Your Tax Question - 052

Dear John, I just got home from India where I have worked for the last year. What will happen on my taxes? Thank you so much, Cal.

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Hi Cal,

In order to not tax a taxpayer twice Congress allows you to take a Credit or a Deduction. The credit is usually the best route because it reduces your U.S. tax liability dollar for dollar where the deduction just reduces the amount of income that is taxable. Determine which is best for you according to the facts of your own individual case. See page 21 of the 1040 instructions for more information.

You know, I can help you with this - I'm just saying...

Happy New Year!!!

John

PS. Did you see that I am offering single moms a deal this year? I will do their taxes for $69.99 complete. That's all the forms necessary and eFile for just $69.99. It's just my small way of helping our single moms.

Your Tax Question - 051

Dear John, What can be expected for the future of taxation? I mean, will the president follow through on his promise to soak the rich people who earn $250,000 a year? Just wondering, Mike

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Hi Mike,

Good question, in 2011 the Marginal Tax Rate (the tax paid on the last dollar of income) will be increased across the board. Without further legislation the lowest tax rates are set to expire in 2010 and then 2011 will see in increase of taxes on just about everyone.

In 2011 the 10% bracket for the lowest wage earners will revert to a higher 15%. What that means is that a single person with an AGI under $8,350 will owe $1,252.50 instead of $835.00 - an increase of 50%. For an individual earning from $8351.00 to $34,000 there is really no change of tax owed at 15%, but for the few taxpayers who have an AGI of $34,001 to $34,500. they will see a 40% reduction in their marginal tax rate: 25% to 15%.

The next rate will be a 12% increase on individuals who have an AGI of $34,500 to $83,600, then an increase of 10.7% on AGIs between $83,601 to $174,400, from there an increase of 9.1% on AGIs between $174,401 to $379,150, and finally for those AGIs over $379,150 and increase of 13.1%.

While I will admit that a 9.1% increase on $174,000 winds up being a heap more significant than a 50% increase on $34,500 it seems to me that taxpayers with the lesser AGIs have less wiggle room in their monthly budgets and they are the ones who really wind up getting "soaked". It's sort of like the Widow's Mite - giving out of one's poverty is more impressive than giving out of one's wealth.

I'm sorry Mike if I showed my political hand in this answer. But when all is said and done those are the numbers that are scheduled for 2011 unless Congress acts.

Best,

John

Your Tax Question - 050

Dear John, is it true that I can deduct the sales tax that I paid through the year instead of the State taxes I paid on my income? Jim

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Hi Jim,

Yes, it is true. Instead of deducting the amount of taxes that you paid to the State on your Schedule A, you may make the deduction with the sales taxes that you paid through the year. This is done by a table that the IRS provides or the actual amount that you paid assuming that you have kept all the receipts as evidence. This approach to the deduction makes sense if you have made major expenses this year such as a car, RV, and/or addition to your home. Compare the allowed amounts and use what gives you the best deduction.

If you need help with this I am always looking for new clients - Email me.

Best,

John

Your Tax Question - 049

Dear John, I have heard that 2010 taxes are due on April 18th. Is this true? Thanks, Helen

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Yes Helen, it is true. Because of a holiday in Washington DC this year, the deadline for getting your taxes postmarked is April 18th. However, I suggest that you don't procrastinate with getting your taxes done because should something happen the IRS will nail you with a penalty and interest.

Get a hold of me and I will help you get your taxes finished and delivered on time.

Thanks,

John

Your Tax Question - 048

Dear John, Earlier this year my house was robbed and many thousands of dollars of valuables were taken and never recovered. My insurance company paid a very small portion but nowhere near what the value was for the items taken. What are the tax rules about losses? Thank you, Ken

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Hi Ken,

I am sorry that your house was robbed and that you have had to go through that ordeal.

Generally congress does not allow losses on anything but business assets but they do allow individuals to claim losses in the case of robbery. The loss is not allowed in the year of the incident if there is a chance at future recovery either of the property or an insurance claim. After that, there is a formula for figuring your loss, it reduces your actual loss but if it was large enough (and your income low enough) then it may be worth figuring.

Let me explain this with an example. Let's say that it has been determined that there is no chance at recovery of your property and your insurance company has already cut you a check. It has been determined, by your insurance adjuster, that your stolen property had an actual value of $10,000 even though you paid $30,000 for it. The rules state that you are allowed the lesser of the basis (amount you paid) OR the adjusted value (what the insurance guy says it's worth) as your loss.

But wait, the $10k still has to be reduced. The $10k has to be reduced by the amount of your insurance adjustment (let's say $2,000) so now you have an $8,000 loss. Plus, you have to reduce the loss by $100 per incident (for 2010) which takes the loss to $7,900. After these adjustments you will then have to reduce it by 10% of your $50,000 AGI - $5,000. You now have a $4,900 loss that you are allowed to deduct on your Schedule A.

That is the way the theft loss works, the actual facts of your particular case need to applied to these rules. Should you need a tax guy to work it out for you just give me a call I am always happy for another client.

Best wishes,

John

Your Tax Question - 047(c)

(This segment is a continuation from Your Tax Question – 047(b) which explores the question about filing as Head of Household.)

Who is a Qualifying Relative?

A Qualifying Relative who qualifies must meet five tests as well and does not meet the Qualifying Child tests.

