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.