Saturday, May 26, 2012

Time to hit the road!

Tax season was stressful this year. It seems everyone came in late. As I write this I still have 4 taxes yet to come in. They, however, were told The Popeye Express is about to fire up her engine and head north. Any forthcoming taxes will be prepared on the road.

So, busier than I wanted to be, our trip is almost a month later than last year, when on this date we were on Whidbey Island WA getting ready to cross into Canada enroute to Alaska.

Thank you all so much for keeping those interesting questions coming and for your support. I sincerely hope you had a relatively stress-free tax filing, and that I was able to point many of you in the right direction.

So now my words will be recorded on The Popeye Express. Please log on and join us for our trip around the US. If plans go as expected, our travels will take us up to the Pacific North West, then east through Montana the Dakotas, Minnesota and to Oshkosh Wisconsin where we plan to be for the 2012 AirAdventure the EAA sponsers each year. From there we will head north to Montreal, then east to Quebec City, the Gaspe', New Brunswick, PEI and Nova Scotia. Sometime in late September, we will head back through Maine, then down the Atlantic Seaboard to visit our favorite southern city, Savannah, then down to Florida, and finally, the final leg of our trip back west to start the tax filing season all over again!

I expect to be online often, just having purchased a new Verison Mifi modom, so keep those questions coming as I will check from time to time. Have a safe and happy summer!

Saturday, April 21, 2012

About your Spreadsheet

Spreadsheets can be quick to learn, simple to use, and a real boon in keeping track of your expenses. BUT, they are not the same as a Profit & Loss (P&L) statement for income tax purposes.

I am happy when a client sends me a spread sheet for the business expenses, as I know they did a good job of record keeping. However, most often, they are a projection of cash flow, or sometimes, budgeting. These are vastly different purposes that determining profitability.

As an example, I received a spread sheet for a real estate rental which had all the expenses neatly categorized on a monthly basis, right down to the travel expenses, mileage, mortgage payments, furniture payments, etc. The only trouble with this system is travel expenses were deductible only to the extent of business mileage used during the year, which turned out to be 18+%, and of course, my client listed 100% of all car related expenses. The mortgage payments are deductible to the extent of mortgage interest allowable, not 100% of the payments made, and I found furnishings listed twice; once under the amount paid for furniture, and again as payments on the loan.

So, my client who thought he had a huge loss on the property, actually about broke even. Then, when you consider the passive activity rules, because he and his wife had Adjusted Gross Income in excess of $100,000 the phase out rules begin. Normally, as long as you qualify as an active participant in your rental properties, you can take up to a maximum of $25,000 in losses, to offset other income. But once your Adjusted Gross Income reaches the phase out limits, you can lose the ability to take any loss in the year in question.

In this case, a P & L statement would have shown them the approximate actual profit or loss on the property, rather than the cash flow expended on the rental. There are many excellent simple accounting programs available, and if you have the time and inclination, they will do a far better job of showing profitability. Your spreadsheet can still be used as a projection of cash flow if desired.

Thursday, April 12, 2012

Keeping tax related documents

Q.  How long is it necessary to keep tax records? Some people have said 7 years, others 4, and some 3. I'm not certain how long to keep my records. Can you solve this mystery for me?

A.  Generally, I advise my clients to keep records for 4 years, even though the federal statute of limitations runs out on the later of 3 years after the filing date or the due date of the return. This is because of the state statute of limitations, which may differ from the federal. I believe the 7 years pertains to payroll records, if you have employees, but the IRS says generally 3 years. Here is a link to an IRS Tax Tip which will have links to several of their other publications. I try to impress my clients with the need to keep records of assets which may be taxable or reportable when sold or otherwise disposed. This is especially true for all real estate transactions, stocks & other securities purchased and not yet disposed, and assets used in business.

Wednesday, April 11, 2012

What to do with a 1099-S

Q.  I just received a 1099-S form and I don't have any idea what to do with it. My husband and I filed a 1040A form in late January. We sold our house at a loss, have moved, and have since both been struggling to find work. We were told the loss from the sale of a personal residence was non-deductible, so did not include it on our tax return. Will we get into trouble?

A.  Trouble, no, aggravation, possibly. When the IRS computers process that 1099-S, they will expect to find it on your return. You need to report the sale to show the loss, even though it cannot be deducted. There are many instances where an item is reportable, but not necessarily taxable. This is one of them. Wait until after April 17th, then you can  download an amended 1040X along with Schedule D, and properly report the loss. This should save you the aggravation of receiving a notice from the IRS in a year or two with a letter asking for payment. All the IRS computers know is that you received $ XXX.XX. They have no idea what your basis in the residence is. This is why you need to report it.

Monday, April 9, 2012

Business Usage of an RV

Q.  Are there any requirements for writing off business use of an RV if you are full timing and working out of the RV?

A. I receive many versions of this question, and as I state on the left side of this web page, there are no established guidelines. We need Warren Buffet or Bill Gates to sell their houses and go to work full time in an RV, then maybe, we can get some guidelines!  Kidding aside, it takes much time and paperwork to establish business usage, unlike a car where you only need to keep track of business mileage. It is my feeling you must also establish the hours used for business on a daily basis. Remember, I am directing these comments to those of you who are self-employed only! Working for someone else is an entirely different matter.