1. Gross Income Test
a. Must be LESS than the dependency exemption amount
i. $3,650 for 2010

2. Support Test
a. The taxpayer must provide more than ½ of the dependent’s support for the year
b. Special notice for Multiple Support situations

3. Relationship, or Member of Household, Test (either)
a. Varied levels of blood relationships
i. Death and divorces not a factor
b. Must be a member of the household all year

4. Citizen or Residency Test
a. U.S., Canada, Mexico
b. OR Legally adopted child but alien resident

5. Joint Return Test
a. Married individuals are not allowed to file as such for this exemption
i. Special joint return test allowance for couples not required to file a return

These are the 5 tests that individuals must meet in order to be considered your Qualified Relative.

There is one other situation that may cause you to be able to file as Head of Household. If your parent lives in his or her own home but you financially maintain that home then you are able to file as Head of Household.

According to your original question, Bart, I would agree that your son does indeed qualify as your Qualified Child but I do question your ability to claim your sister and brother-in-law as your dependents because the facts that you have given do not convince me that they will meet the Qualified Relative Test. To determine this I would need you to get ahold of me with more information.

I really hope this helps.
John

PS. Were you aware that I am accepting first time clients for the 2010 tax year filing season at just $69.00 per client? That’s unheard of but true. They say that you get what you pay for but I am willing to be that in this case you will get a whole bunch more.

Your Tax Question - 047(b)

(This segment is a continuation from Your Tax Question – 047(a) which explores the question about filing as Head of Household.)

Who is a Qualified Child?

A child who qualifies must meet fives tests.

1. Age Test (any of the three criteria to qualify)
a. Under age of 19 at the end of the year
b. Full-time student under the age of 24 at the end of the year
c. Must be permanently and totally disabled

2. Non-Support Test (must NOT have)
a. Must not have provided more than ½ of their own support (Scholarships not counted)

3. Relationship Test (must be the taxpayer’s)
a. Son
b. Daughter
c. Step-son
d. Step-daughter
e. Eligible foster child
f. Brother
g. Sister
h. Step-Brother
i. Step-Sister
j. Or decedent of any or the above

4. Principal Residence Test
a. Must live with the taxpayer more than ½ the year
i. Temp absence such as illnesses, vacation, education, military service, or other

extenuating circumstances notwithstanding.

5. Citizen or Residency Test
a. Must be a resident of the U.S., Canada, or Mexico

This is the 5 tests that a person must meet in order to be a Qualifying Child. In the next post I will explain who qualifies as a Qualifying Relative of a taxpayer which also a consideration in the Head of Household filing status. To read about the Resident Test, click the following link Your Tax Question – 047(c).

Your Tax Question - 047(a)

Dear John, I am a single man and one of my sons has come to live with me this year. Last year I filed my taxes as Single but I have been told that I can file as Head of Household this year because he is with me. Plus, my sister and husband are living with me this year due to the downturn in the economy and I have heard that they will be considered my dependents for the year on my tax return. Is this true? Thanks in advance, Bart
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Hi Bart,

Thanks for the question. It seems (off the top of my head) that everything you have been told is correct, but to make sure let’s run through the rules and make sure.

First, the conditions for the Head of Household filing status are as follows.

To file this way the taxpayer must:

1. maintain a home which is the primary residency
a. of a qualifying child(ren) or
b. other qualified dependent(s)

2. OR maintained a separate home for a parent

The conditions for the Head of Household filing status are straight forward but figuring out who is and is not a qualifying child or dependent is an altogether different matter. I will add these details in following posts so as to not overwhelm this one blog post. Click the following link in order to read Your Tax Question – 047(b), this next post explains the rules for who qualifies as a child.

Your Tax Question - 046

Dear John, I just received a new job and the company is classifying me as a 1099 employee. They have informed me that I will need to save up 15% of my income in order to pay for the these taxes at the end of the year. What gives? Thx, Charlie

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Thanks for the question Charlie,

Some companies classify their employees as 1099 contractors in order to not have to pay certain employment taxes. The IRS is wise to this and they are more than happy to tell you if you are indeed an employee of the company or a contractor. Simply fill out and submit IRS Form SS-8 for the determination.

If the IRS does indeed inform you that you are a W-2 employee and not a 1099 contractor they will have to change the way they treat your paychecks and you will have to fill out Form 8919 with your 1040 for this year. According to IRS Pub 15 employers are always liable for the employee portion of the taxes and add a (ahem) special bonus to the tax for employers who do it wrong.

I hope this helps.

John

PS. Look at the countdown timer just under the header, time is getting short and I am able to help. This year I am only charging $69.00 for new clients that I service as their tax accountant. Can you say "CHA-CHING!" ?

Your Tax Question - 045 (Part C)

(Continued from Your Tax Question - 045 (Part B))

Proposed changes in the tax law for 2011

* W-2 Forms Must Include Health Insurance Costs - Many people mat think that this is for the purpose of taxing workers on this non-taxable benefit but the official word is so that workers may know exactly how much it actually costs to insure them.

* Over-The-Counter Medication No Longer Allowed For No-Tax Health Reimbursement Plans - All those plans that you were putting pre-tax dollars into to pay for health stuff. In 2011 you will no longer be reimbursed for medications that do not have a prescription. Oh, and in case you try the next change is for you.

* Increased Penalty Tax on Non-Qualifying HSA & Archer MSA Distributions - For HSA, the penalty is currently 10% but is raised to 20% and for Archer MSA the current penalty is 15% but is increased to 20%.

