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 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.