Because each case is different, I suggest you contact me after April 17th with specific details. Then I may be able to give you some guidance as to what my other clients are doing!

Friday, April 6, 2012

CA non-resident nightmare!

Q.  I've been informed I must file a California non-resident return as I received a K-1 form with enough California source income to require filing. I'm struggling with a CA non-resident return, and I'm about to give up. Short of hiring someone which I can't really afford, do you have any suggestions?

A.  With 32 years of filing California returns, when it comes to the non-resident returns, I still sweat bullets! Why, because California usually does not conform to federal law, and although you start out with your federal adjusted income, the manual adjustments which need to be made can be mind boggling! It helps to remember that California taxes you on your world wide income, and then the prorations begin.

My best suggestion is to figure out approximately how much tax you would owe if you were a full year resident. Then, get an extension to file Form 3519 and pay the amount you would owe if a full year resident.

After April 15th, call the people at the Franchise Tax Board - see links to California on left side - and you should be able to get through. If filling out a non-resident return is the bad news, at least the people at the Franchise Tax Board are truly helpful and should be able to help you out.

Wednesday, April 4, 2012

IRS & You Tube

If you think you need more last minute help, the IRS does provide short videos via You Tube. Here is the link for the IRS site. If you're a do-it-yourself-er, you may find this to be helpful.

Tuesday, April 3, 2012

Busy, very busy

Sorry I've been behind a few days. It's really crunch time, and taxes just seem to keep getting bigger and more complex. The one I just finished today was too large to even fit into one folder; had to put the federal return in one folder, and then put the 4 state returns into another folder. We sent him over 2 pounds of paper, and that doesn't even include returning his original documents. These will go out in another envelope tomorrow.

Yesterday I had the privilege of visiting with a "full timer" who was passing through our area en route to Las Vegas. This gave me the opportunity to personally give him his individual tax return (I had sent him his partnership return weeks earlier) and to discuss some tax strategy for this year.

What fun it is to actually meet clients and enjoy each other's company, if only for a few hours! He and his wife have a very big rig, and I was able to direct him to a great parking area right off I-15 and we enjoyed dinner together at California's largest casino, about 35 miles from my office.

Meeting new friends and enjoying our travels is what makes RVing special. In this case, we exchanged experiences of our Alaska trip, as they are going back this summer. So, if you are ever passing our way, be sure to let me know. We would enjoy meeting you as well!

Wednesday, March 28, 2012

Limited Liability?

Q.  I loaned my sister some money last year to help her get started in her business. My main concern is protecting my family from liability. I understand we may need a LLC or Corporation. Can you help with tax returns? What is our best course of action?

A.  Unless you formed your corporation or LLC and ran your business through them last year, most likely you operated as either a loosely formed partnership, or your sister ran her business as a sole proprietor. I can't give legal advice, but it is too late to do anything after-the-fact. My best advice is to seek legal counsel immediately in the state your sister operated her business, find out what you can do legally, then get your books in order. You really can't prepare tax returns until all the above is accomplished.

Monday, March 26, 2012

Gas Tax Credit?

Q.  With gas prices so high, is there a credit we RVers can take on our tax returns? I was looking through the IRS forms, and I see Form 4136, Credit for Federal Tax Paid on Fuels.

A.  Great question, but regrettably, although we could all put this to good use, the credit applies only to fuels used on farms, and on off highway business use. In 32 years I have never had an opportunity to use this credit for someone on their tax returns.  We can dream, can't we? Thanks for asking.

Friday, March 23, 2012

Renting out a Room in your House

Q.  This past year I rented out two bedrooms in my house. I've been told I can write this off and possibly get a deduction on my income tax return. How can this be done?

A.  There are many considerations to take into count, and I cannot possibly address them all. I can tell you rules for renting out rooms in a house come under the Vacation Home Rules. Most of your expenses will need to be allocated, and you will not be able to take a loss to offset other income. I strongly suggest you download Publication 527 and faithfully follow the guidelines to stay out of trouble.

Thursday, March 22, 2012

K-1 Woes

Q.  I'm trying to help my dad who has a fist full of K-1 forms, all of which are checked as Publicly Traded Partnerships.  I am at a total loss as to where to enter some of the designations such as Box 13T* which is marked STMT, and Box 17A. What am I supposed to do with these amounts?

A.  Most people who invest in these securities own about a 0.00001020 interest in the partnership. Although these amounts represent your share, quite often they are insignificant. As to the Box 13T designation, you should have a supplementary report breaking down exactly what this amount is. Basically Box 13T is Domestic Production Activities Information, which may or may not even apply to your dad's return. As to Box 17A, that is an adjustment which belongs on Form 6251 for the Alternative Minimum Tax computation. Perhaps it's time to get a pro to prepare his tax if he indeed has many investments of this nature. K-1 Forms can be challenging, even with my 32 years of experience!