* Annual Fee on Drug Manufacturers & Importers - Ever wonder how Medicare Part B is going to be funded? Well, partly it will be funded by this tax on Branded Drug Manufacturers & Importers.

* Small Employers May Establish Cafeteria Plans - For small employers, there will be a 2 year moratorium from the nondiscrimination requirements and be allowed to establish a cafeteria style plan for its employees. For this allowance, an employer must have less than 101 employees average on either of the prior two years.

OK Byron, I think I have sufficiently beat this dead horse sufficiently. I could continue on about 2012, 2013, 2014, and on to 2018 with the proposed changes. However, after Congress regroups for the year who knows what may happen and when. Suffice it to say that this Health Care changes a lot of what we knew about the tax law and if not tempered will do so for years and years to come. For more information you can read about it at the IRS website.

I hope this information clarifies,

John

Your Tax Question - 045 (Part B)

(Continued from Your Tax Question - 045 (Part A))

I won't try to detail all of the items that are new in 2010 because of the Health care Act but I will point out some of the details that will affect most individual tax payers...

2010:

* Tanning Services Excise Tax - This is a 10% tax on all tanning services. As of July 1, 2010 owners of tanning service facilities are required to charge their customers a 10% sales tax on the tanning service and remit those monies quarterly to the IRS. If the business is a health facility that offers health and fitness services but allows its members to use tanning beds as part of the membership then there is no excise tax.

* Small Business Health Insurance Credit - For eligible small employers (ESE) who provide their employees with health insurance a credit may be available. An ESE must have no more than 25 full-time equivalent (FTE) employees [NOTE: A full-time employee is one who works 30 hrs a week for this credit] and an average of $50k per year annual salary per employee including the owner's wage. [Should this be called the Good Luck Small Business Health Insurance Credit?]

* Child Under 27 & Employer-Provider Health Insurance - It used to be that your children were allowed to be on your employer provided health insurance until they turned 24 so long as they were students in an accredited higher education program. Now, your child is allowed to be on your health insurance until the end of the year that they turn 27 years of age and they need only be your child - not even in school.

* Adoption Credit - Under the old law the maximum credit was $12,170 but under this plan the credit is increased by $1000 to $13,170.

While there are more changes to this and the details shared are more intensive than this I hope to have helped you see some of the changes that may effect you for this coming tax season. In Part C of this series I will share a little about the future proposed changes for 2011 and beyond.

John

Your Tax Question - 045 (Part A)

Dear John, I have been hearing all sorts of stories about tax implications of the new Health Care Bill. Can you tell me about what is official and what is hog's-swallow? Thanks, Byron.

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Hi Byron,

There is certainly a lot of speculation about the new 2010 Health Care Act. Before I try to explain what I know, let me clarify that my information is current as of this moment (11/9/2010). Congress has gone on recess and tthey are expected to return before the end of the year to massage the detail. However, that is the nature of taxes, it is only ever current FOR NOW. With that stated, let me details some of the items of interest.

On March 23, 2010 Congress passed, and the President signed into law, new legislation dealing with health care, consisting of H.R. 3590, the Patient Protection and Affordable Care Act and H.R. 4872, the Health Care and then the Education Reconciliation Act of 2010 (Reconciliation Act on March 30, 2010). The most important part of the new health reform law act seems to be the mandate for most U.S. residents to obtain health insurance. This mandate carries with it many new TAX RULES such as:

1. Penalties for individuals who choose to remain uninsured,

2. Tax credits for participating in new insurance coverages,

3. Penalties for larger employers that do not provide insurance (or provide coverage deemed

inadequate or unaffordable),

5. A voucher system for certain lower income employees who choose not to be covered by the

company health plan, and

6. The definition of who is a dependent for an employer health plan (and other purposes) has been expanded.

This Health Care Act is paid for with taxes, penalties and tougher rules for health care related exclusions and deductions. Without getting too political, this legislation could have easily been called the "Tax The Hell Out Of'm Act" to be more to the point. I won't go into too many details but in summary some of the new provisions include:

1. Surtax on “Cadillac” employer health plans,

2. Increased Medicare Tax for higher income individuals,

3. New Medicare Tax on unearned income for higher income individuals,

4. New 10% AGI for deducting medical expenses,

5. New limits on FSA contributions under cafeteria plans,

6. Limits on executive compensation deduction for insurance providers,

7. Annual fees for pharmaceutical companies, manufacturers and importers of medical devices,

and health insurance providers,

8. Codification of the Economic Substance Doctrine and imposition of new penalties,

9. Information reporting for payments to corporations,

10. Eliminating the credit for “black liquor,” and

11. Estimated tax changes for large corporations.

This Health Care Act legislation also creates a few new benefits:

1. A “simple” cafeteria plan for small businesses,

2. Increases the adoption credit and adoption assistance,

3. Creates a new tax credit to stimulate new therapeutic discovery projects, and

4. Provides a new exclusion for certain health professionals.

Of course, all of this is implemented on a timeline that extends into 2018 so how all of it will pan-out has yet to be worked out. So this post doesn't get too cumbersome I will add more details in subsequent posts but for now I just wanted to give you an overview.

Best,

John

P.S. A prof once told me that everything I write has been lifted from someone, the point is to avoid plagiarism and give credit where credit is due. So I would like to credit the UMTax program and the materials that they provide for the information that I know (or at least think I know).

Your Tax Question - 044

Okay, so you did not ask but I thought this was ironic so I will share. Of course taxes are frustrating but sometimes it is just bewildering to me what is actually in the code.

