Wednesday, April 27, 2011

Record retention

Q.  How long do I need to keep copies of my taxes? JG, Virginia

A.  This is one of the most common questions I receive. Usually, 3 years is sufficient, however, I suggest 4 years as the majority of my clients file CA tax returns, and the statute of limitations in CA is 4 years. Be certain to check with the various states you may need to file in.

You will also need to keep records of asset purchases which will be reportable upon disposition such as your personal residence, all real property, and securities. The IRS has an excellent Publication 552 which is easy to understand. Also, be aware if you have a business and have employees, payroll records need to be kept for 7 years.

Monday, April 18, 2011

"T" Day

It's do or die day, and yours truly has lots of catching up to do with my own stuff.  All the taxes have been filed, as well as my 2 extensions. Now it's on to fun stuff like paying bills and financial statements. (Just kidding of course!)

Soon we'll be heading north to Alaska. I'm counting the days and will switch over to The Popeye Express for most of my blogging. I will check to see if any questions are forthcoming, but will concentrate on our travel blog most of the time.

Prior to the end of the year, I hope to expand this blog and add pages where I can post some of the articles I have written. This will address many of your questions in more depth. Hope to meet you on the road!

Saturday, April 16, 2011

Q.  I know I will need an extension to get my return prepared, but how do I know if I will owe anything? JG, Texas

A.  The only way you can know is to do the best estimate with the information at hand you can, then review the IRS tables, and subtract any withholding from wages, and or estimated tax payments made. I have found over the years, especially with complex returns, that I need to have 90% of it finished in order to get an accurate estimate. By the time I go to all that trouble, I'd just as soon finish the return and be done with it!

Friday, April 15, 2011

Time to prepare my own return!

Happy April 15th everyone. Yes, I know, the filing deadline has been extended until the 18th due to some obscure holiday observed in Washington DC today. Yours truly is going to actually file her own tax return and a few extensions. So, I'm taking the day "off" to get this finished. No waiting for IRS servers for me! Hope you all had a great filing season and that you more or less learned what you needed to know. I'll get back to those questions ASAP, so keep them coming!

Thursday, April 14, 2011

Commentary

I've been receiving several inquiries regarding depreciation of RVs, so here is my opinion. First, you must legitimately use your RV for business. Second, you must be able to support and document the business usage. Only when you have the percentage of business use, can you make an informed decision as to what type of depreciation may be appropriate in your case.

Many times in the rush of taking advantage of favorable tax treatment, people opt for accelerated depreciation. This is fine, however, my feeling is to take a larger view. So often, RVs are used a lot at first, then after the bloom has faded, the usage drops to well below 50%.

If you first opt for accelerated depreciation of any type, you must remember two things: (1) When the business usage falls to below 50% you will need to report depreciation recapture. (2) If you dispose of the property prior to its useful life, you will also need to report depreciation recapture.

So what exactly is depreciation recapture? Simply the excess of depreciation over what it would be had you taken SL (Straight Line). In plain english, let's say an asset has a recovery period of 5 years, and the cost is $10,000. In SL depreciation, you would depreciation 20%, or $2,000 of the asset each year. But if you chose 200% DB (Declining Balance) with a half year convention, then the first year the depreciation would still be 20%, or $2,000, the second year $ 3,200, the 3rd year $1,920 and so forth.

The problem comes, as an example, when the asset is disposed prior to the 5 year recovery period. Let's say the asset is totally useless after 3 years. With total depreciation taken in 3 years of $7,120 the excess of accelerated depreciation over SL is ($7,120 - $6,000) or $1,120 which must be claimed as depreciation recapture, or income.

The other consideration is the category. Notice RV's aren't listed in the IRS tables of Class Lives and Recovery Periods. So, here you must use your best judgment. What type of vehicle best fits the size and weight of the RV under consideration? For big rigs, such as ours, I use the table for heavy trucks, which is given a 6 year life. Perhaps for an entertainer driving a Prevost, a Class Life for buses of 9 years is most appropriate. And for a typical gas RV like our old Fleetwood, possibly just using the mileage method would be best.

Whatever your decision, it is imperative that you be able to justify your position if and when an IRS examination should be held. I hope this will help guide you to the best decision for your situation.

P.S. PS. Since my original comment, depreciation has been disallowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Wednesday, April 13, 2011

Payment Options

Q.  When paying the IRS, are there any options available to me other than attaching a check to my return? I'm getting ready to go on a trip, and don't want to stick around to make certain the check cleared the bank, etc. PH, Pennsylvania


A.  If you are electronically filing your return, depending on the software you are using, there should be an option to have the funds taken out of your checking account electronically. In addition, you can now set up for electronic withdrawal of estimated tax payments. I have used this option for several years now and have found it to be quite satisfactory. In addition, the IRS website has an excellent Electronic Payment Options page from which you can choose. Just remember, that if you choose to pay by credit card, you will also have to pay a "convenience fee!"

Tuesday, April 12, 2011

How to pay?

Q.  I just received my tax return and find I owe about $2,000 more than expected. I understand I can apply for an installment plan, but that takes time and the IRS now charges a fee. Is there an alternative? HS, Kentucky

A.  What I tell my clients when confronted with a small amount due such as yours, to pay what you can with the 1040-V voucher. In approximately 4 - 6 weeks, you will receive a bill from the IRS with added interest. Often by then, you will have the additional funds, and will only be out the interest charged, currently 4%. Although this advice would most likely be frowned upon by the IRS, I can't think of a simpler or cheaper way to solve your problem. In theory, this could be done each time a bill appears. To my knowledge, as long as you keep paying, the IRS won't try to levy your wages or property. Good luck!

Monday, April 11, 2011

Extension please!

Tax Tip:  As mentioned in my last post, now is the time to file your extension. Waiting until next weekend is likely to be a disaster as the IRS servers will be totally overloaded. Note, the IRS Extension Form 4868 line 4 is where you need to estimate your total tax liability for 2010. Line 5 is for the payments made (this includes your withholding) and line 6 is for the balance due, if any, and finally, line 7 the amount you are paying.

Note in the past, if your estimate was more than 10% off, it rendered your extension almost worthless! Trust me on this, that last hour of effort can yield tremendous differences! I strongly suggest any tax due should be paid online to avoid late payment penalties.

Saturday, April 9, 2011

Running out of time!

Tax Tip:  Pressed for more filing time? Check out the IRS website for links to extension forms and other forms which may be of help. Don't forget about your state extension. Many states require their own extension forms, others honor the IRS form. Use the links to each state on the left of this blog to check any state you may need to file in. Please don't wait until April 18th to get your extension filed. The IRS servers will likely be clogged and you may not get your extension filed in time!

Friday, April 8, 2011

What is Bonus Depreciation?

Q.  Someone told me you could take 100% of the cost of a depreciable item this year. Knowing this, I included all my equipment purchases (small items like computers, printers, etc.) under supplies. My tax preparer now has asked me to send a detailed list of dates, items and cost for each item. I don't understand why I need to look all this up. It it's 100% deductible, what's the point? SS, Idaho

A.  Like most things, our tax laws don't take the easy way out. In order to take accelerated write offs either under Code Section 179 or as Bonus Depreciation, you must make an election to do so. This election is made on the schedule for depreciation (Form 4562) and for Bonus Depreciation, pertains only to purchases made between September 8th and December 31, on the 2010 tax return. Hence, your preparer needs all the detail information.

Tax Tip:  The 100% Bonus Depreciation extends through this year - until December 32, 2011. This may be a real tax saver for those of you who are business owners and may be able to take advantage of this. Unlike Section 179 depreciation, there are no limitations! RG, Idaho

P.S. Depreciation is no longer available for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Thursday, April 7, 2011

A (x?*&!) Royalty Trust what?

Q.  Honey, according to my broker, I have 5 ***Royalty Trust reports to include in my tax return.  I downloaded just one and it took me 15 minutes to find. Then, after reading through the 36 pages, I haven't a clue as to what I am supposed to do. When I called my broker, he told me to take it to my income tax advisor. I don't have an income tax advisor as I've always prepared my own taxes. Now what do I do? I still have 4 more to go!  MG, Indiana

A.  These trust types of income reporting are a real pain in the you-know-where. I had to do the same today and pro-rate the darn thing for the 4 days my client owned it in 2010.

Perhaps it's time to find a tax advisor-preparer who can help you with these. The issues are quite complex. The broker in question had my client in this "investment" for less than 60 days. It makes me upset to think he bought something in Nov. 2009 and sold it in Jan. 2010. If this investment was so wonderful, why sell unless you want to generate fees?