Wednesday, March 21, 2012


Several queries have been received regarding change of residence to a more tax friendly RV state. Before jumping the fence, I suggest you do your homework. As you know, almost every state is financially strapped and your state of residence isn't thrilled at the prospect of losing you, especially if you are a contributing member to their financial coffers! If any state has a lower income tax, or no income tax, than the state you're currently in, the state with the lower income tax rate has to make up the revenue source somehow. It is my experience, having prepared tax returns in multiple states, you will find either higher property taxes, higher sales taxes, and higher vehicle license fees. Also, just because you have moved out of your current state, don't think the state you left behind is finished with you! Believe it or not, here in California I've attended tax seminars where one of the topics is "How to Become a California Non Resident!"

Notice the link to all the states on the left. If you click on the link to each state, start with Filing Requirements for Non-Residents. Notice how many states want an income tax return even if you have only $1 of source income from that state. It will be a real eye opener. Remember, the technology now exists where you can (and will be) followed wherever you go. I could go on and on, but remember one thing: there is more to life than taxes, just be smart about any move you may be contemplating.

Tuesday, March 20, 2012

1099 Forms for Investments

Q.  I can't find a 1099 form for some investments that I know I had last year, as I'm holding the copy in my hand. I don't want to wait until next month to complete the filing of my taxes. Is there a way I can get this form?

A.  The obvious answer is to contact the institution that holds your investments and see if they mailed it. The deadline was March 15th, so it possibly could still be in the mail. Next, go to their website and see if you can download it. If you still can't find it, ask yourself if the investment was mostly cash. With interest rates at historic lows, it's quite possible your investment didn't generate enough income to require a 1099 filing. For interest and dividends, the filing threshold is $10. So, if the investment income generated was less than $10, you may not receive any 1099. Last but not least, could you have sold the investment last year? Look on your Schedule D to see if you divested yourself of the investments.

Monday, March 19, 2012

Foreign Tax Credit

Q.  Included with my 1099s for Interest & Dividends from my brokerage account, was Form 1116, Foreign Tax Credit. What am I supposed to do with this?

A.  Quite often, foreign taxes are paid on certain investments which are also taxed by the US. The purpose of the Foreign Tax Credit is to give you the opportunity to take this non-refundable credit on page two of your Form 1040, or to take a deduction for foreign taxes paid on Schedule A. You don't have to file this form if all the following apply:

1. The foreign taxes accrued or paid  during the year do not exceed $300 or $600 if filing jointly,

2.  The foreign income is of a "passive" nature, i.e. interest, dividends, annuities, rents & royalties,

3.  All foreign income is reported on Forms 1099-Int, 1099-Div, or substitute forms.

It can be a bear of a form to fill out, so hopefully you will meet the requirements above!

Friday, March 16, 2012

Reconstruction Work

Q.  I have been reinvesting my dividends in a mutual fund I've held for years. Now that it's sold, someone told me I need to review my basis to reflect not only the original purchase price, but also the reinvested dividends over the years. I've moved several times and no longer have the paper work. What can I do now?

A.  This can be a complicated issue, but first, let's address the obvious. I like to make extreme examples as they can be easier to understand. Given the poor state of the market in recent years, let's say you're in a 10 - 15% tax bracket, and the entire mutual fund when you sold it, was worth only $500.  In this case, I would simply claim a zero cost basis, and be willing to pay the tax on $500, even though you do have a cost basis, & might even have a loss on the sale. It's possible you won't owe any tax, or very little, and you can save yourself lots of work and grief of reconstructing years of paperwork. To my knowledge, there is no law that says you can't overpay your taxes.

Assuming paying tax on the gross proceeds is out of the question, the only choice you have is to try to reconstruct records. Fortunately, most mutual funds are sold by companies that keep such records. If you know the firm you purchased it from, I would start by contacting them and asking them to research your records. Dividends paid in a public company are public records, so if you know the number of shares you held each year, you can reconstruct the dividends. How much time all this will take and what the fees will be for the research is yet another matter, but this may be the only way to resolve your problem. Given we are now in the latter half of March, if the sale took place in 2011 and you need to report the sale on your 2011 tax return, you better consider applying for an extension!

Thursday, March 15, 2012

Joint Ventures between Husband & Wife

Q.  Can a married couple filing a joint return report self-employment income on a Schedule C instead of a partnership return in a community property state?

A.  If the husband & wife elect Joint Venture status, the answer is yes. There are a few conditions, however. The only members of the joint venture can be a husband and wife, they both materially participate in the business, and both spouses must agree to the joint venture. When only one Schedule C is filed, you must allocate the Self-Employment taxes between the husband and wife. It is my understanding  residence in a community property state is only an issue if the material participation rules are not met. Please check with your state of residence to see if this is allowable on the return filed for the state.

Wednesday, March 14, 2012

Reportable but not Taxable

Q.  Honey, I just received a 1099-R and I don't understand why I received this. I rolled over a small 401K plan into an IRA, isn't that a tax free transaction?

