2 of Schedule E.
If your partnership interest is nonpassive,

Enter "UPE" (unreimbursed partnership expenses) in column (a) then go to col. (h)

deduct the unreimbursed expense on a separate line in column (h) of line 28, nonpassive loss from Schedule K-1. This amount should not be combined with your other K-1 gain or loss from this activity -- it should be separately stated.

If your expenses are passive, enter "UPE" in column (a) and enter the expense in column (f) of line 28.

These deductions should be ordinary and necessary expense of the partnership, not items which should go on Schedule A as itemized deductions.

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STARTING A NEW CORPORATION OR LLC-

2007-01-27T13:34:00.000-06:00

-The first thing you need to determine is whether a C Corporation, an S Corporation or LLC would be the best way to go. You should explain the nature of the business to a CPA and get his thoughts on whether to incorporate or set up an LLC.

If you incorporate, you will need to file Form 2553 if you want to be taxed as an S Corporation. This would be done after you get your corporate charter.

After you decide between a corporation and LLC, the next step would be to get a corporate charter from the state.

After you get your charter, you need to file a form SS-4 with the IRS to get an Employer Identification number--whether you will employ anyone or not. The EIN is used by the company instead of using a Social Security Number for an individual.

You can download all forms and instructions at http://www.irs.gov

After you fill out as much as you can on Form SS-4, call the IRS at the number indicated in the instructions for the form and get the EI Number over the telephone. You can now begin filing returns under that number.

Another important point is that you may need to report both an income statement and a balance sheet on your corporate or LLC tax return. That means you may need to maintain a set of double-entry books, or get someone to do your accounting. Most CPAs do some bookkeeping work of that type (they call it write-up work). There are also many unlicensed bookkeepers who do this type of work for their clients.

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