I advise my clients not to own any investment they can't explain to a 12 year old in less than 5 minutes. If you don't know what you own and what the income tax ramifications are, why own it? Perhaps you should find a new broker along with a tax advisor.

Wednesday, April 6, 2011

What if I already funded my IRA and the contribution is unallowed?

Q.  According to my tax preparer, I am unable to contribute to either my Roth IRA or my SEP. This really upsets me as I had already funded my Roth IRA. What do I do now? KF, Arkansas

A.  It's unfortunate, but there are times, especially in this economy, where if your self-employed income shows a loss, you are barred from making any type of contribution. Remember, you must have earned income in order to make any type of retirement contribution.

Your only recourse is to call your brokerage house and ask them to apply your contribution to 2011 instead of 2010. Hopefully, this will be a better year for you!

Tuesday, April 5, 2011

Seeking a new or better job?

Tax Tip:  With so many people unemployed, don't overlook Job Searching Expenses if you can itemize your deductions. Although they go under the section for miscellaneous deductions, and are therefore subject to the 2% of AGI (Adjusted Gross Income) limitation, they may add up.

These costs include resume's, postage, employment agency fees, advertising costs, career counseling, 50% of meal and entertainment costs, and any travel expenses directly connected with seeking employment, such as an interview in another city requiring an overnight stay. You don't have to actually land a new job to qualify for taking the expenses.

You cannot be seeking a job in a new career field; it must be in your same occupation. You must also be currently employed or recently unemployed, and it cannot be your first job out of college. Good luck!

Monday, April 4, 2011

How does an extension impact your SEP?

Q.  I want to contribute the maximum to my SEP-IRA, but my preparer is putting my tax on extension. How can I figure how much I need to contribute by the April 15 deadline?

A.  Fortunately, only Traditional and Roth IRA's need to be funded by April 15th for a 2010 contribution. SEPs, SIMPLES, and the various types of other retirement plans can be funded when the tax return is filed, but not afterward! This insures you will be allowed to contribute the maximum amount. I always suggest that clients needn't wait until the last possible moment. Generally most of us have an idea of what we can contribute, so why not make the majority of the contribution in January, and then contribute the final amount by the filing date. This allows your retirement funds to grow for a longer period.


Tax Tip:  There is nothing that says you can't fund your 2011 IRA right now. Why wait until next year when you can have your investments grow as early as possible. I suggest my clients fund their IRA accounts in January of each year.

Saturday, April 2, 2011

What is a K-1 for an IRA?

Q.  I just received a K-1 form in the mail but I already filed my taxes and got a refund. What I don't understand about this K-1 is that it says it's made out to my IRA, and is listed as an exempt organization. I didn't think I had to file taxes for my IRA. What do I do now?  FS, Montana

A.  You are correct. There is no reason to do anything about it. You can either file it with your investments within your IRA or file it in the round basket. I do the latter! All these reports accomplish is to confuse people and cause more stress - something none of us need!

Friday, April 1, 2011

How to calculate Sales Taxes when a move is involved

Q.  We want to take advantage of the sales tax deduction, as our state has no income taxes. The problem is we moved 3 times last year to different counties and the sales tax rate differs by county. Is there an easy way to do this, or do I just make an estimate? FG, Texas

A.  You're in luck! Believe it or not, just this week I had a new client come in where there were no state income taxes paid, and I wanted to use the sales tax deduction. This client moved late last year, from one county to another. Taking a chance, I used the IRS Sales Tax Deduction Calculator. It couldn't have been easier. Simply start on this link by hitting the "continue" button located on the lower right, and follow instructions. You can put in moves, along with dates, and the zip codes involved, and finally, the right answer pops out. I printed out the answer and put it into my clients file for future access if necessary.

Thursday, March 31, 2011

Drowning in paperwork!

Q.  Honey, I seem to be drowning in paperwork - specifically the supplemental reports the brokerage houses pile on us. Do I really need this stuff or can it be tossed? HS, Oregon

A.  Right now, I feel the same way. The basket marked "for the shredder" looks mighty tempting, but regrettably, all this stuff is necessary. Case in point: Do you pay foreign taxes on your investments? If the answer is "yes,"  when you figure the credit on Form 1116, you will need to plow through all that data to arrive at the investment income, by type, for only the securities which paid foreign taxes. I still don't understand why the brokerage houses can't do a better job of separately stating the income earned only by foreign investments, but that's what my clients pay me for, and it's my job to figure it all out. Keep the rollers on your adding machine inked and keep the paper roll full.  Happy taxing!

Wednesday, March 30, 2011

Just how safe is it?

Q.  I'm a little concerned as my preparer suggests that I have my estimated tax payments automatically withdraw each quarter. Just how safe is this? I don't want to give the IRS too much information. They've taken enough of my hard earned money over the years! JP, California

A.  Many of our viewers will commiserate with you! From a practical standpoint, however, it is quite safe (I do this myself) and you don't need to worry about giving the IRS or any state taxing authority too much information. They can get any and all information by court order anyway.  If like my husband and myself, you travel around this great country in your RV, it's nice not to worry about making estimated tax payments on time; and if you normally make payments on line, and can't get a signal or are in a weak area, you run the chance of being late. Rural mail boxes aren't a great idea either. Try it - I think you'll like it!

Tuesday, March 29, 2011

Filing Married Jointly or Separately?

Q.  I would like to take advantage of filing my wife and I separately between two states, as we each have homes in the two separate states, and we each would like to keep them as residences for as long as possible. What do you think? DP Colorado


A.  Filing Married Separately will likely put you both into the state's highest tax rates, and you will arrive at each state's highest brackets sooner rather than later. Then you have a challenge, depending upon which states you are considering, (and it can be a real headache) if one of them is a community property state and the other is not. I would suggest making an appointment with an income tax professional right after the filing season rush to do some serious tax planning for 2011. Depending on circumstances, you may or may not have a choice for 2010. If in doubt, put your tax returns on extension for 2010 until you can get this issue ironed out. Good luck!

Monday, March 28, 2011

Net Operating Losses

Q.  In a discussion of taxes the other night, net operating losses came up. What are they?  SH, Alabama

A.  I'm over-simplifying, but on your individual tax return, if your business expenses exceed your business income, you may have a net operating loss. Generally, you will almost always have negative Adjusted Gross Income when this is the case. There are special forms to fill out to properly compute an Net Operating Loss (NOL), and elections need to be made if you want to carry these losses forward rather than backward. This is definitely not a do-it-yourself tax return!

Saturday, March 26, 2011

Is all this trouble worth it?

Q.  My dad told me to be certain to keep track of all the reinvested dividends on the AT&T stock he gifted me about 8 years ago. He keeps asking me if I've kept records, and I must admit, at first I did, but then stopped as I have no idea why I need to go to this trouble. Is there a reason I really need to do this? JF, Nebraska

A.  Yes, because each time you reinvest a dividend, you are re-purchasing the stock. For example, let's say your gift had a tax basis of $5,000 when he gifted the stock to you. Let's say you decide to sell the stock this year, and you receive $7,000 for the shares. On the surface, that would seem like a gain of $2,000.

However, AT&T has paid a dividend ranging from $0.33+ cents a share to $0.43 cents a share since 2005. Each year, for each 100 shares owned, you would have received and paid an additional amount ranging from $132 to $172 in reinvested dividends. Using an average of $152 for 5 years = $760.  This increases your cost basis from $5,000 to $5,760, making the gain on your sale $1,240 instead of $2000.  If you are paying a 15% capital gain, the savings in tax amounts to $114. 

I realize my example is overly simplified and I didn't go back 8 years, but I think you can see the importance of keeping track of all re-invested dividends for any securities you may own.

Friday, March 25, 2011

What's the big deal?

Q.  Last year I refinanced one of my rentals and my personal residence. My preparer wants me to send her a copy of the escrow settlement statement. I gave her the settlement fees. Why does she need to see the actual document?

A.  Very briefly, there are items included in the escrow settlement fees which may not be currently deductible. As an example, if you refinanced your loan for 15 years, the points you paid, if any, must be amortized over 15 years on a re-fi. The rules differ for the type of loan and type of property.

Another reason I ask for escrow settlement statements is to have copies for when the properties are finally disposed. I had one couple who made 4 major moves in the US and finally disposed of one of the properties. I found 13 escrow settlements which pertained to this one property which had long been forgotten about and partially lost by the movers. How happy do you think they were when I pulled out every re-fi and was able to increase their cost basis by several thousand dollars?

