Unemployment Benefits are Taxable in 2010

One item that did not get extended in this month's tax bill was the exclusion from income of the first $2,400 of unemployment benefits. 

In 2009, taxpayers who received unemployment compensation during the year were not taxed on the first $2,400 of benefits received.  This provision was not extended for 2010, so all unemployment benefits received in 2010 will be taxable.

Tax Implications of the Unlicensed Daycare Provider

One of my areas of specialty is in-home daycare operations, and it's something I haven't blogged about much.  One of the questions about in-home daycare operations is what the tax consequences are to an unlicensed daycare provider.

Different states have different licensing requirements for daycare providers.  In Iowa, an in-home provider can care for up to 5 children without being registered or licensed.  A provider caring for 6 children must be registered, and a provider caring for 7 or more children must be licensed.  (Read more at the DHS website.)

For tax purposes, your in-home daycare is considered a business whether you or not you are registered or licensed.  Income should be reported as business income; legitimate business expenses can be claimed as a deduction against business income.

The tricky part for the unlicensed/unregistered is figuring out whether they can take the deduction for "business use of the home."  This deduction allows a taxpayer to partially deduct expenses associated with the house, such as utilities and mortgage interest.  Only daycare operators who are licensed or registered with the state -- or who are not required to be licensed or registered -- can take the deduction for business use of the home.

So in Iowa, a provider caring for less than 6 children CAN take the deduction for business use of their home, because they aren't required to be registered or licensed.  But if a provider cares for 6 or more children and is not registered or licensed, then no deduction is allowed for business use of their home.  Of course, aside from the tax deduction issue, there could also be problems with the DHS!

Celebrity Tax Problems - Lawyer Mickey Sherman

An attorney who has made frequent television appearances as a legal analyst and who represented a member of the Kennedy family in a murder trial a few years ago has been sentenced to jail time on tax charges.  Lawyer Michael "Mickey" Sherman owes about $1.2 million in back taxes from between 2001 and 2009.  Sherman was sentenced yesterday to one year and one day in prison.  Read more here.

When is Income Taxable, When are Expenses Deductible?

As we head into the last few days of 2010, it is important to consider when income and expenses are recognized for tax purposes.

Most individual taxpayers are on the cash method of accounting, so any income that you have in your hands before the end of the year will be taxable in 2010.  This is true even if the income is in the form of a check and you don't deposit the check until the first part of January.  The same logic applies to expenses.  If you write the check and send it before the end of the year, you can deduct it this year, even if the recipient doesn't cash the check until January.

It gets a little trickier for accrual basis taxpayers.  Many businesses use the accrual method.  Under the accrual method, income is recognized and expenses are deducted when the "all-events" tests have been met.  For income, this means (from IRS Publication 334):

Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy.

For expenses, the all-events test is met in much the same way, except that "economic performance" must have occurred as well, which means the goods or services must have been received or performed, as well.  (NOTE:  this is a very, very general overview of economic performance.)

Special rules apply when related taxpayers are involved and they use different methods of accounting.

Federal Tax Provisions and the State of Iowa

One of the considerations of tax planning is the impact of state taxes.  Many states follow along with most federal provisions for calculating income, but almost every state varies from federal law on at least a few items.  This is often referred to as "de-coupling" from federal law. 

For example, Iowa in 2009 "de-coupled" from federal law on Section 179 expensing and bonus depreciation.  Section 179 expensing was limited to $133,000 (as opposed to $250,000 on federal returns), and bonus depreciation was not allowed at all on Iowa returns.  (Read more about this tax issue in this article.)

Iowa often "de-couples" from other "extender" items such as the front-side deduction for college expenses and the front-side deduction allowed to K-12 teachers for out-of-pocket classroom expenses.  These were a part of the federal tax bill signed into law last week.  The Iowa legislature will decide next month on whether to de-couple from these items and not allow them to be deductible on Iowa tax returns.  It is a safe bet that the legislature will vote to de-couple on these items, and also on the increase in Section 179 and bonus depreciation.

One federal provision that Iowa is coupling with is the provision in the "health care bill" passed earlier this year that allows people to keep children on their health insurance through age 26.  The value of this insurance coverage will be tax-free for federal purposes, and Iowa has announced that it will go along with federal law in this case.  Read more in this informational post from the Iowa Department of Revenue.

IRS Says Itemizers Will Have to Wait a Bit to File

The IRS on Thursday announced that its computer systems won't be ready to handle certain types of tax returns until mid-to-late February.  This is because of certain tax law changes enacted in last week's tax bill passed by Congress.

The IRS says people who itemize deductions, people who claim a "front-side" deduction for college expenses, and K-12 teachers who take the "front-side" deduction for purchases of classroom supplies will have to wait to file until sometime in February. 

The IRS says it will soon give a more-solid date for when these types of returns can be filed.

Standard Deductions Increase Slightly for 2011 Tax Returns

On Thursday the IRS released the standard deduction amounts for 2011.  This will affect your 2011 tax return that you'll file in 2012.

• The personal exemption amount will increase to $3,700 (up from $3,650 for 2010 returns).
• The standard deduction for married couples will be 11,600 (up $200 from 2010); $5,800 for single and married filing separately (up $100); and $8,500 for head of household (up $100).
• The tax bracket thresholds will increase slightly.  For example, the 25% tax bracket for a married couple will begin at $69,000 (up $1,000 from 2010).

Read more in this IRS news release.

Residential Energy Credit Extended, But It's Not As Generous

The tax bill signed into law last week extended the "residential energy credit" that provides a tax credit for purchases of certain energy efficient doors, windows, insulation, furnaces, air conditioning systems, certain types of water heaters, and even certain types of roofs. 

The credit had been set to expire on December 31, 2010, but has been extended through 2011.  There's a catch though -- the amount of available credit has decreased, and people who have taken the credit in the past may not be able to take it at all in 2011.

2010 Rules vs. 2011 Rules

• 2010:  The credit is 30% of the purchase price.  The maximum amount of residential energy credit that you can take in total from 2005-2010 is limited to $1,500 (the credit has existed in several forms since 2005).
• 2011:  The credit is 10% of the purchase price, and the maximum amount of residential energy credit that you can take in total from 2005-2011 is limited to $500.

This means if you have claimed $500 or more in residential energy credits since 2005, the credit is not available to you in 2011.

AMT Patch Approved

A few weeks ago, I posted a story about the Alternative Minimum Tax (AMT) and how it would hit an estimated 1-in-5 taxpayers in 2010 if Congress didn't take action.  Luckily, Congress did take action.  The bill sets the following exemption amounts:

• Married: $72,450 in 2010 and $74,450 in 2011
• Single and head of household: $47,450 in 2010 and $48,450 in 2011.

The AMT was first enacted in 1969 in an effort to force a small number of wealthy taxpayers (155 to be exact) who were reporting little or no taxable income.  Like most aspects of the tax code, the AMT is complex and is hard to explain in a blog post without making your eyes glaze over.  Essentially, the AMT is an "alternate" calculation of taxable income in which certain deductions are not allowed and certain items are calculated differently than for "regular" tax calculations.

Taxpayers are allowed a certain amount as an AMT exemption (see the amounts above) but ridiculously, the exemption amount is not indexed for inflation.  Instead, Congress passes "patches" to the AMT exemption amount year after year that increase the exemption for a year or two at a time.  Unfortunately, even with higher exemption amounts, millions of people (4.5 million in 2009) have been hit with AMT.  Without the patches, that number would be even higher.  Again, when the law was enacted 40 years ago, it was targeted at 155 high-income people, but now it's grown into a monster.

Why isn't the AMT exemption set higher to begin with and indexed for inflation (the "non-patched" base AMT amounts are the same as they were in 1993)?  It's a way to boost revenue projections when lawmakers calculate the "cost" of legislation.  For example, the current AMT "patch" is set to expire at the end of 2011.  So long-term budget projections will forecast revenue for 2012 and beyond based on the old, lower AMT exemption amounts, even though we all know that Congress will pass another "patch" for those later years.

The Importance of Documenting Charitable Contributions

The Dinesen Tax Times has been providing a series of articles about charitable contributions this month (in between the updates on the Congressional debate over taxes ... and of course, Wesley Snipes!).  A recent Tax Court case fits in nicely with that series of articles, in particular this article about documenting charitable contributions.

The Tax Court case involved a couple (a Mr. and Mrs.  Murphy) from California who had more than $27,000 of charitable contributions disallowed by the IRS on their 2006 tax return.  The Court ruled against the couple, costing them nearly $11,000 in taxes and penalties.

The case centered around a lack of documentation for the contributions.  According to the Court report, the Murphys had no receipts for any of the contributions they made.  In one instance, the couple donated items to the Salvation Army and could have gotten a receipt, but chose not to because they "didn't want to wait in line to get one."

Mr. Murphy told the Court that he kept a journal that detailed all of the contributions, but the journal was stolen when his car was broken into in 2007.  When things like that happen, a taxpayer can reconstruct their deductions using credible evidence.  In this case, though, the only evidence offered was the testimony of Mr. Murphy.  The couple also tried to invoke the "Cohan Rule," which allows for the use of reasonable estimates (the Cohan Rule is another blog post for another day), but again, the taxpayer has to have credible evidence on which to base the estimates.

