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!