Tax Tip:  Very few of those pesky costs to re-fi are deductible in the year of the re-fi. They are deductible, however, when you finally dispose of the property. This can add tens of thousands of dollars to your cost basis, so be sure to save them until you sell the property!

Thursday, March 24, 2011

Charitable to whom?

Q.  Last year I donated $10,000 to the University my grandson attends to help with his tuition. This can be deducted as a charitable donation, right? CJ, North Dakota

A.  Well, you were indeed charitable to your grandson, but not to the University as you specified your donation as tuition. The gift you made to your grandson has no income tax implications. Sorry!

Wednesday, March 23, 2011

Making sense of a 1041K-1 Form

Q.  I gave my preparer all the proper documents for the preparation of both the trust return and my individual return. For the life of me, I can't figure out how the figures from the trust return correlate to either the 1041 K-1 form or to my individual return. I never seem to be able to get a hold of my CPA, he's always with a client. Can you help? AJ, Arizona

A.  Trust returns are a unique kind of entity, in that they are not treated the way an individual tax is. For example, you are allowed to deduct the expenses related to the trust directly from income. Additionally, you are allowed to allocate the net income to have expenses offset the highest taxable income first. No other tax return allows us to do that!

I realize how busy your CPA is, and suggest you make an appointment for after April 18th this year. He or she should be happy to review it with you and answer any remaining questions.

Tuesday, March 22, 2011

A lost opportunity? Perhaps. . .

Q.  At a dinner table discussion last night, I learned that if I roll my traditional IRA into a Roth IRA, the limitation on Adjusted Gross Income has been lifted and I can defer the payment of the tax over the next 2 years. I'm seriously considering this. What do you think?

A.  Your dinner table conversation was half true. It is true the AGI limitation has been lifted, which is really good news for many, many taxpayers. The half truth is the deferral of payment of the tax was a one time opportunity only for those rolling their IRA's over to a Roth IRA in 2010. If you choose to do so this year, (which if feasible for you considering the extra tax burden) you will need to adjust your estimated tax payments to cover the entire additional tax.

Having said that, a Roth IRA or now a Roth 401K, are the only vehicles available which allow us to invest in our retirement and have the earnings totally tax free, as long as the requirements are met. I highly endorse the opportunity to do so. With a little planning, even if you can only afford to roll over a few thousand dollars each year, the savings in tax 10, 20, or even 30 years from now could be enormous!

Monday, March 21, 2011

Better safe than sorry

Tax Tip:  Having a separate business entity such as an LLC, Partnership or Corporation is a great way to separate business from personal expenses if you have the type of business and degree of profitability to offset the additional costs of maintaining the entity.

These separate taxable entities live on paper, which means there is considerable extra paperwork involved in order to maintain them. One essential, often overlooked, is to have an accountable business reimbursement plan.
 
For a plan to be considered accountable, the following requirements must be met:

  • The expenses must have a business purpose
  • The employee must properly substantiate the expenses to the employer, and
  • In the case of allowances or advances, any amount in excess of the substantiated expenses must be returned to the employer.

Saturday, March 19, 2011

Unbelievable but true

This next question, although not of general interest, is so unbelievable that I feel compelled to relay it to you. Amazing!

Q.  Recently I received a Notice of State Income Tax Due from the Franchise Tax Board (FTB).  When I read the fine print, it seems I am being penalized for an Other Liability Code 4, whatever than means. Can you explain?  MJ, California

A.  As luck would have it, I also had a client come in with one of these letters. The short answer is you are being penalized for sending the FTB a check instead of paying online! Here is what happened to a client of mine.

She authorized the FTB to take around $90,000 in estimated tax payments directly from her account. During the course of the year it became apparent to me she would be grossly under-withheld, so I had her send in another $100,000 to the FTB. The infamous Notice of State Income Tax Due letter together with a penalty arrived and she paid the penalty.

This week, the actual notice, rather than the faxed copy previously received, arrived on my desk. When I found the code and turned the letter over, Code 4 is explained as a Mandatory e-pay penalty of 1%. Unable to believe what I was reading, and since my client authorized automatic withdrawals, I called the FTB to find that because my client paid the extra amount by check instead of paying online, she was being penalized.

Absolutely unbelievable! You would think a state as broke as California would be happy to get the money any way they could. Most states are so broke they are nickel and dime-ing us to death. Watch out - this may be coming to a state near to you in the very near future, if it hasn't already happened!

Friday, March 18, 2011

What is this?

Tax Tip:  Many of us have our investment portfolios handled by one of the big investment houses, or possibly an investment adviser in our local community. If this is the case and you have investments in a taxable portfolio (I'm not talking about your IRA, 401K, 403B, or within an annuity, etc) it is imperative for you to know what tax forms to expect. Now that March 15th has come and gone, many taxpayers are just now receiving what are called K-1 forms from investments, especially publicly traded partnerships. If you filed your tax return prior to receiving these documents, you may need to amend your tax returns.

Always communicate with your investment adviser as to what forms to expect and make certain they are all accounted for prior to filing your return.

Thursday, March 17, 2011

Family challenges!

Q.  Last year I sold my share of a RV Resort lot I owned with my brother. I wasn't using it and he wanted to buy my share. He was short on cash, so we agreed on some cash together with 1,500 shares of stock he owned, which he was able to transfer over to me. The difficulty I'm having is establishing the value of the stock, which was gifted to him through an UGMA account way back in the 80s from my parents. How should I proceed? RC, Vermont

A Without details and without researching court cases or IRS rulings, I would rely on the willing-buyer willing- seller concept. Since you actually sold a capital asset, it is a reportable taxable event. Whatever share of the lot you sold, your selling price would be the cash received together with the agreed FMV (Fair Market Value) of the stock received. I would ascertain the average trading price (assuming it is a publicly traded stock) as of the date of sale, and report that together with the cash, as your selling price. Hopefully you had the lot appraised at the time of the sale so you don't have below market issues to contend with. Since this was a personal asset, and if the lot was worth less than the purchase price, the transaction is reportable, but you won't be able to take any loss (assuming a loss is the result). If the result is a gain, your holding period will determine whether you have a short term or long term gain.

Wednesday, March 16, 2011

No Depreciation!

Q.  I was working on my tax return today and noticed the program gave me no deduction for depreciation. I have the RV at a cost basis of $128,000 and am using SL depreciation over 5 years. My business use this year is 31%.  Can you tell what I am doing wrong?


A.  Depending on when you put your RV into business use, and the annual percentage of business use (which will usually change slightly each year), it's possible you already used up the allowable depreciation.

Case in point is the tax I worked on this morning. The taxpayers came to me in year 4 of using their coach. The firm which previously prepared the return didn't communicate with my client and used 100% business usage for his coach. In reality, the business usage was in the 30+% range. When I set up the depreciation properly, I had to put in the depreciation previously taken. And yes, because it was way over-depreciated in years 1 -3, there was no deduction for depreciation on the coach at all this year.

It is possible to pick up additional depreciation in a future year, providing the business use of the asset in question goes up. My suggestion is to check all prior year returns to ascertain if the business usage was properly calculated. Without more specifics it would be impossible to say. Computer programs aren't perfect!

 PS. Since my original comment, depreciation has been disallowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Tuesday, March 15, 2011

Inherited Securities

Q.  My father passed away in February last year and I am his sole beneficiary. I sold several of his stocks in October, and now I need to report them on my return. How do I find out when he purchased them and how much in paid for them so I can report them on Schedule D? He's owned some of these stocks for decades! AA, Maine

A.  There are two possibilities: (1) if you were required to file an estate tax return for your dad, all the assets were re-valued as to either the date of death or 6 months thereafter, known as the alternate valuation date. This will be clearly reported on the estate tax return, if indeed, one needs to be filed, and if it has been filed. In this scenario, if the estate tax return has yet to be filed, you may have to file an extension for your return until the information is available to you.

If no estate tax return is required, then you simply get the average trading price for each security on the date of your dad's death, or the nearest trading day to your dad's death, in case he passed away on a weekend or holiday.

The good news is that there is no need to find out when he actually acquired each security and how much he paid for them. You simply report them as inherited and you will automatically receive long term capital gain treatment.

Monday, March 14, 2011

Record of Travel and Entertainment Expenses

Tax Tip:  One of the most frustrating aspects of preparing income tax information is gathering detailed records to maximize your deductions. This is especially true for out-of-pocket expenses pertaining to entertainment and travel.