In the end, the Murphys lost $27,000 in deductions for charitable contributions, amounting to additional tax owed of $9,011.  The Tax Court also found the couple to be subject to the 20% "negligence penalty," which tacks on another $1,802 in penalties.  In ruling that the couple was negligent, the Court said:

Even if Mr. Murphy's journal was in fact stolen, there is no evidence that he made a reasonable attempt to reconstruct his contributions.  We therefore hold that the petitioners failed to meet their burden of showing that the reasonable cause and good faith exception applies.  Accordingly, the Court concludes that the petitioners are liable for the ... accuracy-related penalty....

The moral?  Keep good records, and if your records are lost, destroyed or stolen, do all you can to reconstruct them!  The IRS will not rely on your "word" alone.  That goes for all your tax-related records, not just records of charitable contributions.

Additional Standard Deduction for Real Estate Taxes is No More

Many tax breaks that had expired or were set to expire got extended in the tax bill passed by Congress last week.  But one break that did not get extended and thus has gone away is the additional standard deduction for property taxes paid.

This tax break allowed people who don't itemize deductions to add up to $500 ($1,000 for married taxpayers) to the standard deduction for property taxes paid.  This was a handy extra deduction for anyone who didn't have enough itemized deductions and had to take the standard deduction.  Unfortunately, this tax break expired on December 31, 2009, and was not renewed in any legislation in 2010, meaning that this extra deduction for non-itemizers has ridden off into the sunset.

People who itemize deductions will still get to claim an itemized deduction for property taxes, same as always.  The expiration of this tax break only affects those who take the standard deduction.

Adoption Credit Increases for 2010 and 2011

The "health care reform bill" passed by Congress earlier this year increased the credit available for expenses incurred in adopting a child.  For 2010 and 2011, taxpayers can claim a credit of up to $13,170 for adoption expenses.  Allowable expenses include adoption fees, court costs, attorney’s fees and travel expenses,

The bill also changed the credit to make it fully refundable.  In prior years, the adoption credit was non-refundable, meaning it could only reduce your tax liability to $0.  Any unused credit could be carried forward to the next year.  Now, you can claim the whole adoption credit no matter what your tax liability is.

One important note for people who qualify for this credit:  you will NOT be able to e-file your return.  You'll have to file a paper return and attach documentation relating to the adoption (such as the adoption decree). 

As always, I recommend seeking out a tax professional if you think you qualify for this credit.

No 1099 Relief in Tax Deal

A website visitor asks if the tax deal contained any relief from 1099 reporting for small businesses.  The answer is NO, it didn't.  But there is still hope that Congress will provide relief before the stricter reporting requirements take affect in 2012.  Both Republicans and Democrats seem to agree that the stricter requirements will be a burden on small businesses, but for some reason, they can't reach an agreement to actually provide relief.

Oh, and rental property owners:  you are subject to stricter 1099 rules starting January 1, 2011.  Rental owners have not had to issue 1099s in the past, but now they will, if they pay $600 or more to service providers (accountants, lawyers, plumbers, electricians, etc.).

Read prior Dinesen Tax Times coverage here and here.

Analyzing the Tax Cut Deal

President Obama signed a tax bill into law yesterday (Friday) that gives us some clarity on what the tax situation will be for 2011 and 2012.  Here are the highlights of the bill:

• Tax brackets to remain the same, with a 10% bottom rate and a 35% top rate.  Without this legislation, the bottom rate would have increased to 15% and the top rate to 39.6%.
• A "payroll tax holiday" that reduces the amount of FICA withholding by 2% (self-employed taxpayers will see their self-employment tax decrease by 2%).  For a person making $40,000/year, this would equal an $800 savings.  (But the Making Work Pay Credit is expiring, which negates some of the savings.)
• Another "patch" to the Alternative Minimum Tax that will help millions of taxpayers avoid this tax.
• The capital gains and qualified dividends rates remain at 0% for taxpayers in the 10% and 15% tax brackets, and at 15% for taxpayers in the higher tax brackets. 
• The Child Tax Credit will remain at $1,000 (it had been set to decrease to $500 in 2011).
• You can claim dependent care expenses of $3,000 for one child or $6,000 for two or more children.  These amounts had been set to decrease to $2,400 and $4,800.
• The expanded Earned Income Credit remains in place through 2012.
• The credit available for energy efficient upgrades to your home remains in place through 2012 (it had been set to expire at the end of this year).
• Extension of the American Opportunity Credit for college expenses, and an extension of the "above-the-line" deduction for college expenses.
• Special 100% "bonus depreciation" for purchases of brand-new assets from September 9, 2010, through the end of 2011.
• The estate tax returns with a $5 million exemption per person, and a 35% top rate, retroactive to January 1, 2010.  Estates arising in 2010 will have the option of of using these rules, or using the "old rules" of no estate tax and a reduction in the amount of increase in carryover basis.

We Have a Tax Deal

The House has approved a tax deal that extends the Bush Tax Cuts and provides for a number of other tax provisions for 2011 and 2012.  The bill heads to President Obama for signature today.  Over the next few days, I'll post more about the tax implications of the bill.

Article from CNN.

Section 179 and Bonus Depreciation for Iowans

Following up on my last post about Section 179 expensing and bonus depreciation:  one other aspect of tax planning for asset purchases is to examine what your state's rules are.  Some states, such as Iowa, do not follow federal guidelines for either Section 179 or bonus depreciation.

For example, in Iowa, Section 179 expensing is capped at $134,000, and bonus depreciation is not honored at all.  If your federal Section 179 expense exceeds $134,000, you'll only be able to deduct $134,000 as Section 179 expensing on your Iowa return; the rest will have to be depreciated.  This means an Iowan  could easily have to track two sets of basis and two sets of depreciation schedules - one for the IRS and one for Iowa.

Iowa isn't the only state that does this.  For example, I prepared an Ohio tax return last year, and they have a strange "5/6" rule on bonus depreciation and Section 179 expensing.  The rule gets its name because you have to add back 5/6 of the bonus depreciation amount as income on your Ohio tax return.  And for Section 179 expensing, you have to compare the amount of Section 179 expensing in the current year with the amount that would have been allowable if it was still 2002 (when the 179 limit was $25,000).  Basically, you add back to income 5/6 of the dollar amount of Section 179 expensing in excess of $25,000.

Preparing this Ohio return opened my eyes to the fact that Iowa, while it rightfully ranks very poorly in tax friendliness, is not the only state with mystifying tax rules.

More on Section 179 and Bonus Depreciation

I have had a number of visitors to this blog with questions about Section 179 expensing, which is something I posted about briefly last week (December 10).  I'll go into a little more detail in this post.

When a business purchases an asset that has a useful life of more than 1 year, the tax code gives the business 3 options for deducting the cost of that asset:  depreciation, Section 179 expensing, and bonus depreciation.

Depreciation means the business can deduct a certain amount of the purchase price each year over a number of years set by the tax code for that type of asset.  For example, computers are depreciated over 5 years.  The number of years is set by the code and has nothing to do with how long you actually intend to use the asset in your business. 

Section 179 expensing allows you to write off 100% of the cost of the purchase of an asset in the year of purchase.  For 2010 and 2011, a business can write off up to $500,000 of asset purchases.  If you purchase more than $2 million of assets during the year, your Section 179 deduction will be phased out.  Your total Section 179 deduction is limited to your taxable income for the year; unused Section 179 expenses in one year can be carried forward to the next year.  Please note that most - but not all - property qualifies for Section 179 expensing.  Examples of property that does NOT qualify is leased property and air-conditioning or heating units.

Note for rental property owners:  Section 179 does not apply to rental properties; if you own rental property, you can't use Section 179 expensing.

Bonus depreciation is a sort of hybrid between regular depreciation and Section 179 expensing, where you can claim 50% of the cost of an asset as a deduction, and then depreciate the remainder of the cost.  Bonus depreciation is available to rental property owners.  One caveat on bonus depreciation:  it can only be claimed on assets that are brand new.  (Section 179 can be claimed on used assets, as long as the asset is "new" to your business.)  One other note on bonus depreciation:  the tax bill being debated right now by Congress proposes to allow 100% bonus depreciation on assets purchased between September 9, 2010, and December 31, 2011.  (UPDATE:  this proposed legislation became official in the tax bill passed by Congress.)

Most of the time, a business will just take the Section 179 expense and be done with it.  It provides an immediate deduction and eliminates the need for cumbersome depreciation schedules.  However, Section 179 expenses are limited to the amount of taxable income (as calculated before the Section 179 deduction).  In other words, Section 179 cannot create a business loss.  But regular depreciation and bonus depreciation can create business losses.  Plus, if you expect that your business income will grow in future years but you won't be purchasing assets in those years, it might be nice to have a depreciation deduction available to offset the increase in income. 
As you can see, your depreciation/Section 179/bonus depreciation strategy is part of tax planning and is a good conversation to have with your tax advisor.

Deducting Charitable Mileage (And Other Miscellaneous Charitable Deductions)

An often overlooked charitable deduction is the deduction for mileage driven for charitable purposes.

Taxpayers can take a deduction -- 14 cents per mile in 2010 and 2011 -- for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization.

Iowa taxpayers are allowed to take 39-cents per mile as a deduction.  (Technically, the Iowa deduction is the standard 14-cents per mile as an itemized deduction, and then you can take another 25-cents per mile as an additional deduction.  The net effect is 39-cents per mile.)