The government considers income to be any and all increase to your wealth. Any deductions that you receive from that income is solely and strictly at the leisure of legislative grace. There are two reasons that Congress will issue these reliefs to you: 1) to avoid double taxation and 2) to create a social action.

Under the concept of social action Congress has legislated (made law) that people who are involved in illegal activities are allowed to recapture their costs before they figure their net profit. Unless you are a drug dealer then you are not allowed to deduct these expenses from your business... ... ... I guess I am dumbfounded that congressional leaders actually think that this would actually be a deterrent to potential drug dealers. Maybe white collar drug dealers but really, Congress needs to visit the Cass Corridor of Detroit, or Woodward Avenue before they waste time coming up with this stuff.

I've also been thinking about how Congress does not tax Municipal Bonds (The investments of government municipalities). Is there a bit of admission that the activities of government need to have an added bonus to make them competitive in the market place? I find it thought provoking that none of my investment friends have suggested that I could make good money in muni-bonds. In fact, the only time they suggest such a vantage point is as I am to reach retirement for a safer investment... ... ... I'm just thinking.

So, these thoughts were not meant to help you as much as they were to share with you some of the ideas that are flitting through my head as I consider the tax code. I hope you didn't get scared off.

John

Your Tax Question - 043

Dear John, I was wondering why I should have you fill out my taxes rather than use the free services on the internet or buy the $30.00 software program. I can't imagine that your work is so special that it warrants me paying you more than those other services. Sincerely, James

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Dear James,

When I do your taxes there is something miraculous that happens. The heavens part and the sun shines down upon the earth in its full splendor, you can actually hear the angels of heaven singing the hallelujah chorus, and the sky rains down milk-chocolate.

Any other questions?

John

Your Tax Question - 042

Dear John, I heard that my employer would begin figuring the cost of my insurance premiums so that the IRS can tax me on that benefit as part of my salary. Grrrrr, this just fries me!!! How can the IRS charge my "fringe-benefit" as part of my salary? Frustrated, Sue

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Hi Sue,

Yes, your W-2 form for 2010 is required by The Affordable Care Act (May 23, 2010) to include the amount that your employer paid for your insurance benefits. However, you will not be paying taxes on this amount for it is supposed to be for information only.

The reason that our fringe benefits are presently not taxed as income is because of the grace of Congress. Congress allowed that perk in order to encourage companies to provide health coverage to its employees. If Congress ever wants to change its mind (for whatever reason) the IRS is only ever just one vote from collecting taxes on your fringe benefits. The frustration we feel about this is because we have never thought about insurance premiums that our companies pay for our insurance as taxable income - when it in reality it always has been.

Take care,

John

Your Tax Question - 041

Dear John, As the time to vote comes upon us, I hear certain political candidates platforming on their desire to initiate a Flat-Tax. I was wondering if you could explain how a Flat-Tax would benefit me as an American tax payer. Yours, Pete
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Hi Pete,

Thanks for asking about the Flat-Tax, I will try to explain it as I understand it.

The American system of taxation is based upon certain foundational concepts, and one of these concepts is the Pay-As-You-Go Concept and another is the Ability-To-Pay Concept.

If a straight Flat-Tax were enacted you would simply figure out your income at the end of the year and then pay a flat % rate as your tax. Receiving one giant bill on what you have earned in a year would be burdensome (even if that bill was just 10% of your gross income) for most people who live pay-check-to-pay-check. And because of the Ability-To-Pay Concept most people would not have the ability to pay that one giant bill at the end of the year. So these two concepts (Ability-To-Pay & Pay-As-You-Go) are to be respected when developing any basis for taxation in our country.

With that said then, a Flat-Tax system would be very beneficial to some people while being very burdensome to many other people.

* A Flat-Tax would make tax planning and preparation very easy but on the flip side of the coin It would also destroy the need to employ tax preparers, tax planners, accountants, CPA's, and the like. Yes, simplifying the system sounds good but have we considered how much of our economy depends on the system that we have? Imperfect as it is, it still is beneficial.

* And a Flat-Tax would be very beneficial to people the more wealthy they are and harder on the lower wage earners. 10% is easier to afford when you earn $100k verses $20k. It is still 10% to each but affording rent after taxes is still easier with $90k than with $18k.

In all honesty Pete, I would like the simplification of a Flat-Tax even though I would have to find other employment but I think the problems it would create for the lower wage earners and poor money mangers among us would be more harmful than good. However, what do I know, I'm just a tax guy.

My answer simply glances the depth of the discussion about Flat-Tax but I hope that it sheds a little light on it for you.

Best,
John

Your Tax Question - 040

Dear John, I read this booklet that has me a bit confused about what income actually is. It said that it is not legal for the government to charge taxes on the money that I earn from my labor. It makes sense but I am a little apprehensive about it. What is income in the government's eyes? Thanks, Clark.

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Hi Clark,

I am not sure what booklet you are referring to but I remember reading something that wanted me to invest in gold because they claimed that the IRS and the government was up to no good. I remember being impressed with the logic of the argument but I largely forgot about it and did not invest in their gold. That said, let me try to explain what income is in the government's eyes.

Income is simply the increase of wealth in any given tax period be it an increase from labor (earned income) or capital (unearned income). The concept of income is all-inclusive and only those items that Congress has granted grace from are excluded from determining income. For a good explanation of Gross Income for income tax purposes check out the article at Wikipedia.

