Sunday, January 30, 2011
The Dinesen Tax Times Has Moved
As part of the upgrades I made to my company website, http://www.dinesentax.com/, I have moved The Dinesen Tax Times to Wordpress. You can follow my blog at http://dinesentax.wordpress.com/. All of the articles here on Blogger will eventually be transferred over to Wordpress.
Friday, January 28, 2011
Tax Clinic Promotion With One Iowa
I am proud to announce that I will be holding a free tax clinic about the tax implications of same-sex marriage on Saturday, March 12, at the One Iowa offices in downtown Des Moines. Aside from the clinic, I am also running a promotion now through tax season - if you mention "One Iowa" when hiring me to prepare your taxes, I will donate 15% of my fee to the One Iowa Education Fund. For more information, please e-mail me at dinesentax@gmail.com.
Thursday, January 27, 2011
Understanding Your W-2, Part 2
This is part 2 of a series explaining the boxes that appear on your Form W-2.
In Part 1, I looked at Boxes 1-8. Now we'll start with Box 9:
Box 9 (advance Earned Income Credit): Certain taxpayers who qualify for the Earned Income Credit have been able to take the credit in advance on their paychecks. Starting in 2011, this option is no longer available, so Box 9 will be something else going forward (on the draft 2011 W-2, Box 9 is "grayed out").
Box 10 (dependent care benefits): This box reports amounts you deferred into a cafeteria plan for daycare expenses. It also reports the amount of daycare expenses your employer paid on your behalf.
Box 11 (nonqualified plans): This box reports amounts distributed to you from a "nonqualified plan" and from non-governmental 457(b) plans. Nonqualified plans are deferred compensation plans that generally benefit key executives and are not required to meet the "non-discrimination" requirements that a 401(k) plan has to meet.
Box 12: This box reports any number of transactions, but for most people this box will include salary deferrals into a 401(k) plan (shown as "Code D") This box may also include moving expenses reimbursed by your employer, and adoption benefits received during the year. In total, there are approximately 25 different letter codes that could be shown in Box 12, but again, the most common will be Code D for 401(k) deferrals.
Box 13: If you participated in an employer-provided retirement plan such as a 401(k), the "Retirement Plan" box will be marked. If this box is marked, it means the amount of deduction you can take for contributions to an IRA is limited. The "statutory employee" box will be marked if you are treated as an independent contractor under common law, but are treated as an employee for Social Security tax purposes (that's the very short and sweet definition!). The "Third-Party Sick Pay" box will be marked if the W-2 is reporting sick pay received from someone other than your employer.
In Part 1, I looked at Boxes 1-8. Now we'll start with Box 9:
Box 9 (advance Earned Income Credit): Certain taxpayers who qualify for the Earned Income Credit have been able to take the credit in advance on their paychecks. Starting in 2011, this option is no longer available, so Box 9 will be something else going forward (on the draft 2011 W-2, Box 9 is "grayed out").
Box 10 (dependent care benefits): This box reports amounts you deferred into a cafeteria plan for daycare expenses. It also reports the amount of daycare expenses your employer paid on your behalf.
Box 11 (nonqualified plans): This box reports amounts distributed to you from a "nonqualified plan" and from non-governmental 457(b) plans. Nonqualified plans are deferred compensation plans that generally benefit key executives and are not required to meet the "non-discrimination" requirements that a 401(k) plan has to meet.
Box 12: This box reports any number of transactions, but for most people this box will include salary deferrals into a 401(k) plan (shown as "Code D") This box may also include moving expenses reimbursed by your employer, and adoption benefits received during the year. In total, there are approximately 25 different letter codes that could be shown in Box 12, but again, the most common will be Code D for 401(k) deferrals.
Box 13: If you participated in an employer-provided retirement plan such as a 401(k), the "Retirement Plan" box will be marked. If this box is marked, it means the amount of deduction you can take for contributions to an IRA is limited. The "statutory employee" box will be marked if you are treated as an independent contractor under common law, but are treated as an employee for Social Security tax purposes (that's the very short and sweet definition!). The "Third-Party Sick Pay" box will be marked if the W-2 is reporting sick pay received from someone other than your employer.
