Your Tax Question - 070

Dear John, What is the difference between tax-avoidance and tax-evasion? Sincerely, Hal
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Hi Hal,

Tax-avoidance is the legal use of the tax law to work your taxes to your best advantage while tax-evasion is doing things illegally that is not specifically allowed by the tax law to your own advantage.

An example of a legal tax-avoidance tactic is when a business bills a customer. If a cash method business does work for a person in December 2010 but does not bill that person until January 2011 to avoid getting the payment in 2010’s tax year. Then that is a legal method of avoiding paying taxes (for 2010 at least). However, if that same business just does not report the payment and pockets the cash – that is evading the taxes and that is illegal.

I hope that helps,
John

Your Tax Question - 069

Dear John, in 2010 I sold my home and bought a new one. I understand that I have to consider any profit on the house that I sold but I’ve been told that there are other tax considerations in the information found in the closing statements. Is this true? And if so, what do I need to know? Thank you, Jerry
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Hi Jerry,

Well the sale of one home and the purchase of another each have to be considered on their own but merge together in the itemized deductions of the Form 1040 Schedule A.

The profit from the home you sold needs to be realized against the amount that you had invested in that property (basis) plus closing costs. If you profited $250,000 ($500,000 married filing jointly) then you will need to report this sale to the IRS and pay the tax due. Plus, lines 510 & 511 on your HUD-1 are deductible amounts to you as well as line 901 if it is on the seller’s column.

As the buyer, so long as this is your main home and your loan was secured by the home itself then HUD-1 lines 106, 107, 801, 802, and line 901 (if in the buyer’s column) are deductions to you. The calculations necessary for these are quite cumbersome and you will likely need the aid of an accountant and tax-preparer. (Luckily I am both and know how to handle these adjustments huh?) Don’t worry, the extra costs are well worth the returned money to you.

Please let me know if I may help.

Best wishes,
John

Your Tax Question - 068

Dear John, Hey! Where’s my money!?!? When you efiled my taxes and you told me that it would take about 8 days for it to turnaround. Well, it’s been 8 days, where’s my money? Love, Mom PS. I’m serving pot roast on Friday night.
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Hi Mom,

The IRS was telling everyone that due to the delay of not accepting efiled taxes until the 14th of February, there was a bit of a jam up and that delays were to be expected. While I don’t expect this delay to be significant it may still cause some filers to have to wait a day or two longer for their returns. I’m sorry for your hardship.

See you Friday,
John

Your Tax Question - 067

Dear John, I just found out that my tax accountant will not be doing my corporate taxes for this year. Since they are due on the 15^th of March do you think that there would be enough time for you to prepare my taxes? Thanks, Jo-Jo
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Hi Jo-Jo,

Yes, there will be plenty of time to prepare your taxes. If we find that there is a problem and we need more time then we simply have to file form 1138 or 7004 and remit any payments that we expect to have to pay for an automatic 6 month extension of time. Don’t fret about it, I’ll take care of everything.

Thank you much,
John

Your Tax Question - 066

Dear John, I am trying to get me medical expenses together because I think I have enough of them this year (along with other things) to itemize this year. Can you please tell me what the conditions for claiming medical expenses are? Thanks, Jon
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Hi Jon,

Well, let me express that I am sorry that you had so many medical expenses this year – the medical deduction never really makes up for it the hardships so often involved with the medical problems does it?

There are a number of things that you need to keep in mind about the itemized medical deductions on your Schedule--A. First, in order to have enough to claim, your medical expenses must be more than your AGI. So, for instance, if your AGI is $100,000 then you will have to have had $7,501 dollars in med expenses to begin taking this deduction.

Your expenses are only those expenses made during the year and reduced by any amounts reimbursed to either yourself or directly to the care provider.

You may include qualified medical expenses for:

• yourself


• your spouse


• a person you claim as a dependent under a multiple support agreement
  
  • If either parent claims a child as a dependent under the rules for divorced or separated parents, each parent may deduct the medical expenses he or she actually pays for the child.
  
  
• someone who would have qualified as your dependent except that the person didn't meet the gross income or joint return test.

Deductions are allowed for expenses paid to prevent or alleviate physical or mental defects or illnesses.

Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. The cost of drugs is deductible only for drugs that require a prescription except for insulin.

Transportation costs that are primary and essential to medical care that qualify as medical expenses are deductible as well. And remember that any distributions from your Health Savings Accounts (HSA) and withdrawals from Flexible Spending Arrangements (FSA) are tax free if you paid qualified medical expenses.

I know it can be a bit confusing at times so if you should need any help figuring it out, please know that I am always accepting new clients.

Thanks,
John

Your Tax Question - 065

Dear John, Do you know why the advanced earned income credit was appealed? Thanks, Janice
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Hi Janice,

No, I am sorry, I do not know why the AEITC was repealed – just that it was. Here’s what it says on the IRS’EITC webpage from 1/4/2011.

The Education Jobs and Medicaid Assistance Act of 2010 signed into law August 10, 2010 repealed the Advance EITC. It will not be available to workers after December 31, 2010.

Individuals who received Advance EITC during any tax year must file a tax return to report the payments even if they owe no tax or will not get a refund.

Advance EITC, also known as AEITC, allowed certain workers to receive EITC in installments throughout the year, instead of a lump sum during the following filing season. To qualify for Advance EITC, an individual must have had at least one qualifying child. The amount of Advance EITC was limited to 60 percent of the maximum credit payable for a worker with one qualifying child.

I am sorry if you were one of the people who were depending on that advance for your livelihood. I know that it is a hardship on many.

Regards,
John

Your Tax Question - 064

Dear John, I have friends who adopted a child this year from Russia. Isn’t there a tax deduction for adoption? Thanks, Kelly
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Hi Kelly,

I would advise your friends to consult the agency that helped her arrange her adoption for specifics to their case. But to answer your question: Yes, there is a tax deduction for adopting.

Congress gives you a refundable $12,150 per adopted child tax credit. This means that should your tax liability be $5000 and you spent $12,150 in qualified expenses then the US Government will give you $7,150 back. But this is only the deal for this year and next year. Beginning in 2012, the credit reverts to just $5,000 and it is not refundable.

Thanks,
John