A.  Yes, the transaction you descriped is tax free, but it is a reportable transaction. I'm guessing that there is an amount in box 1, no amount in box 2, and a "G" in box 7. This is how a tax free rollover is usually designated. On your tax return, all 1099s need to be reported; but it doesn't mean it's taxable. Here is a link to the Instructions for 1099 Forms. Note the various codes used for Box 7 on page 9 of the instructions. The IRS computers match all 1099 forms. This is why they must be reported on your tax return.

Tuesday, March 13, 2012

Transferring an IRA Account

Q.  My husband and I are on the road & mail is a real hassle. I want to transfer my IRA to a different brokerage house, but my present brokerage house refuses to transfer the funds by wire transfer. Do you have any suggestions?

A.  Your best option may be to contact the brokerage firm you want the IRA transferred to and see if they can affect the wire transfer. Quite often that will work. If not, instruct your current brokerage to send the check via FedEx, UPS, etc. directly to the brokerage house you wish the funds transferred to. Having said that, I would first confirm with the new brokerage house if they will accept this. Any firm wanting your business will figure out a way to receive your funds!

Monday, March 12, 2012

Deductions for Home Schooling

Q.  My husband and I are full time RVers traveling and home-schooling our son. Can we deduct anything other than our interest, such as campground fees, utilities, etc.

A.  Living in an RV is just like living in an apartment or house. Other than "mortgage interest" and property taxes (personal property in the case of an RV) there are no special deductions. Relish in the knowledge you have your freedom, can turn the key and drive almost anywhere you want, and meet new people and have great experiences. Isn't that what RVing is all about!

Friday, March 9, 2012

California Non-Resident Return Filing

Q.  Recently I received a notice from the FTB (California) FTB 4600B requesting a tax return for 2010. I was able to download the filing requirements for a non-resident return (I now live in Kentucky), and page 3 for the instructions for 540NR Tax Booklet specifically lists California Gross Income limits, which for my filing status and age indicate no filing requirement. What do I do now?

A.  I had a client, now living in Idaho, who received the same notice. When I called the Franchise Tax Board on his behalf, I was told that it is the Gross Income together with California source income that triggers a filing requirement. To be clear, they are talking about the Gross Income on your federal return. If it is above the threshold limits listed on the instructions, California wants a return.

The best I can offer is that the instructions on the 540NR booket are very misleading. California is one of the states that taxes you on your world wide income. I suggest you go ahead and file a return. Most of the time, you will owe no tax; you just need to go through the hassle of filing a non-resident return. Trust me on this: California will make your life miserable if you don't file the return once a demand letter goes out, which is the case with the notice you received.

Thursday, March 8, 2012

Purpose of Form 8453

Q.  Each year I receive Form 8453 from my brokerage firm, but I don't know what to do with it. Can you tell me its purpose?

A.  By law, your brokerage firm is required to send Form 8453 into the IRS reporting the balance of your retirement account. So, the first purpose would be to check the balance reported to see if it agrees with your records. The second purpose however, is to help calculate the tax basis of any non-deductible IRA contributions and or Roth IRA contributions. You may recall that traditional contributions are usually deductible, and therefore 100% taxable when withdrawn at retirement age. If, however, you were unable to deduct all or a portion of your contribution, a portion of your withdrawal will be non-taxable. Most professional software programs keep this information, which is why we request them from our clients.

Wednesday, March 7, 2012

CA Self-Employment Tax Adjustment

Q.  I'm a resident of California, so I need to file both a federal & California return. I am also self-employed, and don't understand the adjustment CA is requesting for the deductible part of self-employment taxes. Can you help explain this?

A.  CA did not conform to the extra deduction allowed for self employment taxes on the federal return. Prior to this year, you were able to take a deduction of one half of the self employment taxes paid on page one of Form 1040. Currently, the federal deduction allowed is 57.51% of self employment taxes due. CA, however, only allows the deduction for 50% of self employment taxes due. Therefore, the difference must be added back to CA taxable income on Form 540 Schedule CA line 27.

Tuesday, March 6, 2012

Missing Social Security Form

Q.  I seem to be missing the statement I receive each year from Social Security. I know I need to report it on my taxes. Can I go online and download this form?

A.  Although you cannot download SSA-1099, you can request it online. Just go to the Social Security Administration website and request a new one. For your convenience, here is the link to request this form: Social Security Administration. They can mail another out to you in a week or so.

Monday, March 5, 2012

Tax Tip

At any given time, I have several taxes "ready-to-go" except for the dreaded K-1 information from Partnerships, LLCs, Fiduciary and S-Corporation returns. If you're wearing a path out to your mailbox looking for them, try going to the company's website and see if they are available to download. Quite often you can save yourself (and your equally frustrated preparer) a couple of weeks. If you sign up for automatic email notifications,  you may receive an email confirming the expected availability date of these documents. It's worth a look!

Thursday, March 1, 2012

Finding your Refund

Q.  I think I should have received my federal refund by now. Other than calling the IRS and waiting for an hour or so to get through, is there an easy way to find out?

A.  Fortunately, yes. Just go to the IRS Website and follow the steps as outlined.

Wednesday, February 29, 2012

Basis of Inherited Stock

Q.  My husband passed away a few years ago, and now I need to sell some of the stock we held. Do I use the purchase price as my cost basis? That was so long ago, how on earth would I ever find the paperwork, assuming it still exists?