Understanding Your W-2, Part 1
If you haven't received your W-2 yet, you should be soon. This is the first in a several-part series where I go line-by-line through a Form W-2, so you understand what you are looking at.
Line 1 (wages, tips and other compensation): This is the amount of your gross income that is reported on Line 7 of your Form 1040. For many employees, this will be your gross wages minus contributions to a 401(k) and cafeteria plan. Someone whose employer-provided health insurance includes a same-sex partner will see the value of that insurance added into Line 1.
Line 2 (federal income tax withheld): Self-explanatory. The amount of federal taxes withheld from your paycheck during the year.
Lines 3 and 5 (Social Security wages / Medicare wages): The amount of wages subject to the 6.2% Social Security tax and 1.45% Medicare tax. Contributions to a 401(k) plan are taxed for Social Security and Medicare purposes. For some people, these two boxes might be different, because only the first $106,800 of wages are taxed for Social Security purposes, but all wages are taxed for Medicare purposes.
Lines 4 and 6 (Social Security / Medicare tax withheld): The amount of Social Security and Medicare taxes withheld from your paycheck during the year.
Box 7 (Social Security tips): For people who receive tip money, this reflects the amount of tips you reported to your employer.
Box 8 (allocated tips): This box is a little strange. For restaurant workers, it reflects the difference between what you reported as tip income to your employer, and 8% of the restaurant's income. That is a very general explanation. If your W-2 shows an amount in Box 8, you probably want to seek the advice of a tax professional because you may have to file a Form 4137.
Line 1 (wages, tips and other compensation): This is the amount of your gross income that is reported on Line 7 of your Form 1040. For many employees, this will be your gross wages minus contributions to a 401(k) and cafeteria plan. Someone whose employer-provided health insurance includes a same-sex partner will see the value of that insurance added into Line 1.
Line 2 (federal income tax withheld): Self-explanatory. The amount of federal taxes withheld from your paycheck during the year.
Lines 3 and 5 (Social Security wages / Medicare wages): The amount of wages subject to the 6.2% Social Security tax and 1.45% Medicare tax. Contributions to a 401(k) plan are taxed for Social Security and Medicare purposes. For some people, these two boxes might be different, because only the first $106,800 of wages are taxed for Social Security purposes, but all wages are taxed for Medicare purposes.
Lines 4 and 6 (Social Security / Medicare tax withheld): The amount of Social Security and Medicare taxes withheld from your paycheck during the year.
Box 7 (Social Security tips): For people who receive tip money, this reflects the amount of tips you reported to your employer.
Box 8 (allocated tips): This box is a little strange. For restaurant workers, it reflects the difference between what you reported as tip income to your employer, and 8% of the restaurant's income. That is a very general explanation. If your W-2 shows an amount in Box 8, you probably want to seek the advice of a tax professional because you may have to file a Form 4137.
Wednesday, January 26, 2011
IRS Launches Mobile App
The IRS has released an app that allows taxpayers to check the status of their tax refund and to get other tax news and information. The app is called "IRS2Go." You can find out more at this page on the IRS website.
Tuesday, January 25, 2011
January 31 Deadline for Charitable IRA Rollovers
Eligible taxpayers still have a few more days to make tax-free contributions to charities from an IRA. This provision had expired on December 31, 2009, but was renewed for 2010 in the tax bill passed by Congress last month. The National Association of Enrolled Agents has more coverage, from one of their weekly news updates for members:
The tax deal reached by Congress and the President in December included a provision which retroactively extends the ability of taxpayers to contribute tax-free to authorized charities from their IRA (up to $100,000). The issue that is unique with the charitable IRA rollover is that because the bill wasn't passed until mid-December, but is retroactive to January 1, 2010, Congress gave taxpayers the ability to elect to treat a charitable rollover made in January 2011 as if it were made on December 31, 2010. There is only a short window of opportunity to take advantage of the incentive.
Saturday, January 22, 2011
Illinois Raises Tax Rates - Will Iowa Benefit?
Illinois has announced that it will enact major increases to its tax rates. Will Iowa benefit? My friends at Radio Iowa have a story about this possibility.