If you haven't already done so, start today by using this or a similar chart to record contemporaneous expenses. If you have a taxable entity other than a sole proprietorship, each week, you should submit the record of expenses to your employer for reimbursement. If you are self employed, write a check either on your corporate, partnership, or LLC account to reimburse yourself. This alleviates the necessity of reporting these expenses on your personal individual return where they may be more closely scrutinized. The expenses will be a deduction at the entity level and will not need to be reported as income on your individual return.

Saturday, March 12, 2011

What is a Third Party Designee?

Q.  What is the difference between a Power-of-Attorney and the Third Party Designee indicated on page 2 of Form 1040 ? They sound like the same thing to me. JT, Alabama

A.  The Third Party Designee is very limited in scope. It allows the taxpayer to indicate one person who can exchange information about the return to the IRS, question the status or a refund or payment, request written tax information relating to the tax return, and respond to certain IRS notices. It is good only until April 15th of the following year. I've called the IRS twice regarding a return where I was appointed the Third Party Designee and found the IRS reluctant to give me almost any information without a Power-of-Attorney.

Friday, March 11, 2011

Where's my 1099-R for my IRA rollover?

Q.  I just received another email from my tax preparer wanting a form called a 1099-R regarding an IRA rollover. I sent all the paperwork I had to her. What do I do now? JB, Kentucky

A.  Thank your lucky stars you have such a diligent tax preparer! Conservatively, I spent half my day today emailing clients regarding missing paperwork. All of us need to remember that when it comes to IRS tax forms, the IRS has them, even though you may not! The IRS computers will match all the forms they receive to your tax return, and if it doesn't match, expect that previously mentioned love letter from the IRS wanting more tax, interest, and possibly a penalty.

I found out something interesting yesterday from one of my full-time RV clients who is very investment savvy. At least one of the big investment houses do not report tax free roll-overs on a 1099-R. I don't know the why or how, but apparently they feel since it isn't taxable, they aren't going to report it.

This is the exception rather than the rule. Most big firms issue 1099s for all types of items, taxable or not, simply because it costs them more to pull them rather than to mail them. Do yourself and your tax preparer a favor. Call the brokerage house that handles your IRA and ask them if they issued a 1099-R. If yes, possibly you can download it, or request another copy. At least you won't be guessing!

Thursday, March 10, 2011

Love Letters from the IRS

Q.  Honey, I'm in a total panic!  I just received a letter from the IRS wanting an additional $8,000+ dollars from a stock sale they say I didn't report in 2008.  I know the taxes were paid on the stock as the stock options were  included on my W-2 form. They also want interest and a penalty. What do I do now? MW, New York

A.  Get our all your paperwork for 2008, sit down with a glass of wine, and try to relax!  I really feel there is no need to panic. I'm assuming that you prepared the return yourself, so the first thing you need to do is to see if you filed a Schedule D reporting the sale.  If not, you will need to amend the return. Stock options can be tricky, and quite often are overlooked.

The good news is that the reason the stock options are reported on your W-2, is that you paid tax on the difference between the option price and the FMV of the stock when you exercised the option. This means that if like most people, you sold the stock the same day you exercised the option, your tax basis is the same as the value placed on your W-2. You should have paperwork from your employer telling you exactly what the FMV was that day.

On your amended return, the sale price should match the 1099-B which you will probably find somewhere in that paperwork. Your basis will be the FMV per share associated with the W-2. You should have virtually no gain and quite possibly a small loss.  Return the IRS letter together with the amended return, and that should clear up the matter.

Tax Tip:  Brokers are required by law to report the sale of securities on a 1099-B to the IRS. Never forget to include the gross proceeds reported with the resulting gain or loss on a Schedule D. Failure to do so will result in a love letter from the IRS as they have no knowledge of the transaction other than the gross sales price reported to them by the brokerage house.

Wednesday, March 9, 2011

Pension plans for the Self-Employed

Q.  My wife and I recently started a small business, and are thinking of setting up a small retirement plan. We have no employees other than the two of us. I'm not certain what the difference is between a SEP IRA and a SIMPLE IRA. Can you please clarify it for me? Thanks for your help. SW, Michigan

A.  Either plan will work fine for your business. Here are the basic differences:

  • A SEP (Simplified Employee Pension) allows an employer to contribute to employees' IRA's without the hassle of setting up a profit-sharing plan. The employee (or self-employed individual) must be 21 years of age, and employed at least 3 or the last 5 years. The contribution is the lesser of 25% of an employees' compensation up to, but not exceeding, $49,000. The employer must contribute to every eligible employee who earns at least $550 in compensation.
  • A SIMPLE IRA  pertains to every employee earning at least $5,000 in the preceding plan year. There are less restrictive eligibility requirements. The employees can make elective deferrals, and for those doing so, the employer makes matching contributions limited to $11,500 ($14,000 for employees age 50 or older), or fixed non-elective contributions equal to two percent of each eligible employee's compensation.
Note:  From the above, you can see a SEP allows you to contribute more to your retirement plan each year. As I am NOT an expert on pension/retirement plans, I only have access to the most basic information. ALWAYS contact a specialist in this area. Most brokerage houses, such as Fidelity Investments which I use, have excellent pension departments and can set these up for you at little or no charge. I call them each year prior to filing our taxes to find out the details I need to know to properly comply with current requirements. You should do the same.

Tuesday, March 8, 2011

Business Weekend

Q.  While attending a recent rally where I was a vendor, we were asked to give a presentation on the following Monday. How do I handle the Saturday and Sunday which I did not work? RJ, Texas

A.  This is known as a Business Straddling Weekend. As such, the costs associated with your weekend stay are considered business days, and therefore deductible - yeah!

Monday, March 7, 2011

Where is my refund?

Q.  I filed my taxes in mid-February and haven't received my refund yet. Is there a way I can check on it? KF, Tennessee

A.  The timing mostly depends on the manner you chose to receive your refund. If you opted for a paper check sent by U.S. Mail, expect a 6 - 8 week wait. If you chose the direct deposit method, the method I always choose for my clients, then it depends on the acceptance date of your filing. Usually, if the acceptance is received by noon on a Wednesday, look for your refund to be deposited a week, possibly two, on the following Friday. IRS direct deposit refunds always hit your bank account on a Friday, so keep checking. Refunds received by a paper check via the U.S. P.S. are always supposed to be delivered to your mailbox on Saturdays. If you feel your refund is overdue, use this link to the IRS.  Where is by refund?

Saturday, March 5, 2011

Where is my Tuition Deduction?

Q.  I am at a loss as to how to take the deduction for tuition and fees on my tax return. Form 8917 won't transfer to my 1040. I finally gave up and gave it to my daughter, but she says she can't use it because we take her as a dependent. What are we doing wrong? DE, Illinois

A.  Most likely you aren't doing anything wrong. In my practice, I find that most parents both work today, and with a Adjusted Gross Income in excess of $130,000 you start to lose the deduction. At an Adjusted Gross Income level of $160,000, the deduction is totally lost. If your Adjusted Gross Income is at or below $100,000 you may realize more benefit by trying the American Opportunity or Lifetime Learning Credits. Usually a credit will benefit you more than a deduction.

Friday, March 4, 2011

Incorrect Forms

Q.  I'm helping my grand-dad with his tax return, and I think I found a mistake. The person he leases his land to reported the rents on a 1099-R form. I think it should have been a 1099-Misc form. In any case, the software we're using refuses to put it on a Schedule E. Now what?  FR, Oklahoma

A.  You are correct in finding a mistake. The rents paid should have been reported on a 1099-Misc. Your best option is to contact the lessee and ask them to please void the 1099-R and reissue a 1099-Misc. That, however, is easier said than done. Barring getting a timely corrected form, these are the choices you have:

  • Ignore the 1099-R and just enter the correct amount on Schedule E
  • If the lessee says they will correct the form, ignore the 1099-R and wait until the corrected form arrives. You may need to put your grand-dad's return on extension pending arrival of the new form.
  • Enter the 1099-R on line 16b where the computer normally puts it, and then make an adjusting entry on line 21 as a negative amount to zero it out, and then enter the correct amount as above, on Schedule E.
Sometimes there are no good answers to a situation as this. I'm grappling with a similar situation now. Always be prepared to justify your actions by keeping excellent records and documenting whatever you do. Be prepared to receive a notice from the IRS inquiring about the missing 1099-R form if you choose to omit it and/or can't obtain a corrected form. As long as the total correct income is reported, you shouldn't incur any trouble from the IRS other than the inconvenience of having to explain the situation.  Good luck!