Example
You volunteer to answer the phones once a week for a charitable organization.  The organization's office is 10 miles from your home.  You can claim 20 miles (10 miles each way) as a deduction each week.  If you do this 52 weeks a year, that would be 1,040 miles.  At 14-cents per mile, the charitable mileage deduction would be $146.  If you live in Iowa, your total deduction on your Iowa return would amount to $406.

Taxpayers can also deduct certain other out-of-pocket expenses incurred while giving services to a charity.  For example, if the organization you volunteer for requires you to wear a special uniform, the cost of the uniform and the cost of dry-cleaning the uniform would be deductible. 

The "value of your time" is NEVER deductible.  In the example above, if a receptionist would be paid $10 per hour to answer the phones, you CANNOT claim a deduction of $10/hour for the time you spend doing that work.

Special rules apply to travel expenses other than mileage.  Generally, you can't deduct travel costs (airplane expenses, motels, etc.) for charitable work if there is any element of recreation to the travel.  If you are planning to travel for charitable work, I would suggest consulting a tax advisor to determine if any of your travel expenses are deductible.

Closure on Bush Tax Cuts Could Come Today

The long wait to know what the tax landscape will look like in 2011 could end today.  The U.S. House is expected to vote on an extension of the "Bush Tax Cuts."  The Senate approved the extension yesterday by a vote of 81-19.  Iowa's Senators were split on the measure, with Republican Charles Grassley voting for it, and Democrat Tom Harkin voting against it.  In addition to extending the Bush-era tax rates, the measure also includes other tax provisions such as another "patch" to the Alternative Minimum Tax.

Donating a Car to Charity

In the good old days (before 2005), taxpayers could donate a car to charity and claim a deduction for the fair-market value of the car.  It didn't matter if the charity only sold the car for a few-hundred dollars.  The taxpayer could claim a deduction for the fair-market value of the car.  That all changed in 2005.

You can still claim a deduction for donating a car to charity, but there are limits on the amount you can deduct.  If you donate a car to charity and the charity sells the car as a fundraiser, your deduction is limited to the lesser of the car's fair-market value or what the charity sold the car for.

Example:
You donate a car with a fair-market value of $2,000 to a charity.  The charity sells the car at a fundraising auction, but only gets $800 for the car.  Your charitable contribution deduction is limited to $800.

You can still claim the fair-market value as a deduction if the charity uses the car as part of its "stated cause" rather than selling it as a fundraiser.

Donating a car to charity is not always a straightforward tax situation, and there are recordkeeping requirements that must be met.  It's best to consult with a tax pro before making such a donation.

Tax Problems for Rapper Doug E. Fresh

Rapper/record producer/beat-boxer Doug E. Fresh appears to be in trouble with the IRS.  Fresh owes more than $2.2 million in back taxes, and the IRS has filed a lien against him in New York.  It's not the first time Fresh has had problems with the IRS; the IRS came after him in 2008 for $367,000 in back taxes.

Read more here and here.

Section 179 Limits for 2010 and 2011

The Section 179 expensing limits have been increased for 2010 and 2011.  A Section 179 election allows businesses to elect to expense asset purchases in the year of the purchase, rather than depreciating those assets over a period of years.  For both 2010 and 2011, businesses can elect to expense up to $500,000 of assets in any one year.  (NOTE:  watch legislation this month to see if anything happens with the 2011 limits.)

Section 179 does not apply to owners of residential rental property.  However, rental owners can take advantage of "bonus depreciation," a special election to expense 50% of the cost of an asset and depreciate the remaining 50%.  Bonus depreciation is an option available to businesses, as well.  In some cases, a business may not want to take a Section 179 expense, and instead take bonus depreciation.

Iowa taxpayers should keep in mind that Iowa does not follow along with federal Section 179 rules or with federal bonus depreciation.  Iowa only allows Section 179 expensing of up to $133,000, and does not honor bonus depreciation at all.  This means an Iowa business or rental property owner could very easily have to track multiple depreciation schedules and basis information.

Recordkeeping Requirements for Charitable Contributions

We've explored the basics of charitable contributions and which organizations qualify for tax-deduction purposes.  Today, I'll explore the recordkeeping requirements for documenting your charitable contributions.

Documentation for contributions by cash, check or credit card is straightforward enough.  Maintain receipts or other records that show the amount donated and when.

If you donate more than $250 in cash to an organization at any one time, the organization must provide you with a written confirmation of the donation.

What if you donate property, such as used clothing to Goodwill?  In that case, you should try to obtain a receipt from the organization.

If you donate more than $500 worth of property to charities during the year, you have to file Form 8283 and include more detail to the IRS about who you made the contribution to, what type of property was donated, and how you determined the value of the property. 

If you donate $500 or more of any single item of clothing or household items that are not in "good condition," you must include a report from a qualified appraiser.

If you claim a deduction for more than $5,000 worth of property donations, you also must include a report from a qualified appraiser.

The rules for donating a car to a charity are even more complex, and will be explored in a future blog post.

If you donate more than $5,000 worth of property, even more detail is required, such as (possibly) a report from an appraiser.

Snipes Reports to Prison

Wesley Snipes reported to a federal prison in Pennsylvania today to begin serving his 3-year prison sentence on tax-evasion charges.  Snipes was convicted in 2008 of failing to file tax returns and pay income tax on more than $37 million of income between 1999-2004.  He lost an appeal in July and another appeal in November.  Click here to read more about Snipes reporting to prison. 

Prior Dinesen Tax Times coverage can be found here, here and here.

The IRS is Now on Twitter

The IRS announced yesterday that it now has a Twitter account.  From "IRS Special Edition Tax Tip 2010-14":

The Internal Revenue Service is using Twitter and other social media tools to share information with taxpayers and the tax professional community.

The IRS Twitter news feed, @IRSnews, provides the latest federal tax news and information for taxpayers. The focus of the IRS Twitter messages will be on easy-to-use information, including tax tips, tax law changes, and important IRS programs such as e-file, the Earned Income Tax Credit and “Where’s My Refund." Anyone with a Twitter account can follow @IRSnews by going to http://twitter.com/IRSnews.

Another important IRS Twitter feed, @IRStaxpros, is designed for the tax professional community. Follow @IRStaxpros by going to http://twitter.com/IRStaxpros.

The IRS also tweets tax news and information in Spanish at @IRSenEspanol. Follow this Twitter feed by going to http://twitter.com/IRSenEspanol.

The IRS Twitter feeds will work in conjunction with http://www.irs.gov/  and the IRS YouTube channels to bring IRS information direct to taxpayers. Since August of 2009, there have been more than 1 million views of videos on the IRSvideos ( http://www.youtube.com/irsvideo), IRS Multilingual (http://www.youtube.com/user/IRSvideosmultilingua) and IRS American Sign Language (ASL) ( http://www.youtube.com/IRSvideosASL) channels.

In addition to Twitter and YouTube, the IRS provides additional social media tools to inform and assist taxpayers.

Roth IRAs Must Be Converted by Year-End to Defer Taxes

A deadline is approaching for Roth conversions.  The deadline is December 31st for anyone who wants to defer taxation on the conversion into 2011 and 2012. 

I talk about Roth conversions in much more detail in this article, but in general:  the amount of the conversion must be claimed as income on your tax return.  For conversions happening in 2010 only, you have the option of claiming all the income in 2010, or deferring recognition to 2011 and 2012.

For conversions happening after the first of the year, the income will have to be recognized in full in the year the conversion takes place.

Deal Reached on Taxes (Maybe)

President Obama and Republicans in Congress have reached an agreement on taxes.  The agreement calls for the following:

• Extension of the Bush Tax Cuts through the end of 2012.  For more on what this means, see this article posted a few days ago on the Dinesen Tax Times.
• A two-year "AMT patch."  This will prevent an estimated 22 million taxpayers from falling victim to this tax.  For more on what would happen without this patch, see this Dinesen Tax Times article.
• Extension of the expanded Earned Income Tax Credit, extension of the expanded child tax credit, and extension of the American Opportunity Credit for college expenses.
• Extension of miscellaneous tax provisions such as the additional standard deduction for real estate taxes paid by non-itemizers.  The $250 "above-the-line" deduction for classroom expenses of K-12 teachers is also extended.
• Unlimited expensing of new assets in 2011.
• A reduction in the employee portion of FICA withholding, from the current 6.2% to 4.2%.  For a person making 40,000 per year, this would equate to a savings of $800 over one year.  This provision may have been put in the agreement to make up for the expiration of the Making Work Pay Credit.
• The estate tax will return with a $5 million exemption and a top rate of 35%

Democrats are not happy with this proposal, so it remains to be seen if it will actually be passed into law.

What is a Qualified Organization for Charitable Deductions?

In a post last week, I explored the basics of charitable contributions, and I mentioned that not all "not-for-profit" organizations are qualified organizations for purposes of getting a tax deduction for a donation.  In general, 501(c)(3) organizations qualify, as do churches.

Officially, the Internal Revenue Code, at Section 170(c), defines a charitable organization as:

• A state or city, as long as your donation is used exclusively for public purposes.
• A community chest, corporation, trust, fund or foundation organized for any of the following purposes:  religious, charitable, educational, scientific, literary or the prevention of cruelty to animals.
• A post or organization for war veterans.
• Fraternal societies, as long as the gift is used for the same purposes as described under bullet-point 2 (religious, charitable, educational, etc.).
• Nonprofit cemetary companies or corporations.