The founder of sandwich company Jimmy John's, based in Champaign, Illinois, has already said he might move his company to Florida because of the rate hike.
The founder of sandwich company Jimmy John's, based in Champaign, Illinois, has already said he might move his company to Florida because of the rate hike.
Friday, January 21, 2011
Cell Phones Are Not Listed Property - Part 2
I wanted to follow-up on this blog post where I wrote about cell phones no longer being "listed property." Listed property is property covered under Section 274 of the Internal Revenue Code and includes "entertainment" property such as computers and cameras. Vehicles are also considered to be listed property. Section 274 requires strict documentation of the business vs. non-business usage of listed property.
Legislation in 2010 removed cell phones from the "listed property" category. As I talked about in my original blog post, this is big news for employees who are provided cell phones by their employers. The employee will no longer have to track business vs. non-business usage, and the non-business portion will no longer be included in the employee's income. But what does it mean for people who are self-employed?
The answer is, it really doesn't change anything. The self-employed will still have to track business vs. non-business usage, and will still only be able to deduct the business portion of cell phone expenses.
Legislation in 2010 removed cell phones from the "listed property" category. As I talked about in my original blog post, this is big news for employees who are provided cell phones by their employers. The employee will no longer have to track business vs. non-business usage, and the non-business portion will no longer be included in the employee's income. But what does it mean for people who are self-employed?
The answer is, it really doesn't change anything. The self-employed will still have to track business vs. non-business usage, and will still only be able to deduct the business portion of cell phone expenses.
Business Credit Card Transactions Now Reported on a 1099
Starting in 2011, credit card companies will begin issuing a new type of Form 1099 (Form 1099-K) to some businesses and individuals. The 1099-K will detail, month-by-month, the amount of income the business received from credit card transactions. It will also apply to debit card transactions, and to payments processed by third-party providers such as Pay Pal.
Form 1099-K will only be issued to business or individuals who have at least 200 transactions and who receive at least $20,000 from those transactions. The goal with these thresholds is to avoid having a 1099-K issued to someone who, for example, sells things casually on e-Bay.
View a draft of Form 1099-K at the IRS website.
Form 1099-K will only be issued to business or individuals who have at least 200 transactions and who receive at least $20,000 from those transactions. The goal with these thresholds is to avoid having a 1099-K issued to someone who, for example, sells things casually on e-Bay.
View a draft of Form 1099-K at the IRS website.
Thursday, January 20, 2011
Itemizers Can File Starting February 14
The IRS today announced that it will start accepting tax returns with itemized deductions on February 14. The IRS had previously announced that there would be a delay in accepting returns from itemizers. The last-minute tax legislation passed by Congress on December 17th affected certain types of deductions, and the IRS said it needed time to update its computer systems for the changes.
Wednesday, January 19, 2011
Tax Deduction Available for Certain Types of Drywall Damage
Taxpayers who have suffered damages from certain types of imported drywall may be able to take a tax deduction for the damages. The Consumer Protection Safety Council says it has received several-thousand reports of "corrosive drywall" damage, including blackening or corrosion of copper wiring and copper elements of household appliances between 2001 and 2009.
Homeowners who have paid to have these drywall problems fixed can potentially take a casualty loss on their tax return. Click here to read IRS guidance on the issue from this past fall.
As explained in this Dinesen Tax Times article, a casualty loss deduction is only available to taxpayers who itemize, and the deduction amount must be reduced by $100 and by 10% of your adjusted gross income.
Homeowners who have paid to have these drywall problems fixed can potentially take a casualty loss on their tax return. Click here to read IRS guidance on the issue from this past fall.
As explained in this Dinesen Tax Times article, a casualty loss deduction is only available to taxpayers who itemize, and the deduction amount must be reduced by $100 and by 10% of your adjusted gross income.
Monday, January 17, 2011
New 1099 Provisions Start This Year for Rental Owners
With the new year comes a new law that applies to owners of rental properties. For the first time, rental owners will have to issue 1099s to service providers (accountants, lawyers, unincorporated plumbers and electricians). This applies to payments made after January 1, 2011.