When you are reading different materials about income taxes, always keep in mind that no matter what someone else explains it is always you who are responsible for your taxes. When the IRS comes knocking and asking for Clark, it will be you who is responsible for all penalties and fines.

Hope this helps,

John

PS. If you need further assistance please email me.

Your Tax Question - 039

Dear John, I'm not exactly sure what the difference is between a deduction and and a credit, could you explain it to me? Thank you, Jim-Bob
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Hi Jim-Bob,

Sure thing, a deduction reduces the amount of income that you pay taxes on and a credit reduces the amount of tax that you actually pay. For instance, in the Adjusted Gross Income section of the form 1040 you can enter certain expenses that you may have during the year and they will reduce the income that you earned and it is that reduced income that is used to with your Itemized or Standard Deductions to determine your Taxable Income and it from your Taxable Income that your Tax is determined. Then, after the Tax is determined Credits are figured and these reduce the Tax amount.

There are 2 types of Credits: Refundable and Non-refundable. A Refundable Credit is one that gives you back money even if the Tax that you owe is $0.00 and Non-Refundable credits do not give any money if you are not paying taxes. The Child Credit is a Refundable Credit so this is why you hear of people getting money back even when they are too poor to pay taxes.

I hope this answers your question Jim-Bob,
John

PS. Congress is not likely to continue the tax cuts and credits that were enacted during the Bush administration which means that many of the tax Refunds and Credits that you now enjoy will end after your next tax season. If you need help figuring out what happens, email me.

Your Tax Question - 038

Dear John, This past year I found out the hard way that my employer was not keeping enough money out of my paycheck - it was ugly! I had to pay a lot of money, penalties, and something called the Estimated Tax every quarter this year. I have filled out a new W-4 with my employer but I am still not sure that there is enough being kept out of my weekly paychecks. Can you tell me how to check this? Thanks, Bunny.

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Hi Bunny,

Thanks for your question. The IRS has a calculator on its website that you may use to input your information to check your withholding status. Of course it is only a guide to help you avoid the dreaded Estimated Tax burden but it should get you pretty close. Use the link below and try it out - its FREE to use.

IRS Withholding Calculator

Best of luck,

John

PS. You are wise person to be checking this now rather than waiting until it is too late to make a difference - I commend you.

Your Tax Question - 037

(PLEASE NOTE: I am sorry that I have been so long between questions. I am finding that as the time gets less until tax deadline I am getting more calls for space on mt client list. There are less than 30 days left and I still have a couple spaces open on my client list. Please contact me before it is too late if you would like to schedule a position on the list.)

__________________________________________________________

Dear John, My husband has filed our joint return for the last few years and I suspect that he has played fast and loose with the numbers. He announced this year that he is divorcing me but he insists that we will still be filing a Joint return because I had no income of my own. He files our return by efile and I have never seen a return nor signed one in these many years. Is there anything that I can do? Thank you, Jenni
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Hi Jenni,

I am sorry for the situation that you find yourself in.

Generally speaking, a spouse is considered liable for everything on a return that his or her name has been signed to. Since your husband has forged your signature I suspect that you might qualify for one the three forms of Innocent Spouse Relief. Getting the IRS to approve this is apparently quite the feat but if you are innocent and there has been wrong doing then it may well be worth the effort.

The three types of relief are such:

1. Innocent Spouse
2. Seperation of Liability
3. Equitable Relief

I hope this helps and please email me if I can be of service to you in this matter.

Thank you,
John

PS: I still have a few slots open in my client list, email me to one of the final few.

Your Tax Question - 036

Dear John, I own a small business with a small amount of lawn that needs to be cut each week during the summer. The business owner next to mine mows my lawn and I in turn help her by power-washing her storefront. I want to show the lawn as an expense to my business and she wants to show the power-washing as an expense to her business but no money actually changes hands. How is this situation viewed by the IRS? Thanks, Max
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Hi Max,

What you have is a bartering service situation. The IRS requires that your business and hers both value the services that you receive and included it in your gross incomes. You will have to enter this information on your Schedule C or C-EZ. Your accountant can explain how to track this in your books.

I hope this helps,
John

PS. Email me and we can talk.

Your Tax Question - 035

Dear John, I have money saved in an off shore account and I am told that I now have to report that money. Is this true? Thanks, Jim
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Hi Jim,

The treasury requires that you report to the government if you have $10,000 in total transactions, interest in, or balance of any signature foreign accounts. Unless of course you are a banker, but if you are a regular old Joe then you are required to file form Form TD F 90-20.1.

I will leave my opinion of this to the political pundits...

John

PS. I still have slots available in my client list if you are interested. Email me

Your Tax Question - 034

Dear John, I paid a Lawyer to assemble my will. I have been told that these charges are deductible on my taxes - is this true? Sincerely, Wilma
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Hi Wilma,

The IRS accepts legal fees deductible only as those services pertain to the production of income. For instance, if you hired a lawyer to write a lease for you to use in your rental property then those fees would be deductible. Or in the case of divorce, attorney fees attributable to collecting alimony is deductible as well.

I am sorry but the fees paid to a lawyer to have your will completed is not deductible.

Thanks for the question,
John

PS. Time is running short, email me if you would like one of the remaining slots on my client list.

Your Tax Question - 033

Dear John, I know I earned $500 worth of income from a side job this past year but I have not received a 1099 from the company that I did the work for - what should I do? Thank you, Gina.
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Hi Gina,

The company that you did the work for is not required to issue you a 1099 unless you earn more than $599.00 which means that you likely will not get one. Assuming that you do not have a business and do not file the Schedule C or C-EZ, You can claim this income on Line 21 of the Form 1040.

