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 - 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 - 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 - 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

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