A.  In the case of jointly held stock, if you live in a community property state, the stock is revalued as of the date of death. You use the average trading price of the stock on the date of death or closest date the stock was traded to the date of death. For example, if your husband died on a Saturday, if the market was open the previous day, you would choose that day. If you live in a non-community property state, then you will have to ascertain how title was held to the stock. In jointly held property, you may need to use your cost basis for your half of the shares, and the stepped-up-basis for your husband's half. Many families have grantor trusts which also impacts how title is held. If in doubt, it is also wise to seek counsel from an attorney familiar with such matters.

Tuesday, February 28, 2012

How to eFile when Attachments are Needed

Q.  I'm not sure what the difference between IRS Form 8879 and Form 8453 is. Can you explain?

A.  When eFiling your return, Form 8879 is almost always used. You use Form 8453 when attachments or explanations need to be submitted to the IRS. This would include items such as multiple listings of security transactions, release of dependents, etc. You can download Form 8453 and it will give you a list of what may be attached along with proper addresses depending on what part of the country you live it.

Monday, February 27, 2012

Filing a Return with No Tax Due or Refund Issues.

Q.  Now that I am no longer married, I am working on my own return. I find that I will not owe any taxes, and will not have a refund. Is there any point in filing a tax return?

A.  Usually I am not in favor or filing a tax return that is truly unnecessary. However, you mentioned that you are no longer married. I take it that you were recently divorced. If this is the case, there is one excellent reason to file a return, to start the statute of limitations running. Very occasionally I file returns for clients even when they have zero income to report. I do this especially in cases of divorce where I feel it important to establish a separate identity, especially if the marriage has been a long one, and there are possible innocent spousal issues. At least by filing a return, it does start the statute of limitations which then expires 3 years after the later of the due date of the return or the filing date. You didn't mention which state you are in, but you need to check with your state to clarify if filing with them is an issue. Good luck!

Saturday, February 25, 2012


I've had several inquiries of late on what to do when you discover your suspended passive activities seem to be overstated. Passive activities can be rental properties, investments, and even an endeavor where you don't meet the material participation rules. Usually it has been my experience that overstated losses occur when an incorrect method of depreciation was used, or someone inadvertently depreciated the cost of a property which included the land.

The "official" answer is of course, to amend past tax returns to ascertain the correct amount of a suspended passive activity.  I prefer a more practical method. If an activity is truly completely suspended, and no change will result in taxable income, I prepare a worksheet to show what the suspended loss should have been, and simply enter the corrected amount on Form 8582 (Passive Activity Loss Limitations) pertaining to the current year.

In my view, the IRS and or state taxing agency is not impacted as the taxable income does not change; I win as I don't have to spend valuable time amended prior returns that result in no change to taxable income; and my clients win as they don't have to pay me additional fees. Of course many practitioners would disagree with me as they want to generate additional fees.

Friday, February 24, 2012

Gifting a Time Share

Q.  I have a Florida time share that I cannot seem to give away. Is it possible to donate this to a charity and at least get a charitable donation for it?

A.  Possible, yes, practical - to be determined. You will need to retain a certified appraiser to obtain a written valuation of the property.  Then, depending on the Fair Market Value (FMV) and your cost basis, the type of charity, etc. you may or may not have a worthwhile deduction. Prior to going to this expense and trouble, I would first determine if there is a charitable organization willing to receive your gift. You may have a real challenge on your hands. Good luck!

Thursday, February 23, 2012

Keeping Track of Gross Receipts

Q.  I just filed my 2011 return, and in today's mail I received another 1099-MISC. Does this mean I need to amend my return?

A.  You should have reported all income received whether or not a 1099 was issued. You didn't say if this is the case, but if you included all income under gross receipts, for whatever purpose, the fact that a late 1099 arrived is not cause to amend a return. This is one reason why it is so important to have some type of accounting system that you will consistently use.

Wednesday, February 22, 2012

Choose the Right Valuation

Q.  In July last year, I started as a rep for 3 different companies selling advertising for various campground directories.  I purchased my car in 2010 and want to use the actual cost method as opposed to the mileage method. For depreciation purposes, I use the amount I paid for the car, right?

A.  Maybe. The rule is the lesser of the FMV of your car when you place it into service or your cost. Most cars depreciate right after you drive them off the showroom floor, so you may have to use an amount less than you paid for your car. Check the Kelley Blue Book or Edmunds websites to get an estimated value of your car when you placed it into business use. IRS auditors are quite savvy about this basic rule.

Tuesday, February 21, 2012

Establishing Electronic Payments to the IRS

Q.  Since we are now full-timers, it is often inconvenient to make estimated tax payments by mail. Is there an easy way to do this online?

A.  Yes! You do so by setting up an account through EFTPS (Electronic Federal Tax Payment System). The first step is to enroll. You simply fill out a questionnaire at their website, then the EFTPS will mail you your PIN number. This is a permanent number and needs to be kept in a secure place. Now you'll be set to make payments, view prior payments, and generally make all necessary payments to the IRS online. Use my link for easy access!