When in doubt, ask the organization, ask your tax pro, or consult IRS Publication 78.  Publication 78 is actually an on-line search engine at the IRS website.  Churches always qualify, and are NOT shown in Publication 78.

Back to the Drawing Board on Taxes

The Senate today voted down two measures to extend the Bush Tax Cuts.  CNN article.

Debt Commission Report Fails to Get Necessary Votes

President Obama's "Debt Commission" voted today on their plan to reduce the federal deficit by $4 trillion over the next 10 years.  The plan was approved by a vote of 11-7, but 14 "yes" votes were needed in order for the proposal to be put before Congress.  Despite that, many analysts think that parts of the proposal will be brought before Congress as part of other budget proposals.

You can read more about today's vote here, and previous Dinesen Tax Times coverage here.

IRS Announces Mileage Rates for 2011

The IRS has released the mileage rates for 2011.  The regular mileage rate increased by 1 cent; the rate for medical mileage increase by 2.5 cents; and the rate for charitable mileage remains the same as in 2010.

• Mileage rate for 2011:  51 cents per mile (up 1 cent from 2010)
• Medical mileage rate:  19 cents per mile (up 2.5 cents from 2010)
• Charitable mileage rate:  14 cents per mile (same as 2010)

House Passes Extension of Bush Tax Cuts

The U.S. House of Representatives today passed an extension of the Bush Tax Cuts for the lower and middle classes.  The measure passed 234-188 in the House and now goes to the Senate.  Pundits say the Senate will likely vote the measure down.

Link to a Reuters news article about the House vote.

Making Work Pay Credit Expires - Paychecks Will Decrease

I haven't seen much media coverage of the "Making Work Pay Credit," but this credit expires soon and will cause a lot of people's paychecks to be smaller in 2011.

The Making Work Pay Credit was part of the 2009 economic "stimulus" package and existed in 2009 and 2010, but is set to expire on December 31st.

The credit amounts to $400 per person for most working adults.  People who receive W-2 wages have received the credit bit-by-bit in each paycheck, in the form of lower withholding. 

If Congress does not renew the Making Work Pay Credit, you'll notice that your first paycheck of 2011 will be lower.  The decrease will amount to $33.33 per month per person ($400/12).

President Obama has proposed extending the credit into 2011, but lawmakers have not been receptive to the idea.

(UPDATE:  the tax bill signed into law December 17th, 2010, did not extend the Making Work Pay Credit, but it did provide for a reduction in FICA withholding from paychecks in 2011, which will more than offset the expiration Making Work Pay Credit.)

AMT Could Hit 20% of Taxpayers in 2010

(UPDATE 12/22/10:  The tax bill signed into law on December 17, 2010, does provide an AMT patch that will help millions of Americans avoid the AMT.  Read the story here.)

We are hearing constantly about Congress debating the "Bush Tax Cuts" and whether to extend the tax cuts for only people who earn less than $250,000 a year, or to extend them for all taxpayers.  But there are other tax provisions unrelated to the Bush Tax Cuts that Congress needs to take action on this month -- and in my opinion, the most important of those provisions is the alternative minimum tax (AMT).

If Congress does nothing regarding the AMT, millions upon millions of taxpayers (an estimated 1-in-5) will be hit with this tax, which, when it was enacted in 1969, was only supposed to hit a few extremely wealthy people.  The AMT exemption amount for a married couple will drop from $70,000 in 2009 to just $45,000 in 2010; and from $46,700 in 2009 for single or head of household to $33,750 in 2010. 

The AMT is too complex to go into in one article, but suffice to say that at the very least, Congress MUST extend the 2009 exemption amounts into 2010 or lots of people will be very unhappy when they find out they owe this tax….

Defining the Term "Bush Tax Cuts"

There has been a lot of talk lately about Congress needing to decide on the fate of the "Bush Tax Cuts."  What exactly are people like me referring to when we say "Bush Tax Cuts"?  I'll try to explain a little bit in this article.

The term "Bush Tax Cuts" refers to a host of tax provisions implemented in the early years of the Bush administration.  These provisions are set to expire on December 31, 2010, unless Congress extends them.  If Congress takes no action:

• The top tax rate in 2011 will rise to 39.6% (up from 35% now), and the bottom rate will rise to 15% (up from 10% now).
• The "child tax credit" will be cut in half in 2011, dropping from $1,000 to just $500.
• The so-called "marriage penalty" will return in 2011.
• The long-term capital gains tax rate is set to increase, and the preferential tax treatment of "qualified dividends" will go away.
• The estate tax will return in 2011 at its pre-Bush Tax Cut levels of a $1 million exemption and 55% top rate.

Major Tax Changes Proposed in Debt Commission Report

President Obama's "Debt Commission" released a report today (Wednesday) with recommendations on how to cut the federal deficit.  The Commission says its recomendations would reduce the federal debt by $4 trillion over the next 10 years. The Commission is made up of 6 Republicans, 6 Democrats and 6 others appointed by the President. In order for any of these recommendations to be put before Congress, at least 14 members of the Commission need to approve the plan. The Commission is set to conduct a vote on Friday.

Major changes to the tax code are a part of the plan.  The Commission proposes repealing the alternative minimum tax, creating three tax brackets for individuals (12%, 22% and 28%), and eliminating all itemized deductions (everyone would take a standard deduction, but certain tax credits would be allowed for mortgage interest and charitable contributions).

Corporate taxes would have one flat rate of 28%.

The proposal includes much more than just tax reform.  You can read the entire proposal here, and a CNN article about the proposal here.

U.S. House Will Vote Thursday on Tax Cuts

Democrats in the U.S. House of Representatives say they will try to push through a vote tomorrow (Thursday) on extending the "Bush Tax Cuts" for people who earn $250,000 a year or less.  Republicans seem lukewarm to the idea, though, because they say the tax cuts should be made permanent for all taxpayers.

The Bush Tax Cuts are just one of a number of items lawmakers need to deal with.  We still don't know whether a number of provisions that expired at the end of 2009 will be extended to 2010.

And perhaps most importantly, we don't know whether lawmakers will provide relief to the "alternative minimum tax" (AMT).  Under current provisions, the AMT exemption amounts are reduced dramatically in 2010, and an estimated 1-in-5 Americans will be hit with this tax unless Congress passes legislation to -- at the very least -- retain the 2009 exemption levels.

This article from CNN provides more information about the wrangling going on in the House.

Senate Votes Down 1099 Relief for Businesses

The Senate on Monday night failed to repeal the stricter 1099 reporting requirements that are looming for businesses.  Starting in 2012, businesses will have to issue 1099s to anyone and any company that they purchase more than $600 of ANYTHING from -- including purchases of goods, supplies, inventory, etc.  This is a major change from current law, which only requires 1099s to be issued to independent contractors and others who provide services to the business (such as accountants or lawyers).  This change was quietly tucked away in the "health care reform bill" passed earlier this year.

There has been a large amount of backlash from the business community (and rightfully so) about these new requirements. But on Monday night, the Senate twice voted down attempts to repeal the 1099 changes.  What's odd is, both Republicans and Democrats say they understand the burden this will place on businesses, and both Republicans and Democrats seem to want to do away with the changes.  But yet, they can't reach a compromise on the issue.  You can read more in this New York Times article.

You can read more about this issue in a prior Dinesen Tax Times article here.

Basics of Charitable Contributions

The end of the year is a good time to make charitable contributions, not only because the holidays are a season of giving, but because there can be tax advantages to giving to charities.

In general, charitable contributions are deductible in the year paid.  If you make a donation with your credit card, you take the deduction in the year the expense was charged to your card, even if you don't pay the credit card bill until the next year.  For donations made with a check, you can take a deduction in the current year as long as you get the check in the mail before the end of the year, even if the charity doesn't cash the check until the next year.

Only donations to qualified charities are deductible.  I'll explore qualified charities in more detail in a future post.

Lawmakers Urge IRS to Allow Breastfeeding Supplies as a Medical Expense

Iowa Senator Tom Harkin was among more than 40 Democratic lawmakers in the House and Senate who wrote to the IRS last week, urging the IRS to recognize breastfeeding supplies as a medical expense.  Currently, breastfeeding supplies are not considered a medical expense, so the cost of the supplies is neither deductible, nor eligible for reimbursement from a flex plan or HSA. 

In their letter to the IRS, lawmakers say that the "IRS is at odds with the growing body of medical evidence showing that breastfeeding has proven health benefits for both mothers and babies."

You can read the letter here, and a news article about it here.

Happy Thanksgiving!

Have a happy Thanksgiving!  Posts will resume at the Dinesen Tax Times on Tuesday, November 30.

Coming Soon: Secure Web Portal

I normally report on tax news on this blog, but today I wanted to engage in a little self-promotion of my tax practice. 

I soon will be adding a secure "web portal" to my website (http://www.dinesentax.com/).  This portal will allow me to exchange documents with my clients by uploading them to the secure portal.  This is a much more secure way to send documents than using e-mail. 

Cell Phone Tax Rules Relaxed

The Small Business Jobs Act of 2010, signed into law in September, removes employer-provided cell phones from the category of "listed property."  This means employers can take a deduction for the cost of the cell phones without having to collect burdensome documentation of business vs. personal use from employees. 

In the past, employees would be taxed on the value of the personal calls made from employer-provided cell phones.  This change would appear to eliminate this, although the IRS has not released further guidance on the issue.