Thursday, March 3, 2011

How do I pay Self-Employment or Estimated Taxes?

Q.  Someone just told me now that I'm self-employed, I should start making estimated quarterly payments of my taxes to avoid penalties. When I was working my employer always withheld income taxes. How much do I have to pay and how do I make them? CR, California

A.  If you are no longer having any type of federal or state withholding, you indeed may incur a penalty if taxes are not prepaid. Currently you are allowed only to owe $1,000 with your timely filed 1040 without incurring a penalty. Since you are from California, the balance due must not exceed $200 without incurring a penalty. Each state has a different threshold, so be sure to check for each state you are required to file a return.

I can't tell you how much to pay without knowing all the facts about what you expect to make. Wouldn't it be nice to have a crystal ball! A good place to start would be with your 2010 return. Review each line item and ask yourself if the amount will be greater or less than you reported in the current year. Then, estimate the amount of self employed income you expect to make. Multiply your self-employment income by 15.3%. This will cover your self employment taxes, i.e. social security and medicare. Note: if you have a loss from your self-employment, no self-employment taxes are due.

The final part will be to estimate the amount of income taxes you expect to owe in the coming year. Add that to your self-employment taxes, and the result will be the amount of estimated taxes you are required to pay. You pay them on Form 1040-ES and in California, 540-ES on a quarterly basis. Remember, you only need to pay California income taxes. Currently there are no self-employed state taxes. The address to mail them to is right on the form. Alternately, you can now pay online. Go to the IRS website and the FTB website and follow the instructions.

Wednesday, March 2, 2011

I don't understand the answer to my question. What does it mean?

Q.  After getting our tax return back from our CPA, I noticed our partnership loss wasn't deducted from gross income. When I called him, he was busy, and wouldn't you know, when he returned my call, we were traveling in a dead area and he left a message on my cell saying we didn't get the loss because it was a passive activity. What on earth does that mean? CA, New Mexico

A.  The best way to answer your question is to give you a little background on our income tax laws. Many decades ago, you reported two types of income: (1) capital gains or losses resulting from the sale of capital assets, and (2) ordinary income, which was everything else.

Then, I believe it was in 1986, congress decided more taxpayers needed to pay taxes, and in their wisdom, added two additional classifications of income (3) portfolio income which is basically interest and dividends, and (4) passive activity income, which includes rentals, partnerships which you don't actively participate in, and a few other things as well. You can read all about the Tax Reform Act of 1986  , but I strongly suggest you refrain from printing the 1379 pages!

Since its passage, depending on your filing status and Adjusted Gross Income, you may or may not qualify to take a passive activity loss on your tax return unless you have passive activity gains to offset them. Lacking passive activity gains, your loss will be carried forward on form 8582 to the ensuing year. This can go on for years, until the property in question is disposed. The final disposition of a passive activity frees up accumulated losses to offset any gain which may result in the disposition. If the activity is sold at a loss, both the accumulated passive activity losses together with the loss on the disposition of the property can be taken. Whew - I hope I didn't make things worse!

Tuesday, March 1, 2011

Where or where did my 1099 go?

Q.  I just received a 1099-Int and a 1099-Div form for my grandson. Since he already filed his taxes, can't I just include the interest and dividends on my return?  RA, Illinois

A.  No, that is not possible. It may be possible for your grandson's parents to include it on their return, depending on the your grandson's age, his earned income, if any, and other considerations.

Tax Tip:  It's always a good idea to have all investment portfolio income mailed directly to the recipient, even if you were the investor. Many grandparents like to make small investments on behalf of their grandchildren, but at the end of the year, if there is taxable income which needs to be reported, it will save everyone a lot of time and inconvenience if these reports go directly to the address of the account holder.

Monday, February 28, 2011

Can you help?

Q.  I just arrived at my home park  & one of the ladies in my group mentioned she finally got her 2010 tax returns finished. My husband passed away last year and he always took care of our taxes. Someone suggested I contact you to see if you are available to prepare my taxes this year and in the future. JR, Florida

A.  First, thank you for the vote of confidence. Yes, I am available, but can only take on a limited number of returns, and the information would need to be in my hands ASAP.  The week is soon approaching where I can take on no further clients, and all the information will need to be complete. No missing K-1 forms, 1099s, etc. Please email me at the address on the header or use the comments section to contact me personally. Your comment will come directly into my email account and we can go forward from there.

Saturday, February 26, 2011

Can it be too good to be true?

Tax Tip:

I'm skipping the daily question as I have an important alert. A client sent me almost the exact version of yesterday's question for me to review. (1) His teenage daughter filed her first tax return on a very popular tax preparation software program. (2) In addition to her W-2 wages, she had a Form 1098-T, used to report college tuition, and (3) the 1099-B form reporting the exchange of mutual funds was omitted.

What I found really astonished me. The software allowed her to take the refundable American Opportunity Credit which she clearly did not qualify to take, instead of the nonrefundable Education Credit she was entitled to. I had to override my software and force fields to replicate her return so I could amend it.

My alert is this: don't assume because the computer says it's so, that it really is right! Please take the time and read the instructions for the form in question. Had she read page four of the instructions for Form 8863, she would have realized that she couldn't take the refundable credit.

Many young people are filing their tax returns with missing or erroneous information, and then about 6 months later receive a notice from the IRS along with a large bill. Most often, the IRS computers don't catch these errors at first pass. Then after much time has passed, the error does surface, and the young taxpayer is stuck with having to return the excess refund received, and in addition, pay interest, and if the error was large enough, pay an additional negligence penalty. No fun!
    

Friday, February 25, 2011

OMG! Another tax form arrived. Now what do I do?

Q.  As a family, we travel full time with our teenage kids whom we self-school.  As part of her "learning experience," my daughter who had  W-2 wages from a summer job, self-filed her tax return. Our mail just caught up with us, and she received a 1099-B form from the Kaufmann Fund. Apparently her grandparents redeemed shares from one fund and reinvested the proceeds into another. Can't we just ignore this since the funds were reinvested? It appears the fund was sold at a loss. If this needs to be reported, can we include this on our return?

A.  Investing in securities are not the same as investing in a CD or just putting money away into a savings account. By law, when securities are sold or exchanged, it is a taxable event. There is no such thing as a tax free exchange.

You daughter will need to file an amended return and include the Gross Proceeds on Schedule D. Most likely, even if your daughter did not have wage income and withholding, she would be required to file her own tax return, depending on the gross proceeds reported to the IRS.  Form 8814 can be used to report interest and dividend income of a minor, on the parents return, but not the sale of securities.

Tax Tip:  Every year I receive calls for "help" from either children, parents, or grandparents who have prematurely filed their tax return. I mean prematurely in the sense that in the rush to get that refund (all kids are certain they are owed a refund!) they overlook the possibility of other forgotten income reportable on forms which haven't come in yet. Brokerage houses legally don't have to mail these form to you until March 15th! It's a good idea to involve the entire family and do as we professionals do: get an income tax organizer or at the very least, a checklist of reportable items.

Thursday, February 24, 2011

What is the best method to expense my vehicle?

Q.  Having read your past posts on taking auto expenses, just when is it better to take mileage versus actual costs? BG, Idaho

A.  Excellent question! The first thing I would want to know is if you're really asking about a car or an RV. So I'll try to address both. Let's talk about actual expenses first. The depreciation tables for a car cover basically 5 years; really 6 years because you are limited to half or quarter year conventions on the first year. Then the actual amounts you can deduct are further limited to maximums set by congress. Then, if the vehicle is used less than 100% of business (which is usually the case), the amount needs to be prorated. With the hassle of keeping all  receipts for the year, many people are dissuaded from using the actual cost method. If the cost of the vehicle isn't covered in the years allocated due to depreciation limitations, you simply start the process all over again.

Now, if you talking about an RV, due to the high cost, it's usually the only way to go, unless of course, your RV costs no more than the typical new car. Typically because of the weight, you are not limited to the tables used by cars, so the depreciation can be very generous.That being said, I prefer to take a more conservative approach with the Table of Class Lives and Recovery Periods. Trucks and buses range from 4 to 9 years.

To use the actual cost method with an RV, you still need to keep all the receipts during the year and, of course, allocate the business portion to total usage.

Many people are keeping their cars and RVs a very long time. If you use the mileage method, there is no limitation as to the length of depreciation, so in the long run, it may be more generous over time. There are other items you can actually add to the mileage: (1) license fees, and (2) interest paid on the vehicle, if any, (3) parking fees, and (4) tolls. Another benefit is there is no receipt keeping, other than the 4 items listed in the previous sentence.