And starting on January 1, 2012, rental owners will face even stricter 1099 requirements, as will all businesses. Starting in 2012, businesses and rental owners 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.
Thus, if you own a rental house and you pay the utilities, you'll have to issue a 1099 to the utility company, starting in 2012.
I think Congress will provide relief to the stricter provisions that take effect in 2012. But I think the stricter 2011 requirements on rental owners are here to stay.
Read prior coverage of the 1099 issue here, here and here.
And starting on January 1, 2012, rental owners will face even stricter 1099 requirements, as will all businesses. Starting in 2012, businesses and rental owners 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.
Thus, if you own a rental house and you pay the utilities, you'll have to issue a 1099 to the utility company, starting in 2012.
I think Congress will provide relief to the stricter provisions that take effect in 2012. But I think the stricter 2011 requirements on rental owners are here to stay.
Read prior coverage of the 1099 issue here, here and here.
Saturday, January 15, 2011
Tax Headaches for Same-Sex Couples in California, Nevada and Washington
The New York Times has a good article about the tax headaches faced by same-sex married couples in California, Nevada and Washington, where special "community property rules" apply. An IRS ruling in 2010 allows same-sex married couples in those states to calculate their federal taxes in the same was as opposite-sex couples. Most people considered the ruling a step forward for same-sex couples, but as the article points out, it is also a source of headaches and confusion.
I wrote two articles about the ruling in 2010. Those articles can be found here and here.
I wrote two articles about the ruling in 2010. Those articles can be found here and here.
Tax Lien Filed Against Montel Williams
Montel Williams is the latest celebrity to have tax problems. According to "The Smoking Gun," the IRS has filed a $1 million lien against Williams and his wife in connection with their 2008 and 2009 tax returns.
Read more here.
Read more here.
Friday, January 14, 2011
Oops! Yale Payroll Error Costs Gay Employees
Yale University says it made a payroll error that resulted in under-withholding for 61 employees with same-sex partners. Yale failed to withhold federal taxes on the value of domestic partner health insurance during 2010.
Same-sex marriage is legal in Connecticut, where Yale is located, but the federal government does not recognize same-sex marriage. The issue here is taxability of health insurance provided to a same-sex spouse. Connecticut does not tax the value of such health insurance, but the federal government does. A programming error in Yale's payroll system treated the health insurance as not taxable for both state and federal purposes, instead of just for state purposes, so federal taxes were not withheld on the value of the insurance.
The affected employees will see smaller paychecks in 2011, because they'll not only have "regular" withholding for 2011, but they'll also have the 2010 under-withholding withheld from their paychecks in 2011.
Read all about it in this New York Times blog.
Same-sex marriage is legal in Connecticut, where Yale is located, but the federal government does not recognize same-sex marriage. The issue here is taxability of health insurance provided to a same-sex spouse. Connecticut does not tax the value of such health insurance, but the federal government does. A programming error in Yale's payroll system treated the health insurance as not taxable for both state and federal purposes, instead of just for state purposes, so federal taxes were not withheld on the value of the insurance.
The affected employees will see smaller paychecks in 2011, because they'll not only have "regular" withholding for 2011, but they'll also have the 2010 under-withholding withheld from their paychecks in 2011.
Read all about it in this New York Times blog.
Thursday, January 13, 2011
Recapture and Repayment of Homebuyer Tax Credits
Taxpayers who have claimed the homebuyer tax credits over the last couple of years may have to repay some of the credit, starting with 2010 tax returns. The rules differ depending on which credit you claimed.
$7,500 Credit for Home Purchases Between April 8, 2008 and December 31, 2008
The original First-Time Homebuyer Credit was a credit of up to $7,500 for first-time homebuyers. Anyone who claimed this credit will have to repay the credit over 15 years, starting with their 2010 tax return.
Example
Someone claiming the full $7,500 credit will repay $500 of the credit each year for the next 15 years. The $500 is included as additional tax owed on the back side of Form 1040.
If the home gets sold at any time during the 15-year repayment period, the outstanding amount of the credit is due in full in the year of the sale.