Monday, February 20, 2012

Room for More?

Q.  Are you currently taking on any new clients? I need help!

A.  At this time, I am happy to report that I do have room for a few new clients. My practice is now 32 years strong; with an aging client base, some have passed on, while others have retired and are no longer in business. So, if you are a good record keeper, and have a clean set of books, the answer is yes. My only request is that you contact me immediately so you can be certain of receiving timely service. April 15th will be here before we know it!

Friday, February 17, 2012

Balance Sheets Woes

Q.  My accountant says she needs both a Balance Sheet & a Profit & Loss Statement for my business. I keep my books on an Excel Spread Sheet. What is a Balance Sheet?

A.  Think of a Balance Sheet as a snap shot of your business on any given day. Basically it is a compilation of your business assets, liabilities, and net worth of your company. Most accounting software companies provide this information. Since you use a spread sheet, if you have a business entity that requires a balance sheet on your tax return, she may have to compile one from your bank statements, past tax returns, and other information she may request. If this is an ongoing problem, it may be wise to switch to a simple accounting program that can pull this information together for you.

Thursday, February 16, 2012

Q.  We lost our home in foreclosure last year, and are now happily full timers. I thought our worries were over, however, I just received a 1099-C in the mail for the amount of loan forgiveness, that is well over $175,000. Am I really expected to pay tax on this amount? We don't have that kind of money!

A.  There are 3 possibilities here: 1) If you also had to file for bankruptcy, you will owe no tax on this amount. 2) If you can prove insolvency, (see Form 982) you may be able to reduce the tax attributes as if it were discharged in a bankruptcy, and the one I like best, 3) If you truly had to abandon the property which was your residence and it was taken over by the bank, you may qualify under Code Section 121, the Qualified Principal Residence exclusion, assuming the property meets all the criteria for a qualified principal residence.

These issues are complex, need to be fully explored, and definitely are not for the self preparer. Find a competent preparer who is knowledgeable in these areas!

Wednesday, February 15, 2012

IRA Contributions limited to Earned Income

Q.  My daughter wants to start contributing to a Roth IRA.  Since she's in her early 20s and still in school, I will make the contribution on her behalf. She worked part time at her school last year, and earned around $1,850. I understand since she's under age 50, the maximum she can contribute is $5,000, but the brokerage house where I want to make the contribution isn't clear. Can you help?

A.  I'll try. Yes, normally the maximum contribution for a person under age 50 is $5,000. However, you can only contribute amounts originating from earned income. You will need a copy of her W-2 form, and whatever is in box 1, up to $5,000 will be her maximum contribution. From what you stated, it sounds like you will be limited to around $1,850. The law prevents us from making a contribution from investment funds.

Tuesday, February 14, 2012

1099 Requirement

Q.  I realize that I should have sent a 1099 for my rental to the company that did some maintenance as I paid them over $700 last year. Is it too late to file a 1099?

A. Yes and no. Yes, technically it is late to be sending your maintenance company the 1099 as it was due by January 31. No, it is not too late to file the 1099 with the IRS. You have until February 29th (Leap Year) to do this. One quick suggestion: Since you plan to send the 1099 to the IRS, I would send it to the recipient late. Any legitimate company will report all income regardless of whether a 1099 is issued or not.

Monday, February 13, 2012

Where is the check box on Form 1099-B?

Q.  I recently received my Fidelity 1099-B, but can't find the box that's checked to enter on Form 8949. What do I need to do now?

A.  I called Fidelity and spoke with one of their specialists. As luck would have it, the tax department people had already left for the day. As I understand it, Fidelity does not use a box, but lists by small code next to the Cost or Other Basis Provided, as to whether the cost basis has been reported to the IRS or not. For 2011, they are only reporting the cost basis of stock, if they have it. (Often stocks are transferred to a brokerage house and the basis is not provided.)

Currently, the only advice I can give is to check box "A" if the cost basis is provided, and on another Form 8949, you would list the stocks or mutual funds, etc. sold with the cost basis not provided. In this case you would check Box "B". If a 1099-B is not provided, you would then need yet another Form 8949 and would then check Box "C". If you are still in doubt, please call Fidelity at 800-544-4442 and speak to one of the customer service representatives.

Friday, February 10, 2012

What kind of accounting program?

Q.  Since it's still relatively early in the year, I've decided to bite the bullit and purchase an accounting program. Is one better than the other, and do I need a very comprehensive one, or will a simple program suffice?  I should add that I do consulting work, and occasionally bill for out-of-pocket expenses.

A.  Happy to hear that you've made the commitment to organize your business life. For the vast majority of people, the simplest accounting program will do. Most don't want to get involved with payroll and fixed assets. Let your tax preparer handle the depreciation.

The best advice I can offer is this. Most professionals don't care what type of program you have as long as you use it consistently! So often clients wait until the end of March & early April to send us their "stuff," and at that point, unless you are exceptionally organized, it is almost impossible to get out an accurate return by April 15.  So whether you use a simple spreadsheet, or one of the many off-the-shelf software accounting programs, start with the simplest one (and the least expensive!) program and go from there. Many programs now offer trial programs on line free of charge.