Removing cell phones from the "listed property" category means that employees can deduct the cost of cell phones used by the employee as an unreimbursed employee expense without the employee having to meet the "condition of employment" and "for the convenience of the employer" tests.  However, the employee will still have to track the amount of time spent on personal vs. business calls, to calculate the deduction.

For self-employed taxpayers, the change means a relaxation in the strict documentation requirements for cell phones.  However, I would recommend that a self-employed person who uses a cell phone for both business and personal purposes still keep a log of their calls.

Self-Employed Can Deduct Health Insurance for Self-Employment Taxes

People who are self-employed and provide their own health insurance will be able to deduct the insurance premiums from business income, thus reducing their self-employment taxes.  Normally, the self-employed can only deduct health insurance premiums when calculating income tax, but not for calculating the self-employment tax. 

The same rules and restrictions that normally apply to self-employed people who deduct insurance premiums will still apply (e.g. must not be eligible for coverage under a spouse's insurance plan).

This change is effective for 2010 only and was part of the "Small Business Jobs Act" that was signed into law in September.

Snipes Loses Appeal, Told to Report to Prison

Wesley Snipes has lost his request for a new trial on charges of tax fraud (click here to read the story from earlier this week on The Dinesen Tax Times).  A district court judge in Florida today denied that request and ordered Snipes to report to prison to start serving a 3-year prison sentence.  That sentence was first handed down in 2008; Snipes lost an appeal in July of this year.  Click here for the story from July.

Payments to Exonerated Prisoners May Not Be Taxable

The IRS last week (November 12) issued a Chief Counsel Advice memorandum (CCA)* that says compensatory damages paid to people wrongly convicted of crimes may not be taxable – but only in very limited circumstances. According to the CCA, the payment must be for injuries, sickness or economic losses from “physical injuries or physical sickness” of people wrongly convicted and incarcerated.

Put another way, wrongful-imprisonment restitution is taxable unless the person can prove that they suffered physical injuries or illness while imprisoned. Someone who “just” receives a restitution payment as a form of state apology or make-good for being wrongfully imprisoned would have to pay taxes on the restitution. While this seems contrary to good law (and common sense), that is the way things currently are.

And I should also point out that the term “physical injury or illness” does NOT include psychological trauma unless the taxpayer can prove that the psychological trauma stems from a physical injury or illness. So someone who goes into depression for being wrongfully imprisoned and receives restitution would have to pay taxes on that restitution.

The same “logic” applies to court settlements – settlements for physical injuries are not taxable, but settlements for psychological trauma can be taxable, unless it can be proven that the psychological trauma was caused by physical injuries. So someone who receives psychological damages in a discrimination lawsuit will probably have to pay taxes on the settlement. But that’s another blog post for another day. (Note from Jason: this last paragraph is a vast simplification of the tax treatment of court settlements; like I said, another blog post for another day!)

*-Like “Private Letter Rulings,” CCA’s are not precedent-setting and apply only to the taxpayer who requested the ruling, but they do give us some insight into how the IRS views certain issues.

Tax Votes Won't Happen Until After Thanksgiving

What is happening with the Bush Tax Cuts, which expire on December 31?  No one knows yet, and we won't know until after Thanksgiving.  That's when, apparently (and finally!) Congress will try to vote on what to do.  Read more here and here.  In the coming weeks on the Dinesen Tax Times, I'll talk about some of the important Bush Tax Cuts that will affect most people's pocketbooks.

Nine Side Businesses, No Documentation = Big Tax Bill

If you're a regular visitor to The Dinesen Tax Times, you know that I like to chronicle the cases that appear in front of the U.S. Tax Court, and the more bizarre, the better.  I ran across a case Wednesday that I think is certainly strange.

The case involved a California woman named Sharon Griffin who lost a Tax Court case involving 9 different "side businesses" that she ran.  Griffin worked part-time as a videotape operator and technician, making about $70,000 a year in the years in question before the Tax Court (2001-2003).  During these same years, she also filed Schedule C's (sole proprietorship return) for 9 side businesses that took in more than $2.8 million in gross revenues.  But she always showed enough expenses on the Schedule C's that she had losses each year.

Griffin's businesses were diverse:  delivery service; video production; janitorial services; computer repair; handyman services; landscape maintenance; parking lot maintenance/steam cleaning; consulting services; and notary services.  Most of her business was conducted in her South Los Angeles neighborhood that she called "The Jungle."

Griffin operated mainly in cash and told the Court that she tried to avoid banks and the "paper trail their records tend to create."  Without a "paper trail" or much legitimate supporting documentation for her deductions, the Court ended up disallowing her business deductions, and also took away many of the personal itemized deductions she had claimed for things such as charitable contributions.

The total tax and penalty hit was not discussed in the Court's ruling, but if she has to pay tax on $2.8 million of income, that would be well over $1 million in taxes owed.

Wall Street Journal Reports - "'Audits from Hell' Target Rich"

The Wall Street Journal had an article recently said said the IRS is targeting wealthy taxpayers and their financial arrangements for audit.  The audits are being conducted by a new IRS unit called the Global High Wealth Industry Group.  People who have gone through one of these audits say the audits seem unusually harsh.

According to the article:

"The IRS group is focusing on many kinds of financial instruments and asset classes, from derivatives to real estate—such as, say, a stake in a winery in Europe—as well as trusts, royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately held companies and partnerships."

You can read the complete Wall Street Journal article here.

IRS Looking for Taxpayers Who Are Owed Refunds

The IRS says it's looking for more than 110,000 taxpayers (111,893, to be exact) whose tax refund checks have been returned as undeliverable due to bad addresses or other mailing issues.  If you think you're one of those 111,893 people still waiting on a refund check, you can visit the IRS's "Where's My Refund" page on-line to update your address.  Here is the link.

These refund checks total $164.6 million, or an average of $1,471 per taxpayer.

Couple from Carroll Loses Tax Court Case

A couple from Carroll face a large amount of taxes and penalties after they lost a Tax Court case yesterday.  The case involved transactions between three companies owned by the couple.  The Tax Court issued a dense, 87-page ruling in which they determined that certain transactions between the three companies lacked "economic substance" and were mainly for paying the couple's personal living expenses.

We're not talking about small amounts of money here.  In losing this case, the couple now owes more than $105,000 in taxes, plus more than $20,000 in penalties.

Barclays to Reimburse Same-Sex Couples for Health Insurance Costs

British-based Barclays has announced that it will "gross up" pay of U.S. employees to help off-set the extra taxes paid by employees whose health insurance covers a same-sex partner.  Under federal law, the value of insurance coverage for people other than spouses or dependents is included in income.  (Remember, federal law does not recognize same-sex marriage, so a same-sex spouse is not considered a "spouse" for federal purposes.)

According to the New York Times, Cisco, Google, The Kimpton Hotels, and The Gates Foundation also provide similar reimbursement programs for employees in same-sex relationships.

Read more at the Times and at Bloomberg.

Wesley Snipes Appeals Tax Evasion Conviction

Lawyers for actor Wesley Snipes filed an appeal on Monday of Snipes' conviction on tax evasion charges.  As reported earlier this year on the Dinesen Tax Times, Snipes was convicted of failing to file tax returns and pay income tax on more than $37 million of income between 1999-2004.  He was sentenced to three years in prison in 2008, and lost an appeal in July.

This time around, Snipes' lawyers are arguing that Snipes deserves a new trial because of an allegedly tainted jury.  One of Snipes' attorneys says he (the attorney) received e-mails from two jurors saying that three other jurors had made up their minds about Snipes being guilty before the trial started.

Snipes' attorneys are also arguing that Kenneth Starr, a financial advisor to Snipes and a key government witness against Snipes, was a "tainted witness" because Starr has since pleaded guilty to charges of fraud.

You can read more about the appeal here and here.

Turbo Tax Defense Shot Down Again

The U.S. Tax Court has again ruled against a taxpayer who used the "the tax preparation software said it was okay" defense.  In the case of Phu and Yvonne Au, the couple had claimed a deduction for more than $40,000 of gambling losses.  They claimed no gambling winnings.  The Internal Revenue Code only allows gambling losses to be deducted to the extent of gambling winnings.  Since they had no gambling winnings, the $40,000 of losses were not deductible.  (For more on gambling losses, see this article on the Dinesen Tax Times.)

In addition to the extra tax assessed by the IRS, the Au's were also hit with a 20% accuracy related penalty.  The couple tried to argue that they should not be subjected to the penalty because they say they followed the instructions in the computer software they used to prepare the tax return.  The Tax Court disagreed with that argument.

The Court said "(the Au's) indicate that they were unaware of the provisions of the Code and that they did not consult any ... (IRS) publications or professional tax advisors before claiming deductions equaling almost half of their reported income in 2006."

The Court also said "We doubt that the (software) instructions, if correctly followed, permitted a result contrary to the express language of the Code.  Petitioners may have acted in good faith but made a mistake.  In the absence of evidence of a mistake in the instructions or a more thorough effort by petitioners to determine their correct tax liability, we cannot conclude that they have shown reasonable cause for the understatement of tax on their 2006 return."

Two New Lawsuits Challenge DOMA Regarding Tax Issues

Two lawsuits have been filed this week which challenge the Federal Defense of Marriage Act of 1996 (DOMA).  DOMA defines marriage, for federal government purposes, as being ONLY between a man and a woman.  As we have blogged about before at the Dinesen Tax Times, this creates unique headaches for same-sex couples who are legally married under state law, such as here in Iowa.  The federal government does not recognize same-sex marriages, period.