I hope this helps,
John

PS. I am more than happy to help you with this if you need a tax preparer. Email me.

Your Tax Question - 032

Dear John, I've heard that the First-Time Homebuyers Credit now applies to those of us that recently bought a house but are not actually a First-Time Homebuyer. Is this true? Hank
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Hi Hank,

The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase. The Maximum credit remains at $8,000.

Additionally, this law provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time homebuyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

Thanks for the question,
John

PS. April 15th is getting closer - email me.

Your Tax Question - 031

Dear John, This year I received my W-2 and I also received a 1099 from the same job but the 1099 has a different business name on it. My tax software is now requiring me to fill out a Schedule C as part of my taxes. Filing out a Schedule C is requiring me to answer a bunch of questions that I don't have answers for. Can I get around filing out the Schedule C? Thanks, Pat
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Hi Pat,

I don't want to get into a guessing game here so I would suggest that you call your company and find out if there was not a mistake and inquire why this happened. Remember, that the IRS will make a determination about your worker status, simply fill out Form SS-8.

Sorry, there really is no way around the Schedule C-EZ in this case. If there were no you taxes withheld from the 1099 (which I doubt that there were) you will have to pay double on the Social Security and Medicare portions of your wages. This is all covered on the 1040 SE form when you do your taxes. It should not be too difficult just a little extra effort.

I hope this helps.
John

PS. I know of a great tax guy if you need one. ;-) Email me

Your Tax Question - 030

Dear John, I was given stock options as a bonus several years ago, and I was required to "exercise" them in 2009. I have a receipt showing the estimated price at exercise, broker proceeds, grant price/share, taxable amount, tax rate, estimated tax, and net income. At the bottom it says that local payroll will pay the taxes and distribute the remainder as income. It looks like everything was taken care of, and the net proceeds were less than $1000 (woo hoo -- some bonus!). How do I declare this? Is it on the misc income section of the tax return? Thanks, Frank
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Hi Frank,

The simple answer is: "You have a long term gain which gets entered on 1040, Line 13"

The more informative answer:

Employers and banks have until January 31 to have W-2 and 1099 forms mailed. Brokerage houses, on the other hand, have until February 15 to have 1099-B forms mailed to clients -Your exercised stock options fall into this 1099-B category. The information from the 1099-B will be used to fill out 1040 Schedule D which when finished will be used to fill in Line 13 of your Form 1040.

Welcome to the world of stock options!

Good luck,
John

PS. I still have room on my client list if you need me to handle this for you. email me

Your Tax Question - 029

Dear John, The last few years my wife and I have ended up owing taxes to MI, but this year since it's over $500 we're being penalized for it being late. Last year we paid over $500 and weren't penalized. is this was a new law this year. I'm rather ignorant about taxes and rely on TurboTax to help me out. Thx, Chuck
---
Hi Chuck,

There are 10 civil and 4 criminal penalties imposed by MI but without seeing the forms and reasoning of your software program I am at a loss as to what your specific situation is. With that disclaimer I am willing to venture that the state acts like the federal in situations like this. When you owe Federal Taxes of over $1000 in a year you are required to pay Estimated Tax because simply put - the government will not wait for money. I am guessing that this is why you have been gigged for the $500 mark on your state taxes. Why this year and not last? I am not sure.

My best advice is to search your program's Help for the answer and you may even have to call the State Treasury Department. However, when it boils down to it, you may be further ahead to simply pay the fines than to hire a tax professional to solve this problem.

And oh yeah, consider fixing your W-4 with your HR department at work so that they can start taking more money out of your paycheck.

I hope this helps,
John

PS. I know a really good tax guy ;-) email me.

Your Tax Question - 028

Dear John, I filed my tax return nice and early this year because I thought it would be nice and straight forward this year. After I patted myself on the back and let out a deep sigh of relief for having filed my taxes so early, I got a form 1099-A from our former mortgage company because they sold our house which they foreclosed on. The 1099-A has the ending balance of our loan which was $100,000.00, and the "fair market value" of $50000. It states that "If the fair market value is less than the principal outstanding, and your debt is canceled, you may have cancellation of debt income. If the property was your main home, see Pub. 523, Selling Your Home, to figure any taxable gain or ordinary income." As far as I can tell, we're not liable for any additional taxes because we went through a bankruptcy and this was our principal residence. The best conclusion I can see is that I have to submit an amended return and attach form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness just to say that it was our principal residence. But I don't know what number to use as the amount. The full principal outstanding? The fair market value? Or the difference between the two? I don't know if you'll have a simple answer for me or if you'll really need to look at my stuff. If you want I can hire you to help me and I can bring all my stuff and come see you. Sincerely, Monica
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Hi Monica,

You're basically correct in what needs to happen.

1. Your taxable gain due to the Discharge of Debt is your loan balance (100k) less the fair market value (50k) which equals your taxable gain (50k).
2. But your gain is not taxable because it was you primary home. So you will report this discharge on a Form 982 explaining that it was not taxable for this reason.
3. Since you have already filed your 2009 taxes you will need to do a Form 1040X to explain why you need to include your 982. Since it does not affect your figures it will be a fairly straight forward fix.

