Your Tax Question - 078

Dear John, I was wondering if there is an age limit for claiming my child on my taxes.  Thank you, Jennifer
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Hi Jennifer,


Yes, Your child must be under age 19 (or under age 24 if a full-time student).  However, you may still be able to claim your child as a dependent relative as long as he/she meets some other IRS criteria as well.


Thanks,
John


PS.  Shoot me an email and I will be happy to help you with the Dependent Exemption tests.

Your Tax Question - 073

Dear John, What is the current deduction that I can take for miles that I drive? Larry

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Hi Larry,

The Standard Mileage Rate varies from purpose to purpose. Business purposes, Medical & Moving purposes, and Charitable purposes. For 2011 there are two sets of deductions to be considered. From 1/1/11-6/30/11 the rates are $.51, $.19, & $.14 respectfully. Then as of 7/1/11-12/31/11 the rates change to $.555, $.235, & $.14 respectfully.

For information about deducting mileage on your vehicle for business or moving you should refer to IRS:

Topic 510 - Business Use of Car or

Topic 455 - Moving Expenses

I hope this helps you.

Thanks,

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 - 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 - 063

Dear John, Is there really a tax deduction for my child's day care? Thanks, Wilma

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Hi Wilma,

There is not a deduction but a Child and Dependent Care Credit. (Credits are always better than deductions).

Here are the details.

1. The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

2. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

3. You – and your spouse if you are married filing jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or they were physically or mentally unable to care for themselves.

4. The payments for care cannot be paid to your spouse, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.

5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

6. The qualifying person must have lived with you for more than half of the year.

7. The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.For 2009, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

8. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.

9. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax.

There's a lot of little details but it is worth wading through them if you had care expenses. Please let me know if I can help.

Thanks,

John

Your Tax Question – 058

Dear John, I have recently gained employment that grants me a fairly large salary. I have heard of a thing called the “Pease” limitation of deductions for high wage earners. At which point in my income will this Pease limitation affect me? Thanks, Evelyn
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Hi Evelyn,

Congrats on the new job!

For high wage earners the Pease limitation was adopted by Congress to decrease the amount of the income deductions of higher wage earners. It was a 3% reduction on an amount over a specified AGI.

In 2001 the Pease limitation was scheduled to be phased out over time until in 2010 it was eliminated completely. It was set to be reinstated for 2011 but the 2010 Tax Relief Act that was adopted by Congress on December 17^th, 2010 eliminated it all together for another 2 years – until December 31, 2012.

So I say all this to inform you that the Peace limitation on deductions will not affect you until your 2013 taxes. We’ll see what happens then.

Enjoy,
John

Your Tax Question – 056

Dear John, I had a business trip to L.A. and while I was there I visited some friends and even did some sightseeing. My accountant told me that because I did these things that the trip is not deductible as a business expense. I don't really buy his answer, what do you think? Thanks, Pocko
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Hi Pocko,

Well, I am going to guess that you have had a misunderstanding with your accountant or I don’t have all the facts. From what you have told me I would say that yes, the business portion of your trip is expendable. Here’s how it works.

First, what was the primary purpose of the trip – business or personal? If business then you may move ahead , if personal then you are out of luck.

Was the business purpose of the trip more or less than 50%? If more than 50% then you are allowed to expense but your personal lodging, meals, and incidentals are not allowed, if less than 50% then you do not have a business expense at all.

So let’s say, for instance, you had 2 days business & 1 day personal (66% business, 33% personal). Your flight to LAX is fully expensed but your lodging, meals, and incidental costs must be reduced by the personal amount (33%). Then, your meals have to be reduced by 50% as only 50% of business meals are allowed to be claimed by the IRS.

You see, I expect that there is a communication break-down between you and your accountant because I don’t know of any real accountant that does not know how to properly expense business items. However, should your accountant be someone who should have retired 35 years ago and you find yourself in need of a new accountant – please don’t hesitate to call on me.

Thanks,
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 - 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

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
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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