One lawsuit filed in a Manhattan federal court by a woman named Edith Schlain Windsor involves the estate tax.  In this case, Edith and her same-sex spouse, Thea Spyer, were married in Canada but lived in New York.  The state of New York recognized their marriage, but the federal government did not.  When Thea died in 2009, more than $350,000 in estate taxes were assessed, even though Edith was the beneficiary.  If they had been an opposite-sex couple, the "unlimited marital deduction" would likely have applied, and no estate tax would have been assessed.

The other lawsuit was filed in federal court in Connecticut and involves federal employees who are legally married under state law to a same-sex spouse.  According to the Wall Street Journal, "The lawsuit alleges the couples were denied certain benefits because their marriages aren't recognized under federal law, including work leave to care for a spouse and retirement or survivor benefits."

Iowan Convicted of Tax Evasion

The Eighth Circuit Court of Appeals last week upheld the conviction of a man from Dallas County, Iowa, on tax-evasion charges.  Richard Rosenquist faces a 51-month prison sentence.  The indictment against Rosenquist accused him of concealing assets from the IRS, filing false tax returns for several years, and faling to file a tax retrn for 2003. 

Donating a House to a Fire Department

Can you claim a charitable deduction for donating a house to a volunteer fire department?  The answer is yes, but it's hard to strucure the transaction in such a way that you can get a big deduction.

The U.S. Tax Court recently ruled against a Wisconsin couple that had claimed a charitable contribution deduction of more than $235,000 for donating a house to a fire department to burn down in training exercises. 

The couple had been planning to demolish the house, anyway, and build a new house on the land.  The main reason why the Tax Court ruled against the couple is because, in the Court's eyes, the couple received a benefit from the donation.  The benefit being - the free demolition of their house.

The Internal Revenue Code prohibits a taxpayer from taking a deduction if they received a benefit from the donation, unless the dollar amount of the contribution exceeds the dollar amount of the benefit received.  In this case, the Tax Court ruled that the house had NO value as a donation to the volunteer fire department, because the underlying land still belonged to the couple, and all the department could do with the house was burn it down.

The Tax Court ruling is precedent-setting. 

Like I said in the opening paragraph, donating a house to a fire department may result in a charitable contribution, but generally only if the transaction is structured in such a way that the fire department receives the underlying land and can use the property as it sees fit. 

DISCLAIMER:  This article does not constitute tax advice and is presented for informational purposes only.  Each taxpayer should seek the counsel of a qualified tax advisor to discuss their unique tax situation.

Required Minimum Distributions

I've received a few questions recently about "required minimum distributions" (RMDs), so I will address the basics of RMDs in this article.

If you're over age 70 1/2, you may be required to take an RMD from your retirement accounts.  Non-spouse beneficiaries who inherit IRAs or 401(k) funds may also be subject to RMD rules BEFORE the beneficiary turns 70 1/2.

The RMD is calculated using actuarial tables found in IRS Publication 590.  Different tables are used for different situations.  Most people will use the "Uniform Lifetime Table" for age 70 1/2 RMDs, but that's not always the case. 

The RMD must generally be taken by December 31st of each year.  There is an exception for the year of the first RMD, when the RMD must be taken by April 15th of the following year. 

For 401(k) and other employer-provided retirement plans, people over age 70 1/2 do NOT have to take an RMD if they are still working (unless the person is a greater-than-5% owner, in which case they DO have to take the RMD even if still working).  This does not apply to IRAs; you must take an RMD from your IRA even if you're still working.

One important note:  Roth IRAs are NOT subject to RMD rules, but Roth 401(k) money IS subject to RMD rules. 

If you don't take the RMD, you can be subjected to a 50% excise tax.

RMDs can be simple, but they can also be very complex, especially for non-spouse beneficiaries or for married people where there is more than a 10-year difference in age between the two spouses.  It is best to consult a tax or investment professional to make sure the RMD is calculated correctly.

DISCLAIMER:  The above information does NOT constitute tax advice and is presented for general informational purposes only. Please consult a tax or investment professional to discuss your unique situation.

Is My Home Sale Taxable?

A visitor to this website asks the following question:


I bought my house almost 4 years ago for $50,000, put $10,000 in it for improvements.  If I sell it for $72,000, and don't purchase another house, just rent, what are the pros and cons of that?

Answer:

There is good news here, tax-wise. A single person selling a home can exclude up to $250,000 of the gain on the sale (meaning, you don’t have to pay tax on the gain). A married couple filing a joint return can exclude up to $500,000 of the gain. It doesn’t matter what you do with the money from the sale; you just have to meet the following two tests:

1) In the last 5 years, you must have owned the house for at least 2 of those years.

AND

2) In the last 5 years, you must have lived in the house (meaning, used as your primary residence) for at least 2 of those years.

If a person does not meet the above two tests, they may still be eligible to exclude a pro-rated portion of the gain, provided they meet certain other requirements. Based on the information provided, it appears our questioner fully meets both of the above tests, so the entire exclusion would apply.

Their basis in the property is $50,000 purchase price + $12,000 improvements = $62,000.

In this case, if the house is sold for $72,000, they would have a $10,000 gain. Since this sale qualifies for the $250,000 exclusion, they would not be taxed on that gain. And because the entire gain is excludable, the sale would not need to be reported on their tax return.

The situation can become much more complex if you don’t qualify under the above two tests, or if you do qualify for the above two tests but also used the house as a rental property part of the time, or if you have used part of your home for business purposes and taken tax deductions, or any number of other “what if” scenarios.

Have a tax question on your mind?  E-mail me at dinesentax@gmail.com.  All people asking questions will remain anonymous.

DISCLAIMER:  The above information does NOT constitute tax advice and is presented for general informational purposes only. Please consult a tax professional to discuss your unique situation.

Iowa Has a Bad Tax Climate

Iowa once again rates very poorly in the annual Tax Climate Index released by the Tax Foundation.  Iowa ranks 46th (5th-worst) in business tax climate, and 42nd (9th-worst) in individual income tax climate.

Iowa has the highest top corporate tax rate in the nation (at 12%) and a complex system of corporate taxation overall.  On the individual side, Iowa ranks low because of high rates and complexity.

This should come as no surprise to anyone who has dealt with filing an Iowa tax return.  You can read the full report here.

IRS Releases Various Cost-of-Living Adjustments for 2011

The IRS has released the cost-of-living adjustments for items such as the adoption credit, eligible long-term care premiums, medical savings accounts and the gift tax. 

The maximum adoption credit in 2011 will be $13,360.  For medical savings accounts, a "high-deductible health plan" will mean a plan that has an annual deducible between $2,050-$3,050 for self-only, and $4,100-$6,150 for a family plan. 

The limitation on eligible long-term care premiums starst at $340 for people under the age of 40; $640 for people between the ages of 40 and 50; $1,270 for ages 50-60; $3,390 for ages 60-70; and $4,240 for age 70 and older.

And, the gift tax exclusion remains the same in 2011 as it was in 2010.  The first $13,000 of gifts to any one person are not taxable.

You can find more cost-of-living adjustments, including such oddball items as "tax on arrow shafts" and a number of other items, here.

IRS Releases Retirement Plan Limits for 2011

The contribution limits to IRAs and other retirement plans will stay the same in 2011 as they were in 2010.  The contribution limit to an IRA will remain at $5,000 for people under the age of 50, and $6,000 for people age 50 and older.  The contribution limit to a 401(k) plan will remain at $16,500 for those under the age of 50, and $22,000 for those age 50 and older.

Roth Conversions

The rules on converting a traditional IRA to a Roth IRA have been relaxed for 2010, opening the door to more taxpayers to make this conversion.

Contributions to a traditional IRA are generally tax deductible. Distributions from a traditional IRA are generally considered to be taxable income.

Contributions to a Roth IRA are post-tax, meaning you get no tax deduction when you make a contribution. However, distributions from a Roth IRA are generally tax-free.

Taxpayers have always been able to convert a traditional IRA to a Roth IRA, but only if their income was less than $100,000. For 2010, the income limitation has been removed. Meaning, anyone can now convert a traditional IRA to a Roth IRA. And, a bill was recently signed into law that allows Roth conversions within 401(k) plans as well.

When you make a conversion, the money in your traditional IRA/401(k) is treated as being distributed to you, so you’ll have to claim it as income and pay tax on it. For 2010 conversions only, you will have the option of claiming half of the amount as income in 2011 and the other half as income in 2012.

Example:
John has $40,000 in a traditional IRA account that he wants to convert into a Roth IRA in 2010. John will have to claim the $40,000 as income on his tax return. He can elect to claim all $40,000 on his 2010 return, or claim $0 in 2010, $20,000 in 2011 and $20,000 in 2012.

The upside to a Roth conversion is that a Roth account will provide you with tax-free income at retirement. That being said, the decision on whether to convert a traditional IRA/401(k) to a Roth account is complex and involves many variables. In general, a Roth conversion is advisable if think you will be in the same or higher tax bracket at retirement, you have a long time to go before retirement, and if you can afford to take the current tax hit. You should consult with both a tax advisor such as me, and your investment advisor, before making a final decision on whether to convert.

Recycled and UPDATED - Will My Health Insurance Be Taxable?