I hope this helps,
John

PS. I am happy to help you further should you require my assistance. email me

Your Tax Question - 027

Dear John, I have heard that the Child Tax Credit that returns $1000.00 per child per family will be expiring this year - is that true? Thx, Clair
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Hi Clair,

Yeah, it's true. 2010 will be the last year for the $1000.00 credit and in 2011 the CTC will revert to a $500.00 credit. Unless Congress acts to extend it - that is the plan.

I'm not much of an activist but this is one of the issues that I think I will write Congress about. If you also want to write a letter, here is a list of suites that will help you do that.

1. How to write a letter to Congress.
2. How to find you congressional representatives.

And FYI - I've heard that it is good to sign your name in blue so that your reps know that it is not part of a mass mailing campaign.

Good luck,
John

Your Tax Question - 026

Dear John, I am a college student and I had a summer job. I did not make a lot of money and I was wondering if I had to file a tax return this year? Thanks, Jay
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Hi Jay,

From what I gather you are single. The IRS requires that you file a return if you earned at least $9,350 in wages. If you made less than that you are not required to file. However, I suggest filing because you may have some federal or state tax money that is due back to you and since you are a student you may have student loan interest to claim. Also, this year President Obama is giving you $400 for having earned income so you really do need to file.

Best wishes,
John

PS. I know an excellent tax guy you can trust. Email me

Your Tax Question - 025

Dear John, I have heard that the IRS actually taxes money that is made illegally. Is this true or was my leg just being yanked. Really, Ken
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Dear Ken,

I find it humorous that you would ask this question but the funniest part is that I actually know the answer to this question. According to the IRS, under the heading of Gambling Income (And Other Gains), gains made on illegal activity is actually a taxable event. However, I would have to have this verified with your legal counsel.

Best of luck,
John

PS. I know a Tax Attorney. Email me

Your Tax Question - 024

Dear John, I received a correction to my taxes and a check with extra money. Now that the IRS told me that I did not owe them as much as I thought, does this mean that the state owes me some money too? If so, how do I get that money back? Thanks, Heather.
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Hi Heather,

The answer to your question depends on the reason for the IRS returning money to you. If it was a simple clerical error then the IRS was just adjusting some wrong math or something taken from a wrong line. However, if you received money because your stated income was incorrect then the state likely does owe you some money. Contact your state's Treasury Office for more information.

Happy Hunting,
John

PS. I'm a pretty good shot if you need some help with this. Email me

Your Tax Question - 023

Dear John, I got an email a while ago telling me that I would have to pay a tax and register my firearms with the IRS. Something about since President Obama was not able to pass the anti-gun law that he wanted he decided to tax them. Is this true? Mike
---
Hi Mike,

I verified this with SNOPES and with the MASTER TAX GUIDE and this is FALSE. The only tax implications that you may have with a firearm is if you sell one, there is an excise tax per firearm that you should be aware of, but if you simply own the firearm you have no tax obligations. Thank you for the question.

John

PS. There is still room on my client list if you need a tax preparer. Email me.

Your Tax Question - 022

Dear John, My in-laws have retired to Tahiti but have retained their permanent address here in the states. I have the Power of Attorney and am responsible to make sure their taxes get done. I expect it to be nothing more than a 1040A form but they will not be here to sign their forms. Since I have the Power of Attorney can I just sign for them. Thanks, William
---
Hi William,

First off, since your in-laws live in another country they have an automatic 6 month extension for getting their taxes completed and filed. They will have to pay interest on any taxes due after April 15, but they will not be penalized for being late. You will need to file form 2350 to register the extension and you should check out publication 54 as it will have details about this situation.

And second, this is the first year that you do not need to send in a physical signature on a separate form to the IRS. Instead, if the return is submitted electronically their signature forms just need to be held on file for 3 years. All you would have to do is have them fill out form 8878 and form 8879 then fax them to you for your tax preparer's records.

Good luck,
John

If you need help with this, please email me.

Your Tax Question - 021

Dear John, I rented a house to a gentleman who has agreed to fix-up the rental house in exchange for rent. How will this affect my taxes? Thanks, Rich
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Hi Rich,

What you are describing is a bartering arrangement. This means that even if cash does not change hands, you have to include the value of improvements as income on your Schedule C. Also, your tenant will need to include the fair market value of rent in his income.

Best wishes,
John

PS. Act now and reserve a spot on my limited client list for this tax season. Email me

Your Tax Question - 020

Dear John, I recently became a waitress and I've been told that I have to keep track of my tips and that my employer will be automatically deducting taxes from tips that I am supposed to be making? Is this right? Just wondering, Sally
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Hi Sally,

The way I understand it, you are to keep a daily log of your daily tips and then report those to your employer. Keeping track of your tips is very important - especially if you "tip-out" to buss-boys and/or bartenders. When I worked at a restaurant many of the waitresses simply told the employer to stick $20.00 a day in their wages for tips but somehow I think the IRS has gotten wise to that practice. At the end of the year you will have to fill out form 4070A (found in publication 531) to determine the proper amount of tips that you owe taxes on.

Best of luck,
John

PS. I am a record keeping fanatic - if you need help I still have room on my limited client list. Email me

You Tax Question - 019

Dear John, This year is going to be a very interesting tax return year. I started the year being self-employed, in the middle I had a part-time job and the last half I was hired as an independent contractor (paid on commission). Is there anyway I could do my return without an accountant? Thanks, Colleen
---
Hi Colleen,

There are three sources of Income: Two of these sources will be directly addressed by your Net Profit (from your self-employment and independent contracting) on your Schedule C and then the wages (W-2) from your part-time job will be addressed on your 1040. The W-2 & Schedule C are pretty common & straight forward.