Remember, in either case, you should keep track of the actual depreciation taken in the cost method, or the implied depreciation using the mileage method for when you sell or otherwise dispose of a vehicle used in business. There are special rules for switching methods and some pitfalls if Section 179 and or accelerated depreciation is taken. Careful consideration should be used prior to deciding which is the best method to use.

PS Since my original comment, depreciation has been disallowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Wednesday, February 23, 2011

War of the Accountants?

Q.  While working at a recent rally, my neighbor in the next booth told me his accountant has his company reimburse him each month for his mileage expenses. My accountant insists I simply take the deduction on my tax return. Who is right? RJ, New Jersey

A.  Probably both of you! It isn't a matter of who, but what. That is, what kind of entity do each of you have. Here's how it can work.

To deduct business mileage, and or actual costs, every taxpayer must keep track of the who, what, where, why and when. In other words, we are required to keep contemporaneous records of who we saw, what the occasion was, where it was held, why, or the business reason, and when, or the dates.

Now you have options. If you are a sole proprietor and don't pay yourself a salary or have an accountable business reimbursement plan, which most small sole proprietors don't, it makes little sense to take money out of one pocket to put into another when you have already incurred the trip expenses. It is usually easier to simply take those expenses as a deduction when you file the Schedule C on your Individual Tax Return.

Conversely, if you have a separate business entity such as a Partnership, Limited Liability Company, or a Corporation, and you set up an accountable business reimbursement plan, your partners or employees can report their expenses to the business entity in the same manner as an individual would to the IRS. In this case, the business entity would simply reimburse their partners or employees on a regular basis for their out of pocket costs. The individual would take no deduction on their tax returns, nor would the reimbursement be required to be reported as income.

Tuesday, February 22, 2011

Where did my credit go?

Q.  I purchased a new Honda Insight last year and am hoping to take advantage of the Motor Vehicle Credit. What form do I need? LA, Kentucky

A.  The Qualified Alternative Fuel Motor Vehicle Credit under Code Section 30B in your case is taken on Form 8910. However, if you check out the US Department of Energy Federal Tax Credit for Hybrids, you will regrettably find that Honda Hybrids were phased out after December 31, 2008.

You may be eligible for the New Motor Vehicle Tax Deduction if you itemize your deductions on Schedule A, and you meet the Adjusted Gross Income limitations. The deductible taxes include state, local sales, and excise taxes on the purchase of a new vehicle with a purchase price up to $49,500.

Monday, February 21, 2011

Welcome Back!

And thank you for your patience. The "invisibility cloak" that surrounded this blog for the past four weeks serves as an example of how easy it is to make a mistake (several in this case) and not even know it!

My sincere thanks to  Nitecruzr of The Real Blogger Status and to my friend Christine of Geeks on Tour my mentor and the gal who taught me about blogging, for their invaluable assistance and patience with me. Thanks to them, I'm up and running again.

Now, send in those questions and I'll get back with answers!

Saturday, January 29, 2011

Inherent Depreciation

Q.  From previous questions, I understand there is an inherent amount of depreciation within the mileage rate pertaining to business use of a vehicle. In order to keep track of the basis of our rig, I need to adjust our purchase price by these amounts, but where can I find them?  LA, Virginia

A.  The IRS doesn't make this easy to find. I found part of your answer on Notice 2010-88, however they only go back to 2007.  My records indicate that from 1994 - 1999 the amount is 12 cents; in 2000 it's 14 cents; in 2001 - 2002, 15 cents; 2003 - 2004 16 cents; 2005 - 2006 17 cents. Fortunately I have a program that figures all this out. For current mileage rates see IR 2010-119.

Friday, January 28, 2011

Turning a Hobby into a Business

Q.  I'm an avid fly-fisherman & since it's relatively easy to tie flies on the road, I'm thinking of starting a business. Some of the guys at our campground are sure I can write off the motor home, but then I heard that this activity may be classified as a hobby. What do I need to do?

A.  Your concern is a legitimate one, and space prohibits a comprehensive reply here. Please go over to my article, just published, at AboutRVing. At the top of the right hand column, there is a link to my article IRS Tax Info for RVers. Currently under the heading Articles, it is the last link. When you get there, page 6 discusses the difference between a business and a hobby. This will answer many of your concerns. Good luck, and write back and let us know how you're doing!

Thursday, January 27, 2011

Residential Energy Credit for an RV?

Q.  There was a recent news item reporting on a residential energy credit for solar panels. Would this pertain to my 5th wheel? We bought 3 new solar panels last year, and it sure would be nice to get a tax credit to offset the cost. CB, Nebraska

A.  The good news is qualified solar-electric property does qualify under IRC Section 25D for a 30% credit. However, the news gets better in that the residence dues not have to be the taxpayer's principal residence. This means, if your RV is a second home, it can also qualify.

Currently there is no limitation as to Adjusted Gross Income (AGI) and the credit is effective through 2016. This means we all have time to upgrade our rigs! For more information, please visit the IRS site (Notice 2009-41) and also visit the Energy Star site.  

Wednesday, January 26, 2011

Tax app for Smart Phones

Q.  I thought I saw something on TV this morning about a new tax app for smart phones. Since we don't always stay in one spot long enough to set up the computer, this might be convenient to have. Do you know what it's called and where I can find it? BL, Illinois

A.  Just today I received an email from the IRS about their new app: IRS 2 Go Since I use an iPhone, I downloaded it immediately & got it up and running. It's a free app available from the App Store & other places listed on the link above. It claims you can check on the status of your refunds, sign up for enews letters from the IRS and access various tax tips. It looks like a winner to me!

Tuesday, January 25, 2011

Reporting the sale of your RV

Q.  After 15 years, it's time for me to buy another motorhome and after reading some of your posts, I realize there may be more to this than meets the eye. Basically, what are the income tax ramifications under these 4 scenarios:
  1.  I trade in the old coach?
  2.  I sell it privately?
  3.  I give it to my son? or
  4.  I donate it to charity? 
Your advice please. JE, Mississippi

A.  First, some general rules:  Anytime you sell a personal asset at a gain, it is a reportable and taxable event. Anytime you sell a personal asset at a loss, since you cannot take the loss on your tax return, most people don't report the sale on their tax returns. You didn't mention if you ever used your coach for business purposes, but if you did, you need to calculate the tax basis, and to the extent you used it for business, you will report the sale in the year sold, and will recognize either a business gain or a business loss.

  1. If you trade in the coach, the trade-in value allowed would be the same as the selling price. Also, on a trade in, if you use the coach for business, it is quite possible to have a tax free exchange, if the asset is sold at a gain. You wouldn't want to use this approach for a loss, which most often, will be the case.
  2. Same as #1 above other than here you would be actually receiving the sales price directly in the form of cash or a check.
  3. If you give the coach to your son, your remaining basis becomes his basis and under current law, you can gift up to $13,000 without having to file a gift tax return.
  4. If you donate your coach to charity, usually the charity will sell the coach and separately report the sales proceeds they received  to you. This is the amount you can take for a tax deduction.
Tax Tip:  If you ever use any part of your RV for business purposes, always keep track of your basis. You never know when just the right deal comes along and, on a lark, you decide to buy a new rig. Stay prepared!

Monday, January 24, 2011

Balance Sheet Blues

Q.  I'm trying to help my dad with his partnership tax return, and I see on the last page they want the Balance Sheet information. How do I get this from his checkbook and why do I need it? AG, Georgia

A.  Unless you have an understanding of accounting, trying to create a Balance Sheet from a check book is a pretty tough job! Your need  a double entry bookkeeping system. With that, it would be a snap. Depending on the circumstances, you may not need to enter the information on the tax return. Generally, if Gross Receipts are under $250,000 and Total Assets are under $250,000, you can opt out of putting that information on the return by using a check box.

Tax Tip:  If your business is an entity other than a sole proprietorship, more complex books and records are required.  Other than income tax concerns, there is one outstanding reason to keep a double entry bookkeeping system: designed over 300 years ago to avoid mistakes, it still serves this most important function.

Saturday, January 22, 2011

Volunteer Time & Services

Q.  I am a retired residential construction contractor and my wife just signed us up for a 2 week stint with Habitat for Humanity this summer. How much can we deduct for the value of my time and services?