Thursday, February 9, 2012

Minimum Required Distributions

Q.  My wife just reminded me I will be turning 70 1/2 later this year, which means I will be required to withdraw from my IRA. For tax planning purposes, is there an easy way to figure out the actual amount I will be required to withdraw?

A.  Fortunately IRS Pub. 590 has all the information you need; and if you put your mouse over the link I provided, it will take you right there. It's a rather lengthy publication, but has loads of useful information. Note that for married persons with spouses 10 years or more younger, there are separate tables. Please be certain to choose the right table for your situation

Basically you find your age, read the factor on the right and divide the 12/31/xx balance of your IRA by the factor. As an example: Your age is 70 1/2 and the 12/31/11 balance of your IRA is $82,000. The factor is 17. Divide $82,000 by 17 and the answer is $4,823.53. That would be your minimum required distribution. Of course you can take more. The good news is banks and brokerage houses acting as the trustee of your IRA account will more than likely send you a notice of required distribution well in advance of the deadline.

Whatever you do, don't forget. The penalty for non-withdrawal is 50%!!!

Wednesday, February 8, 2012

IRS App Revisited

Tax Tip:  My many emails from the IRS included this link for the IRS2Go App. If you have a smart phone, it may be handy to have. One word of interest, if you sign up for emails and notices, expect to receive several on a daily basis throughout the year. The volume can be somewhat overwhelming!

Tuesday, February 7, 2012

Too much Information!

Q.  I noticed, when reading the instructions for one of the forms I was attempting to fill out, the instructions from the IRS said to also refer to 3 other publications. Why do the instructions refer you to yet more instructions?

A.  Good question! Our tax laws have become so complex, many answers aren't "black and white." There are many conflicting issues, and the IRS tries to point you in the right direction by suggesting you read more related material. This is one reason I have a loyal and (hopefully) grateful clientele! If you're dealing with a real complex issue, I suggest you find a competent professional to help guide you. Many tax returns definitely do not fit the do it yourself category. Even as a professional with 32 years experience, when the issues get really tough, I seek the opinion of my colleagues. I find their fees to be cheap insurance.

Monday, February 6, 2012

Unreimbursed Business Expenses

Q.  Someone told me I can deduct my out of pocket expenses that are unreimbursed by my employer. Quite often I take business contacts to lunch or pick up postage, etc. to take to the office. Is this true?

A.  Unreimbursed business expenses as you mentioned may be deductible if you itemize your deductions. The catch is it must be a requirement of your employment, be ordinary and necessary, and be substantiated on a contemporaneous basis. Other restrictions may apply, so seek competent advice as this is an area known for abuses, which the IRS just loves to audit.

Friday, February 3, 2012

State Links

Q.  I notice you have links to all 50 states on the left. A few of these have no state income tax. Is there a purpose for showing all 50 states?

A.  Although some states do not have any individual state income tax, most impose several other types of taxes. In fact, if a state doesn't receive revenue from state income taxes, be assured the real property, personal property, and state sales tax rates will be high. States need to general revenue somehow! If you don't pay one type of tax, ultimately, you will pay tax in an alternate form. Additionally, most of the states official websites have convenient links to other governmental related sites in their state. You may find a benefit you didn't know about. By the way, if your browsing, go to the link for South Dakota. They get my vote for the most attractive site!

Thursday, February 2, 2012

Receiving Social Security Benefits

Q.  I'll be 65 next month and am wondering when I can start receiving Social Security benefits?

A.  If my math is correct, you were born in 1947. To receive your full social security benefit, you will need to wait one more year. Persons born between 1943 & 1954 must wait until age 66 to receive full social security benefits. The Social Security Retirement Planner is an excellent online resource to help you plan. I suggest you use the actual Social Security website and become familiar with it. This is an excellent free resource. Take advantage of it!

Friday, January 27, 2012

Cost vs Basis

Q.  My tax forms keep referring to "basis." Isn't this the same as my cost?

A.  Good question! Quite often your cost and basis will be the same, but sometimes not. For example, when you purchase real property, your cost is increased by capital improvements, and decreased by the amount of depreciation taken, if any. For securities, your cost may be reduced by the amount of principal payments (if any) you receive in lieu of dividends. Although this is a super simple example, your basis in property usually makes common sense. If in doubt, call up your income tax advisor.

Thursday, January 26, 2012

Do I Need to File a Return in 2011

Q. I'm single, over 65, and have a small retirement and social security coming in. Do I need to file a 2011 return?

A. Filing is not required unless your Gross Income is $10,950 or greater. Remember, just because you are required to file a return does not necessarily mean you owe tax. Quite often exemptions and tax credits will reduce your tax liability to zero.

Wednesday, January 25, 2012

Deducting Mortgage Interest

Q:  I work and live in Texas full time in a 5th wheel RV as my one and only primary residence on a private lot. I pay about $1500.00 a year in interest on the loan. Is this interest deductible?