So yes, I am sure that you can do this without an accountant. (But in my biased opinion you should hire a tax professional - wink wink).

Hope this helps,
John

PS. Did you know that tax preparation expenses are deductible? Business tax prep fees are not deductible but directly reduce the Net Income on your schedule C. If you need help with this I still have room on my client list. ;-) Email me

Your Tax Question - 018

Dear John, Can I really deduct the costs of preparing my taxes? Thank you, Jill
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Dear Jill,

If you itemize your deductions on Schedule A then you can add into your deductions the fees of preparing your taxes. However, any tax expenses associated with a business are not deductible as those expenses reduce the Net Income of the business claim.

HTH,
John

PS. Now that you know that the fees that you pay for tax preparation is deductible, it makes my introductory price levels more appealing doesn't it? Email me

Your Tax Question - 017

Dear John, I paid off my house at the end of last year and the reduction in the interest payments make it unnecessary for me to itemize this year. Is there any other deductions for homeowners? Phil.
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Hi Phil,

Congrats at burning the mortgage note. To answer your question -If you cannot itemize your taxes this year but pay property taxes there is more money for you. You can get another $500 added to your Standard Deduction for paying property taxes (plus another $500 if you are married filing jointly). You can consider this a discount on your annual property tax bill. (can you say "Ca-ching?")

Best wishes, John

PS. You know? If you are in need of a tax guy, I still have openings on my client list and I would love to help you with that.. Email me

Your Tax Question - 016

Dear John, My mom just got a job at job as a WalMart greeter. She will be 89 years old but still she works and lives on her own . Her job is new this year and I was wondering what to expect as far as taxes go. Warmly, Pat.
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Hi Pat,

Since your mom lives alone she will file her own return. There are some things that I don’t have enough information to respond about but since she is over 65 she will qualify for the additional standard deduction of $1,400. Check out IRS Pub. 554 for more information.

I hope this helps,
John

PS. You know my client list also is open to seniors. Email me

Your Tax Questiion - 015

Dear John, Thanks for this great blog -It is like a car wreck that I don’t want to stare at but I can’t help myself. Here’s my question: What are the standard deduction rates for 2009 taxes? Thanks, Billie.
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Hi Billie,

Thanks for the kind words - It warms my heart to know that I can suffer tragedy for your viewing pleasure.

To answer your question, the Standard Deductions for 2009 are as follows.

• $11,400 Married Filing Jointly
• $5,700 Married Filing Separately
  
• $8,350 Head-of-Household
• $5,700 for Single filers.
  

Best wishes,
John

PS. There is still room on my client list if you want to take a ride - no worries, no wrecks here. Email me

Your Tax Question - 014

Dear John, Do you know how much money the IRS collects each year? Do you know where that money goes? Just wondering, Rich
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Rich,

Although your question is a bit off topic I want to field this one (because I actually know the answer to the question).

The IRS creates a Data Book each year and in it there is a table about all the money that they collect and from whom. In the 2008 Data Book there is the details in Table 1. The skinny is that the IRS collected a gross $2,745,035,410 in taxes and netted some 2.316 billion of that. Check out the Data Book for more details than you really wanted.

Also, I cannot verify the accuracy of the following, there is an image that illustrates where all that money goes. Check it out as well.

John

PS. I still have room on my client list for you - Email me.

Your Tax Question - 013

Dear John, For fun I am trying to understand how the tax system works. Do you have any pointers to make my quest easier? Pauline.
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Hi Pauline,

yes, I have a suggestion – forget the tax code and memorize the Periodic Table – That’s a little easier. Seriously though, I to think the tax system is fun to maneuver but it always changes because the Congress is always changing things. You’ve heard that “Death and Taxes” are the only two inevitabilities in this world - someone has commented that death if preferable because it is the only thing that does not get worse when Congress meets.

Visit the IRS website - it has a lot of good stuff. And if you have a little lawyering blood in you I suggest reading the U.S. Tax Code itself. And if that is still not enough for you you can read all the opinions and decisions of the tax courts that you want at Legalbitstream.com.

Have fun,
John

PS. Until you are comfortable doing your own taxes my services are available and there are still some slots open on my client list. Email me

Your Tax Question - 012

Dear John, I know that I will owe taxes this year but I really do not have the money, what can I do? Sincerely, Desperate.
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Dear Desperate,

You can do a couple of things. First, you can fill out Form 4868 for an automatic 6-month extension and then simply pay the interest on what you owe in October. Or, if you will have the money soon after April 15th you could file but leave it to the IRS to figure your tax for you - that way the IRS would bill you which would give you an extra 30-45 days to come up with the money.

In the worst case scenario (and I don't endorse this) you could borrow the money from your grandmother and never repay her - she is likely less intimidating than the IRS. ;-)

Best of Luck,
John.

PS. I would be happy to help you with the IRS part (not your grandma). email me

Your Tax Question - 011

Dear John, I do my taxes myself but I am never sure what form to use. How can I figure this out? Thanks, Martin.
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Dear Martin,

Did you know that 80% of people use a paid tax preparer or third-party software to prepare there annual tax return? Did you know that I am a paid preparer? (Just say’n). However, if you are going to do your taxes by yourself then I suggest reading IRS Pub. 17. Use this link to determine which form to use.

Best of luck,
John

PS. My services are not that pricey. If you hurry, you can become 1 of my 30 clients for this tax season. Email me