A.  Unfortunately there is no deduction allowable for the value of time and services.  You may be able to deduct your travel costs if you need to drive to the location where the project is. You can also deduct any out-of-pocket expenses incurred in connection with the project. I'm thinking of some small tools, hardware, safety glasses, etc. but only if you are not reimbursed for these items. You must keep all receipts and a clear record of the items purchased and used in connection with this project. The deduction is taken on Schedule A. Of course if you take the standard deduction, no record keeping is required!

Friday, January 21, 2011

Work Camping Forms: 1099 or W-2 ?

Q.  I'll be work camping for the first time this season & I'm a bit confused.  Will I be receiving a 1099 or W-2 form?  BS, Montana

A.  That will depend on your contract. If you've been hired as an employee, you will receive a W-2 form. If you've been hired as an independent contractor, you'll receive a 1099 form.

Tax Tip:  Always read any employment or services type contract carefully. Most often, you will be receiving a 1099 form as many small employers don't want to pay for half of your self-employment taxes. This means, however, that you will need to pay them. Don't forget to estimate the amount of both income and self-employment taxes in order to make quarterly payments. You want to avoid penalties and interest for underpayment of taxes when filing your individual tax return.

Thursday, January 20, 2011

Travel Expense deduction, please!

Q.  I just received word that I will be starting a job in South Dakota. It seems to me that I should be able to deduct travel expenses since I will be leaving from Yuma the last week of April. How much can I deduct? MG, Arizona

A.  With the limited information you gave, most likely you won't qualify to deduct any travel expense. Basically, when you leave Yuma, you will relocate your tax home to South Dakota. For most of us, where we park is where we work, thus making it our tax home. If you were self employed and Yuma was your tax home, a temporary leave for business reasons in South Dakota might qualify. However, if you are working for someone else, your travel comes under the heading of commuting, which has always been considered a personal expense.

The better question to ask yourself is would you qualify to take the moving expense deduction? Again, that depends on your situation. Generally the move must be a minimum of 50 miles from your former workplace. Then you must work full time at least 39 weeks during the 12 months after the move. Self employed individuals must work full time at least 78 weeks during the 24 months after the move. There are a few exceptions, so check them out if you think you qualify. Here's a link to Pub 521, which includes all the rules and instructions for Form 3903.

Most RVers work part time jobs to supplement their income and will not qualify for any type of travel or moving expense. Perhaps it will help to think of it this way. Our elected US Senators and Congressmen can't deduct their travel expenses either. They must continue to reside in the state they represent, however, their tax home is clearly in Washington DC.

Wednesday, January 19, 2011

Books and Record keeping

Q.  As a new RVer just starting out in business, what type of records do I need to keep? FG, South Dakota

A.  Although not a tax question, this pertains to so many people, I decided to publish your question. Without proper records, it would be impossible to prepare a tax return. For everyone starting out in business, and even if you've been in business a few years, reviewing  IRS Pub 583 is an excellent start. When paging through this publication, keep hitting the next button on the bottom right of each page, as this pub is several pages long.

If you are any type of entity other than a sole proprietor, you  need to use a double-entry bookkeeping system. There are several good software products on the market.

Tuesday, January 18, 2011

Business use of a vehicle using the Standard Mileage Rate

Q. My previous tax preparer told me I need to keep track of my business mileage until I sell my vehicle. Since I take the standard mileage rate, I don't understand the need to keep track of it. Please explain, why? JA, Iowa

A.  One of the elements in using the standard mileage rate for business use of a vehicle includes depreciation.  As an example, if you drove your vehicle 10,000 miles for business usage in 2009 and used the standard rate of 50 cents, 23 cents of that 50 cents or $2,300 was considered to be depreciation. You would need to reduce the cost basis of your vehicle by the $2,300, the depreciation allowed in 2009.

Tax Tip:  When using a vehicle for business use, even if claiming the standard mileage rate, you must also calculate the amount of depreciation taken. You will need this cumulative figure when you dispose of the vehicle. Since most vehicles are used for both business and pleasure, when disposing of the vehicle, you need to prorate the sales (or trade-in) price of the vehicle and report either the gain or loss on the sale.

Monday, January 17, 2011

Filing requirement for CA Part-year and Non-residents

Q.  Last year we rented out our house and we left California. Will we still be required to file a California return even though we are no longer residents? JR, Nevada

A.  You didn't say when you left California, but most likely you will be filing a Part-year Resident return. The filing requirement for a CA part-year resident or a non-resident depends on the gross receipts. Since I would need to know your marital status, ages, and if you had any dependents, I can't give you a definitive answer. Use the links on the left to reach the Franchise Tax Board's on-line site.

Tax Tip:  California taxes on world-wide income. Once your taxable income together with the resulting tax is determined, the percentage of California source income to total income is used to calculate any tax due.

Saturday, January 15, 2011

New Requirements for Landlords

Q.  Since buying our motor home, we have rented our house while waiting for the real estate market to rebound. While having lunch the other day, the people at the table next to us were talking about all the new reporting rules pertaining to landlords. Can you enlighten me? JN, Iowa

A.  Apparently many RVers are also landlords, as I've had several questions along these lines. Here's the scoop. The Small Business Jobs Act effectively declared real estate as a business for information reporting purposes. Then, along came the Health Care Act, which is trying to eliminate the underground economy. Together, they're going to keep landlords very busy!

This means, that beginning in 2011, for any person or persons whom you pay $600 or more to in the course of the calendar year for services, you are required to report this on Form 1099.  Before actually handing over any money for compensation, have them fill out a W-9 Form. You may need to tell them, no form, no check! This is the new rule for this year. But . . . it gets worse:

Beginning 2012, you must report anyone you pay $600 or more to during the course of a year, (pertaining to your business) a 1099 form not only for services, but for goods and tangible property as well. This is a real headache! The only exception is for payments made by credit card rather than by check or cash. In other words, if the gardener won't accept your credit card, you need to issue them a 1099. Many businesses, of course, are hoping this will be repealed during the year, but I'm not holding my breath! Stay tuned.

Friday, January 14, 2011

Business Entity

Q:  My neighbor suggested that I put our 5th wheel into a corporation or LLC, thus turning it into a business, in order to write it off. Will this really work? BM, New Jersey

A.  And your neighbor's professional qualifications are . . .?  The ability to write off your 5th wheel isn't an issue of having a business entity. The only thing that matters is that you use it for business. If you aren't in business, there is no write off. And even if you do have a business, it may not meet the ordinary and necessary requirements set forth by the IRS. Remember also, that each state is different. A separate taxable entity, whether it be a corporation, partnership, limited liability company, family limited partnership, etc. exists only in the eye of the state. Each state has different requirements, and some states now charge a minimum tax just to have the entity in existence. Unless you are prepared to pay extra fees for the entity tax returns, licenses or fees by the Secretary of State, and extra fees for the bookkeeping requirements (you get the idea) . . . . keep it simple!

Remember, this blog is for addressing income tax issues, but quite often, legal ramifications get intermingled. If your neighbor happens to be an attorney, he may have had something in mind, but many attorneys give very sound legal advice, but fail to explain to clients the income tax ramifications and extra costs involved. This very topic came up yesterday when a client called regarding his real estate business. I suggested he contact his broker to check on their errors and omissions policy. We all want to limit our personal liability; but sometimes an insurance policy is the simpler and less costly answer.

If it sounds too good to be true, it is! Even though I do some work while in my rig, I don't write any of it off. I wouldn't pass the ordinary and necessary test, the record keeping is onerous and my job when we are on the road is to have fun!

Thursday, January 13, 2011

Motor Vehicle Department Fees

Q.  In trying to gather the information for our tax organizers this year, I see we may be able to deduct the fee we pay the Motor Vehicle Department. Do I really need to find the bill? Can't we just take the amount from our checkbook?  JB, Kentucky

A.  You really need to start searching for that bill.  The total amount of the check will include registration fees, special county fees, possibly weight fees, and a myriad of other charges by state and local governments. The only portion you can deduct is the actual tax on the value of your RV.

Tax Tip:  The above is true only if you itemize your deductions on Schedule A. If you take the standard deduction, remember, all taxes together with medical, interest, charity, and miscellaneous items are included.

Wednesday, January 12, 2011

Establishing your tax basis for depreciation

Q:  In reading the instructions for depreciation, I'm not quite certain what is meant by the lower of basis or Fair Market Value. Can you please explain? JE, Nevada

A.  When depreciating an asset, the beginning point is when you place the asset into business use. Thus, for example, you could start renting a house which you lived in for 10 years prior to taking off in your RV. The depreciation would start as soon the house becomes available for business use. With the declining real estate market, the depreciable basis would be the lower of the purchase price, less the value allocated to the land beneath the house, plus the capital improvements made during the years you owned the house; or today's fair market value, less the allocation for land value. Whichever of the two is lower, would be the basis for depreciation.