A.  If your RV is the security for the loan, then the interest would be deductible under the mortgage interest rules. Since you live in Texas there is no state income tax to consider. RVers living in other states may find their state of residence no longer allows this deduction, so please check with the state in question. Due to the dire financial situation many states find themselves in, more and more of our state deductions are being eroded.

Tuesday, January 24, 2012

State Use Tax

The final item worth mentioning prior to returning to the Q & A format is use tax. With revenues down in all states, one of the means utilized to increase revenue is with use tax. Some states have actually included it as a line item on the state income tax return. Most commonly, use tax results from on-line purchases made without the seller collecting state sales tax.

If you live in California, Kansas, Maine, Massachusetts, Michigan, New Jersey, New York, North Carolina, Oklahoma or Vermont, be aware these states now have a Tax Use Look-up Table. As a "Safe Harbor," you can pay the amount on the table based on your state adjusted gross income. Of course if you kept your receipts, you should report the correct amount. The Safe Harbor should protect you from intentional disregard in the event of an audit and the resultant penalties.

Monday, January 23, 2012

New Lines on Schedules C,E and F

In order to better track the 1099 reporting requirement, the IRS has added two new lines to all business forms, including those for the Individual Income Tax Return.

First new line: Did you make any payments in 2011 that would require you to file Form(s) 1099?

Second new line: If "Yes," did you or will you file all required Forms 1099?

The catch is, if you wait until after January 31, 2012 to file these forms, you are late and can be assessed a penalty. It won't do much good to file them in March, when you file your individual or business tax returns. And, now that this question is a part of our returns, you can't ignore them as we all sign our returns under penalty of perjury, which by the way, is a felony! I can't stress the importance of timely compliance enough!

Friday, January 20, 2012

Deducting Property Taxes

If you have real property, knowing the correct amount to deduct for your Schedule A has always been a challenge. Technically, the only portion of property taxes which can be currently deducted is the ad valorum tax, in other words, the tax assessed based on the assessed value. There are a few other items that may be deductible if the item is to maintain an existing public facility already in service, such as a sidewalk or water tank.

Most property tax bills are totally inadequate when it comes to breaking down the deductible amounts. Items on your tax bill such as Mello-Roos taxes and special assessments are required to be capitalized, just as a capital improvement made to your property. Basically, rather large portions of your tax bill may not be currently deductible. It isn't a matter of if, but when you may take the deduction.

With most states being broke, California especially, beginning this year, CA is considering a website where you can look up the deductible portion of your taxes. With that said and done, it is still possible that CA law may conflict with federal law. Beginning with the 2012 filing season, if deducting real property taxes, you will be required to enter both the street address and the assessor's parcel number right on the schedule A. Stay turned; further information should be forthcoming over the year.

Thursday, January 19, 2012

Time Share Rentals

If you rent out your time share and show a loss, a new ruling (Rundlett vs. Comm. TCH 2011-229) prohibits taking the loss as a passive activity. The ruling stipulated the loss can only be taken as a hobby loss as a miscellaneous itemized deduction on Schedule A, up to the amount of rental income.

Wednesday, January 18, 2012

Standard Mileage Rates

For reporting on your 2011 tax return:

Business mileage: January - June $ 0.51 and for July - December $ 0.555

Charitable Mileage: all of 2011 and for 2012 $ 0.14

Medical Mileage: January - June $ 0.19 and for July - December $ 0.235
Medical Mileage 2012: $ 0.23

All rates are per mile and contemporaneous records are absolutely required without exception!

Tuesday, January 17, 2012

Schedule D Changes

Schedule D will no longer be the friendly 2 page form with 5 worksheets to go through. Beginning with the 2011 filing season, brokerage firms are required to designate your cost basis as well as the net proceeds on Form 1099-B when you sell a security.

There are 3 possible combinations of 1099-B:

  1.  The cost basis is stated
  2.  The cost basis is not provided by the brokerage firm
  3.  You fail to receive a 1099-B

All 1099-B forms with the cost basis stated are then grouped and placed on one new Form 8949, with short term capital gains on page one, and long term capital gains on page two. 1099-B forms with the cost basis not provided will then be grouped and placed on a separate Form 8949 and so forth.

The reality is, if you have some of all 3 of the above combinations, you will have 3 separate Forms 8949. And if you have several sales, you may need more forms. It's going to be an interesting filing season!

Monday, January 16, 2012

Happy New Year and. . .

Happy Tax Filing Season as well. The annual tax seminar I attend each January began a little later this year, and I wanted to have the most recent information to pass on some of the changes which will effect many of us. For the next few days I will highlight some of these changes.

If you look in the archive, you can find where I address the 1099 filing requirements. The copy to the recipient is due on January 31, and the copy for the IRS is due February 29.

Here's the change: Schedules C, E, and F now have two additional line items. The first line specifically asks if you made any payments during the year which require you to file form(s) 1099, and the second line asks if you filed the required forms.

It is important to remember you sign your tax returns under penalty of perjury, and misrepresenting information on a tax return is a felony, not a misdemeanor. Oh yes, did I mention failure to furnish the required information is subject to a $200 fine (per required form), up from $50?