I have published this article twice already, but the rumor is still out there, plus the IRS recently issued more information for employers.
-----------------
(Originally posted June 27, 2010, and re-posted on July 21, 2010)

I saw one of my clients yesterday, and he asked me whether the rumor is true that the government is going to start taxing people on health insurance provided by their employers. The answer to that question is, NO.

My client is right that there is a rumor going around about this, including one of those wonderful "chain" e-mails that breathlessly states that starting in 2011, you'll be taxed on employer-provided health insurance and that you need to forward the e-mail on to all your friends.

As with most rumors like this, there is a small grain of truth here. The health care bill passed in the spring does indeed impose an excise tax on employer-provided health insurance (this is the so-called "Cadillac Tax" that you may have heard of). Here are the facts about this excise tax:

•The tax starts in 2018, not 2011
•The tax applies only to employer-provided health insurance that exceeds $27,500/year, and the tax is imposed on the insurance company, not on you
•It is true that the value of your employer-provided health insurance will be reported on your W-2 starting in 2011, but that's all -- it will be reported on your W-2 but it's not a taxable item to you; it will be shown for reporting purposes only.

UPDATE ON OCTOBER 25, 2010: The IRS says that employer reporting of health insurance on the W-2 will be optional for 2011. So, your 2011 W-2 may or may not show the value of employer provided health insurance. At any rate: you will not be taxed on this! It will be shown on the W-2 for informational and reporting purposes only.

Snopes.com provides more information about the original rumor:
http://www.snopes.com/politics/taxes/hr3590.asp

Residential Energy Credits Expire Soon

If you've been planning to make home improvements, time is running out -- not just on the weather but also on your chance to qualify for tax credits related to certain improvements. 

The "Residential Energy Credit" expires December 31.  The credit is available for qualifying purchases of energy efficient doors, windows, insulation, furnaces, air conditioning systems, certain types of water heaters, and even certain types of roofs. The credit is 30% of the purchase price.
Example:

If you spend $500 on energy efficient doors for your house, you can claim a credit of $150 on your tax return ($500 purchase price x 30%).

The purchases must be for an existing home that you live in as your principal residence. Purchases for new construction are not eligible for this credit, nor are purchases made for rental properties that you own.

The credit was available in 2009 as well, and the maximum total credit that you can take is limited to $1,500 combined in 2009 and 2010.

Please note that not all Energy Star rated purchases are eligible for the credit. You can find a listing of eligible products and more information in general about this credit at this website: http://www.energystar.gov/index.cfm?c=tax_credits.tx_index.

Changes Coming to Flex Accounts

Those of you who take part in a flex plan or an HSA for reimbursement of medical expenses will want to take note: starting in 2011, you will no longer be able to claim reimbursements for purchases of non-prescription, over-the-counter medicines. You'll only be able to claim reimbursements for medicines purchased with a prescription. The only exception to this will be purchases of insulin.

This does not apply to "non-medicine" purchases relating to your health, such as crutches or bandages. You can still be reimbursed for those purchases.

This change affects flex plans, HSAs and Archer MSAs and goes into effect January 1, 2011. The change comes as part of the health-care reform bill passed earlier this year.

Deducting Flood Losses and Other Storm Damage

If you live in Iowa, you know that it has rained pretty much every day this summer (and that's not much of an exaggeration!).  Many people have suffered water damage from flooded basements, and others have suffered other types of storm damage from hail and even tornadoes.  What are the tax consequences of storm damage?  Can you deduct anything?

As with most things involving tax law, the answer is, yes (maybe).  You are allowed to deduct "casualty and theft" losses on your tax return, but there are certain rules and limitations.

First, you have to calculate the total amount of damage.  Then you subtract out any insurance reimbursements.  From that, you subtract $100.  Then you subtract 10% of your Adjusted Gross Income.  Whatever is left can be claimed as an itemized deduction on your tax return.  If you claim the standard deduction, you can't claim a casualty loss.

Example:
Water causes $10,000 worth of damage to John's basement.  He doesn't have flood insurance, so there's no insurance reimbursement.  His Adjusted Gross Income is $50,000.  John calculates his casualty loss as follows:
     $10,000 loss - $100 - $5,000 (10% of his AGI) = $4,900
John can include $4,900 as an itemized deduction on his tax return.

Generally a casualty loss is claimed on the tax return for the year the casualty occurred.  However, if the area you live in is declared a federal disaster area, you have the choice of claiming it in the year it occurred, or going back and amending your prior-year tax return to claim the loss.

Tax News Roundup, 7/22/10

SHORT NEWS WEEK


This is a short week for the Dinesen Tax Times Tax News Roundup. Your correspondent is leaving on Friday for a week-long vacation to Montana, South Dakota and Wyoming. The Tax News Roundup will return at some point in August!

PROPOSAL TO ELIMINATE ESTATE TAX VOTED DOWN

Here's the latest in the saga of the estate tax: the U.S. Senate this week voted down a proposal to eliminate the estate tax altogether. Senator Jim DeMint, a Republican from South Carolina, made the proposal. It was defeated by a vote of 39-59. Read more about it in the Wall Street Journal.

THE TAX COURT, GAMBLING AND FENG SHUI

The U.S. Tax Court this week ruled in favor of a couple who used Feng Shui and other traditional Vietnamese methods to determine their “lucky days” for gambling. The couple had claimed that they were professional gamblers but the IRS disagreed. The Tax Court sided with the couple. Read more in the Dinesen Tax Times blog posting.

RECYCLED: WILL MY HEALTH INSURANCE BE TAXABLE?

This question keeps popping up: will my health insurance be taxable? The short answer to the question is NO. The Dinesen Tax Times has covered this story, once on June 27th and again on July 21st. Read the July 21st article here.

UNEMPLOYMENT BENEFITS EXTENDED

Congress extended unemployment benefits for 2.9 million unemployed Americans this week. Read more here.

As a friendly reminder, unemployment benefits are taxable, so if you receive unemployment in 2010, you'll have to report it as income on your 2010 tax return. For 2009, you were exempt from taxes on the first $2,400 of unemployment benefits, but Congress has not extended that exemption for 2010 (at least not yet).

Recycled: Will My Health Insurance Be Taxable?

I am recycling this article from last month because I've had more questions come up about this:
-----------------
(Originally posted June 27, 2010)

I saw one of my clients yesterday, and he asked me whether the rumor is true that the government is going to start taxing people on health insurance provided by their employers. The answer to that question is, NO.

My client is right that there is a rumor going around about this, including one of those wonderful "chain" e-mails that breathlessly states that starting in 2011, you'll be taxed on employer-provided health insurance and that you need to forward the e-mail on to all your friends.

As with most rumors like this, there is a small grain of truth here. The health care bill passed in the spring does indeed impose an excise tax on employer-provided health insurance (this is the so-called "Cadillac Tax" that you may have heard of). Here are the facts about this excise tax:

• The tax starts in 2018, not 2011
• The tax applies only to employer-provided health insurance that exceeds $27,500/year, and the tax is imposed on the insurance company, not on you
• It is true that the value of your employer-provided health insurance will be reported on your W-2, but that's all -- it's reported on your W-2 but it's not a taxable item to you; it will be shown for reporting purposes only

Snopes.com provides more information:

http://www.snopes.com/politics/taxes/hr3590.asp

Tax Court Finds in Favor of Couple that Claimed to be Professional Gamblers

The U.S. Tax Court has ruled in favor of taxpayers who used “Feng Shui” to determine their lucky days for gambling. The taxpayers had claimed to be professional gamblers and had claimed their gambling losses on Schedule C (business return for a sole proprietor) rather than as an itemized deduction on Schedule A.

For casual gamblers (which is the overwhelming majority of us), gambling winnings are reported as income on the front side of the 1040, and gambling losses (up to the amount of gambling winnings) are reported as itemized deductions on Schedule A. Professional gamblers report winnings and losses on Schedule C. Without going into detail (that’s another blog post for another day), the difference in reporting is significant.

In this case, the taxpayers took up gambling to create another source of income after the husband learned that his employer planned to move the business to Costa Rica. He and his wife would drive 130 miles one way to Nevada on Friday nights to gamble, and would gamble most of the weekend. According to the Tax Court report, the couple would only sleep three or four hours a night, and would return home on Monday morning. They were both born in Vietnam, and used Feng Shui and other religious beliefs to determine which one was having a “lucky day,” and that person would bet the heaviest that day.

In 2006 (the year being contested in Tax Court), the taxpayers had gambling winnings of about $850,000, and gambling losses of over $1 million. The taxpayers claimed to be professional gamblers that year, and the IRS disagreed. The IRS said the gambling activity was not a business because it wasn’t conducted full-time and because the taxpayer’s Feng Shui approach was “not businesslike and that it was irrational.”

The Tax Court sided with the taxpayer. In the ruling, the Court said the time spent by the taxpayers on weekends was close to the amount of time the husband devoted to his day job during the week. The Court also disagreed with the idea that the approach wasn’t businesslike, saying that the taxpayer’s profit motive was legitimate.

The ruling saved the couple almost $9,400 dollars in taxes and another $1,880 in penalties.

But before you all run out to become professional gamblers: this ruling is not necessarily a happy ending for the couple. They gave up on trying to be professional gamblers in early 2007 after they realized that they were almost $200,000 in debt. They had withdrawn money from retirement accounts and took out loans to finance their failed attempt at making a living as professional gamblers.

Tax News Roundup 7/17/2010

Here's a roundup of some of the tax news from this week....