PS. Since my previous answer, depreciation is no longer allowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Tuesday, January 11, 2011

Depreciation recapture

Q.  I recently read an article about depreciation recapture. What is this? GN, Arkansas

A.  First, it helps to remember that income tax rates come in two flavors: Capital gains, and Ordinary gains. Capital gains have most favorable tax treatment, at the lowest rates. With that understood, depreciation recapture is the term used to recapture depreciation previously taken on an asset when the asset is disposed. Let's say you sold your RV for a total gain of $10,000.  Over the years, you took, as an ordinary expense, depreciation of $2,000.  Since assets held more than 1 year are considered to be a Capital asset, you would pay whatever the capital gain rate is in the year of disposal. However, because over the years you wrote off $2,000 at ordinary rates, you now must recapture the depreciation at ordinary rates. In this over-simplified example, since the total gain was $10,000, you would report a capital gain of $8,000 and an ordinary gain of $2,000. In real life and the current economy, the chance of having any type of gain on the disposal of an RV would be remote at best.

PS. Since my previous answer, depreciation is no longer allowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Monday, January 10, 2011

Non-Resident State Taxes

Q.  Apparently our investment adviser put us into some investment which included royalties in Oklahoma. Since my husband and I are residents of Texas, we don't need to pay state income taxes. A few weeks ago we received a letter from the state of OK requesting a state income tax return. My husband said to ignore it, but I don't want any trouble. What should we do? JG, Texas

A.  Every state having a state income tax has a filing requirement depending on Gross Income, your filing status, and your age. Quite often the filing requirement threshold for a non resident is lower than if a resident. I did look at OK and found that in 2009, non-residents with a Gross Income of $1,000 or more were required to file a return. Based on receiving a letter from OK, you probably are required to file a return. This doesn't mean you will owe taxes, but you need to file the return and meet the state's requirement.

Tax Tip:  Many states are sending out letters to non-residents requesting state income tax returns. Technology today has caught up with all of us. Every state knows the amount of gross receipts earned by any taxpayer. Many of my clients are shocked when they learn they now need to file in 2,3,4 or more states. This doesn't mean you will pay double tax, but double filing, if you will, is required. For residents of states which have income taxes, any tax owed to the non-resident state is usually taken as a credit on the resident state return, if taxes are due.

For your convenience, I have placed a link to the Department of Revenue or state equivalent for all 50 states on the left. If in doubt, check, as penalties and interest add up fast!

Saturday, January 8, 2011

Choosing a Lower Tax State

Q:  My wife and I just sold our house and are ready to hit the road and become full timers. We plan to leave California and their high taxes as soon as escrow closes. Which state would you recommend? RS, California

A.  There's more to life than taxes and your question goes beyond the scope of income taxation. Let me make a few suggestions. First, visit: RV Bookstore and do some reading. Two excellent books which I have read are Fulltiming, by Ronald Jones and Choosing your RV Home Base, by Roundabout Publications. There may be other books, publications and even DVDs which look attractive.

If you look in the left column of this blog, I have a link to the Department of Revenue for all 50 states. As laws change constantly, before coming to any final decision, check for yourself.

Second, every state is on the verge of financial disaster. The states with low or no state income taxes have the highest property, sales taxes, and motor vehicle fees. One way or the other, we all pay. At least you can have fun visiting all the states, talk to the residents, try it out for a month or two and then move on if it doesn't fit your needs. Isn't it great to be an RVer!

Friday, January 7, 2011

RV as Principal Residence

Q:  In Oct 2009 I purchased a motor home for cash.  I had read online that their were some deductions available as this is our only home.  I asked my tax preparer to research if I was eligible for a deduction on my motor home as a Principal Residence.  His answer was in the negative but I still am not entirely sure he was right.  I will take your answer as final!  AR, Arizona


A.  You may have read about The American Recovery and Reinvestment Act (P.L. 111-5) which was enacted to help stimulate the purchase of a new home as a Principal Residence. Since RVs are wheel estate and not real estate, they don't qualify - but I sure wish they did!


The usual deductions allowed are mortgage interest (which didn't pertain to you), personal property taxes, and sales tax, but only if you don't deduct state income taxes.The standard deduction may well have been higher than the sum of all the items that go on Schedule A. This should be easy for you to check.


Tax Tip:   For 2010 there is a new special deduction for sales tax on a new vehicle. You can fully deduct the sales tax paid on the purchase price up to $49,500. As an example, if you purchased your new RV in an area with a 9% sales tax rate, the tax on the first $49,500 would be $4,455, This could mean it may be worth the extra effort to file a Schedule A rather than taking the standard deduction as the combined total of your medical, interest, taxes, and charity may be higher than the standard deduction in 2010.

Thursday, January 6, 2011

RV Interest

Q:  I recall reading somewhere the interest I pay on my coach is tax deductible. I already deduct mortgage interest on our house, do we add this to it? RA, Mississippi

A:  Since you already have a mortgage deduction for interest paid on your principal residence, you may qualify to deduct the interest paid on your coach as a second home. Here the rules are quite complex, depending on the total of all mortgages, if you have refinanced your house, and how you used the proceeds on the refinanced loans over the years. The simple answer for loans taken out after October 13, 1987 is: If the total of all the outstanding mortgages is $100,000 or less, then 100% of your mortgage interest will be deductible.

Wednesday, January 5, 2011

Sales Tax

Q.  The salesperson who sold me my Trailer told me a new deduction was available to deduct the sales tax. I take the standard deduction and don't find a place to put the sales tax I paid anywhere on the return. Where does it go? RA, Arizona

A.  You received a partial explanation. This special sales tax deduction, which is limited to a purchase price of $49,500 was designed to stimulate car sales after the expiration of the successful Cash for Clunkers program. It applies only to the purchase of new vehicles and can only be taken if you itemize your deductions on Schedule A of your Individual Tax Return, Form 1040. There is a special worksheet to calculate the deductible amount on page 2 of Schedule A.If you claim any state income tax deduction, you will not qualify to deduct any sales tax.

If you purchased a used RV, you still may be able to itemize the sales taxes paid under general sales tax, Schedule A on line 5b. The IRS has an excellent worksheet for this purpose. Remember, you can deduct sales taxes only if you don't deduct state income taxes on Schedule A line 5a. Since many full-time RVers live in states without income taxes, this could be an excellent deduction if you itemize!

Court Case establishes rule

Yesterday's tax seminar brought to my attention a December 2010 ruling (Minick v. Comm., TCM 2010-12) that a taxpayer living in an RV was not considered to be away from home.

In an article I recently wrote regarding travel expenses, I mentioned that in my opinion, as an RVer, your tax home was where you parked. Remember, travel expenses can only be taken while away from home. In this case, a field engineer worked in Georgia and South Carolina and lived in his RV when working. Although he had a residence in North Carolina, he never returned to it for business purposes. His deduction for travel expenses were denied.

Tuesday, January 4, 2011

2011 Business Mileage Rates

Q:  Fuel prices here in California or going crazy! What is the business mileage rate this year? AB, California

A:  On December 3, the business mileage rate was increased to 51 cents per mile, up from 50 cents per mile. Not much of an increase, but if fuel prices surge to $4 or more per gallon as some people project, I would expect a mid-year mileage price hike. But . . . don't quote me on that & don't hold your breath!

I'm off to a tax seminar for the day. Will look forward to passing on any useful information for your RV lifestyle.

Monday, January 3, 2011

Welcome!

Welcome to day 1 of the 2011 income tax filing season.

This first question arrived over the New Year holiday:

Q:  I've negotiated a mileage reimbursement for the company I work for. How is this handled on our taxes? KF, Florida

A:  If you are an employee of this company, they should provide you with a periodic report in a format requesting the same information as the IRS would. In this case, you would turn over the report, and they would give you a check as reimbursement. When you file your income taxes, neither the reimbursement or expense would need to be reported as the reimbursement is not reported on your W-2 form.

If you are an independent contractor, most likely the reimbursement will be included on the 1099-MISC form you receive in January. In this case you will need to report both the income and the expense to "cancel" it out on your tax return.

Tip  As many small employers don't understand income tax codes and regulations, it's always a good idea to save a copy of all reports turned over to your employer or company who engages you. This way, if your reimbursement is included in your W-2, you have the information to report the expense on your tax return.