SNIPES SENTENCED
Actor Wesley Snipes has lost his appeal of his 2008 conviction for willfully failing to file tax returns. Snipes had said he failed to receive a fair trial and that the three-year prison sentence he received was not fair, but an appeals court in Florida this week disagreed. Snipes was convicted of failing to file tax returns and pay income tax on more than $37 million of income between 1999-2004. You can read more about his case in a variety of locations, including here and here.

Jason’s comments: Snipes aligned himself with dubious tax advisors who led him into frivolous tax positions. What is a frivolous tax position? Here’s a good example, from the Orlando Sentinel:

“(Snipes) claimed that as a "fiduciary of God who is a 'non-taxpayer,' he was a foreign diplomat and not obligated to pay U.S. taxes….”

Those kinds of arguments never work. Bottom line? File your tax returns!

RETURNED MAIL COSTS THE IRS $57.9 MILLIONThe Treasury Inspector General for Tax Administration (TIGTA) this week released a report showing that, of the 200 million pieces of mail the IRS sends out to taxpayers, more than 19 million of those pieces of mail were returned as undeliverable in 2009. The report says the returned mail costs the IRS $57.9 million, and can cause harm to taxpayers because penalties and interest can rack up when notices are not received.

The report recommends that the IRS provide more ways for taxpayers to update addresses. Currently, the IRS accepts changes over the phone or the internet only in limited circumstances. For most people, your address gets updated at the IRS when you file a tax return with a new address on it, or when you submit Form 8822. Form 8822 should be submitted if you move after you have filed your tax return for the year.

Brave souls can read the entire TIGTA report here.

Jason’s comment: If you move and are concerned about the IRS not having your current address, contact your tax advisor. You may want to file Form 8822.

ESTATE TAX RUMBLINGS
Another estate tax proposal was made this week, this time a bipartisan proposal from Democrat Senator Blanche Lincoln of Arkansas and Republican Senator John Kyl of Arizona. Their proposal calls for an exemption of $5 million (phased in over 10 years and indexed for inflation), and a flat rate of 35%. It appears their proposal would allow taxpayers to either use this year’s estate tax rate (0%) but not get a basis step up, or use the 35% rate with a basis step up.

There have been a number of estate tax proposals out there. Iowa Senator Tom Harkin recently co-sponsored legislation that would provide an exemption amount of $3.5 million. Estates valued between $3.5 million and $10 million would be taxed at 45%, estates between $10 million and 50 million would be taxed at 50%, and estates worth more than $50 million would be taxed at 55%. The proposal also calls for an additional “billionaire’s surtax” of 10%.

In 2009, the top rate was 45% with an exemption amount of $3.5 million. If Congress does nothing, the estate tax will return in 2011 with a flat rate of 55% and an exemption amount of $1 million.

Jason’s comments: It will be interesting to see what happens. I wonder if the death this week of billionaire New York Yankees owner George Steinbrenner will spur action on the estate tax. Speaking of Steinbrenner, here’s an article that talks about the estate tax implications of Steinbrenner’s death.

YOURS TRULY FEATURED IN ONE IOWA ARTICLEI recently had an article featured at One Iowa, talking about gift tax issues facing same-sex couples. You can read the article here.

Can I Deduct Summer Camp Expenses?

If you send your kids to camp this summer, you might be able to deduct the cost on your tax return. The IRS allows a deduction for summer day camps, but not for overnight camps. In order for a day camp to be deductible, you have to meet two basic rules.

1. Your child must be under age 13.
2. The expenses must be incurred so you can work or look for work.

These are the same rules that have to be met in order to deduct daycare expenses.
The cost of the day camp would be included with your other childcare expenses, such as daycare expenses. You can claim up to $3,000 of childcare expenses per child per year, up to a maximum of $6,000 total for two or more kids. You then get to claim a credit of between 20-35% of that amount, depending on your income.
As mentioned earlier, the cost of overnight camps is not deductible, nor is the cost of sending your kids to summer school.

This is a basic overview of the subject. As always, if you have specific questions about your situation, consult your tax advisor.

Homebuyer Credit Closing Deadline Extended

The Senate on Wednesday approved an extension of the closing deadline for people who qualify for one of the homebuyer tax credits. Yesterday (June 30) had been the original closing deadline, but the deadline has now been extended through September 30.

The homebuyer credits provide a tax credit of up to $8,000 for first-time homebuyers, and $6,500 for "long-time homeowners" who buy a new house.

Will My Health Insurance Be Taxable?????

I saw one of my clients yesterday, and he asked me whether the rumor is true that the government is going to start taxing people on health insurance provided by their employers. The answer to that question is, NO.

My client is right that there is a rumor going around about this, including one of those wonderful "chain" e-mails that breathlessly states that starting in 2011, you'll be taxed on employer-provided health insurance and that you need to forward the e-mail on to all your friends.

As with most rumors like this, there is a small grain of truth here. The health care bill passed in the spring does indeed impose an excise tax on employer-provided health insurance (this is the so-called "Cadillac Tax" that you may have heard of). Here are the facts about this excise tax:

1. The tax starts in 2018, not 2011
2. The tax applies only to employer-provided health insurance that exceeds $27,500/year and is imposed on the insurance company, not on you
3. It is true that the value of your emloyer-provided health insurance will be reported on your W-2, but that's all -- it's reported on your W-2 but it's not a taxable item to you; it will be shown for reporting purposes only

Snopes.com provides more information:
http://www.snopes.com/politics/taxes/hr3590.asp

Excise Tax on Tanning Services Starts July 1

A 10% excise tax on tanning services starts July 1. The IRS today released regulations about the tax, which will be assessed in a similar fashion to a sales tax. The provider of the tanning service will have to submit the excise tax to the IRS quarterly, which means an increased cost to the consumer.

The tax only applies to ultraviolet tanning services; "spray-on" tanning and tanning lotions are not subject to the excise tax. The regulations provide exceptions for licensed medical professionals who use ultraviolet lights as part of medical treatment, and for fitness centers that provide tanning as an incidental cost of membership.

The affect on your pocketbook will be to add 10% to your current tanning cost. So if a tanning fee is $20, you'll be paying an additional $2 in excise tax starting July 1.

This excise tax is part of the health care reform bill that Congress passed in the spring. Officials estimate that the tax could raise $2.7 billion of revenue over the next 10 years.

IRS Ruling -- What Does it Mean for Iowa Same-Sex Couples?

As I posted earlier, the IRS recently issued three rulings – a “private letter ruling” and two “CCAs” (CCA = Chief Counsel Advice) that give same-sex couples in California somewhat equal treatment to opposite-sex married couples when filing federal tax returns. You may be wondering how this will affect same-sex married couples in Iowa. Here are the basics, followed by more detail:

• The rulings allow Registered Domestic Partners (RDPs) in California to calculate their income in the same manner as opposite-sex married couples under “community property” rules (California is a “community property” state).


• The rulings do NOT allow RDPs to file federal returns with a filing status of “married filing jointly” or “married filing separately.”


• The rulings do not change the federal tax situation of Iowa same-sex couples because Iowa is not a community property state.

Here are some specifics about the ruling:

What the Heck are “Private Letter Rulings” and "CCAs"?
“CCA” stands for “Chief Counsel Advice” and refers to advice given by the IRS’s chief legal advisor (the “Chief Counsel”).

Private letter rulings are issued by the IRS in response to a taxpayer’s request for guidance. Technically, the ruling is only binding between the IRS and the taxpayer who requested the ruling. Meaning, private letter rulings are not precedent-setting. However, this particular private letter ruling, combined with the two memos from Chief Counsel, do seem to set precedent for RDPs in California.

What are “Community Property” laws?
For federal tax purposes, if a married couple in a community property state files “married filing separately” on their federal returns, each spouse must share equally in the other’s income and deductions. There are 9 states that follow community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Example:
Ronnie and Johnnie, an opposite-sex married couple, live in a community property state. Ronnie earns $60,000 in wages while Johnnie earns $40,000 in wages. They decide to file separate federal returns. On their separate returns, each will report $50,000 of income.

In the past, the IRS has said that community property rules did not apply to RDPs for federal tax purposes. So in the “Ronnie and Johnnie” example, if they were an RDP, they would each only report their own income on their individual returns, rather than splitting it between them.

What These IRS Rulings Do:
These rulings extend community property rules to RDPs for purposes of calculating federal income and deductions. So if “Ronnie and Johnnie” are an RDP, they can now calculate their income based on community property rules. In our example, they would each report $50,000 in income.

What the Rulings Do NOT Do:
It is very important to note that the rulings still do NOT allow RDPs to file as “married filing jointly” or “married filing separately. The only allowable filing statuses are “single” or “head of household.”

Affect on Iowa Same-Sex Married Couples:
Iowa is not a community property state, and the rulings do not deal with the issue of filing statuses. Therefore, it really has no affect on same-sex couples in Iowa. However, the rulings can be seen as a positive step toward tax equality for same-sex couples.

IRS Private Letter Ruling on Same-Sex Couples in California

The IRS recently issued a "private letter ruling" that affects same-sex married couples in California. Read more here: http://online.wsj.com/article/SB10001424052748704080104575286931017169308.html.

What affect does this have on same-sex married couples in Iowa? It really won't have much of an affect, because this ruling deals with "community property" rules. Iowa is not a community property state. I'll post a more thorough analysis of the ruling soon.