$8,000 or $6,500 Credit for Purchases Between January 1, 2009, and April 30, 2010
Legislation in November of 2009 changed the original First-Time Homebuyer Credit and added a second credit for long-time homeowners who purchased a new home. The First-Time Homebuyer Credit was increased to up to $8,000 for homes purchased between January 1, 2009, and April 30, 2010. Most importantly, this credit no longer had to be re-paid -- as long as the homebuyer lives in the new home for at least 36 months.
The legislation added a $6,500 credit for long-time homeowners who purchased a new home between January 1, 2009, and April 30, 2010. This credit also does not have to be re-paid -- again, as long as the homebuyer lives in the home for at least 36 months.
If the homebuyer doesn't live in the home for at least 36 months, the entire amount of the credit is subject to being recaptured. So, someone who claimed the full $8,000 credit for a first-time home purchase could see their tax bill increase by $8,000 if they sell their home before the end of 36 months.
There are certain exceptions to the recapture rules in situations where the homebuyer dies, is in the military, or sells the home for a loss. It is best to seek the help of a tax professional if you think the recapture rules might apply to you.
$7,500 Credit for Home Purchases Between April 8, 2008 and December 31, 2008
The original First-Time Homebuyer Credit was a credit of up to $7,500 for first-time homebuyers. Anyone who claimed this credit will have to repay the credit over 15 years, starting with their 2010 tax return.
Example
Someone claiming the full $7,500 credit will repay $500 of the credit each year for the next 15 years. The $500 is included as additional tax owed on the back side of Form 1040.
If the home gets sold at any time during the 15-year repayment period, the outstanding amount of the credit is due in full in the year of the sale.
$8,000 or $6,500 Credit for Purchases Between January 1, 2009, and April 30, 2010
Legislation in November of 2009 changed the original First-Time Homebuyer Credit and added a second credit for long-time homeowners who purchased a new home. The First-Time Homebuyer Credit was increased to up to $8,000 for homes purchased between January 1, 2009, and April 30, 2010. Most importantly, this credit no longer had to be re-paid -- as long as the homebuyer lives in the new home for at least 36 months.
The legislation added a $6,500 credit for long-time homeowners who purchased a new home between January 1, 2009, and April 30, 2010. This credit also does not have to be re-paid -- again, as long as the homebuyer lives in the home for at least 36 months.
If the homebuyer doesn't live in the home for at least 36 months, the entire amount of the credit is subject to being recaptured. So, someone who claimed the full $8,000 credit for a first-time home purchase could see their tax bill increase by $8,000 if they sell their home before the end of 36 months.
There are certain exceptions to the recapture rules in situations where the homebuyer dies, is in the military, or sells the home for a loss. It is best to seek the help of a tax professional if you think the recapture rules might apply to you.
Iowa's Dizzying Array of Tax Credits
In a recent post, I talked about 3 tax credits that are available to Iowans for various charitable contributions. As a follow-up, I should note that these are just 3 of the approximately 30 tax credits that Iowa makes available to individuals and businesses for various things. You may have noticed that the 3 credits mentioned in my last post can be confusing to decipher. I can tell you that the other 27 (or so) credits are just as confusing.
Iowa's dizzying array of obscure and confusing tax credits, coupled with multiple tiers of tax rates and a high "top rate," is why Iowa consistently ranks very low in terms of "tax friendliness." Plus, some of the credits have been very poorly administered and full of fraud.
Iowa's dizzying array of obscure and confusing tax credits, coupled with multiple tiers of tax rates and a high "top rate," is why Iowa consistently ranks very low in terms of "tax friendliness." Plus, some of the credits have been very poorly administered and full of fraud.
Tuesday, January 11, 2011
Earned Income Credit Remains "Expanded" in 2011
The expanded Earned Income Tax Credit (EITC) that has been in place for 2009 and 2010 has been extended through 2011 and 2012. The expanded credit allows a higher EITC for families with three or more qualifying children (the "normal," non-expanded EITC rules are based on a maximum of 2 qualifying children).
For 2010, the EITC could be available to taxpayers with 3 children and income of up to $48,362 if married, and $43,352 for other filing statuses. This is a slight increase over the 2009 amounts.
For 2010, the EITC could be available to taxpayers with 3 children and income of up to $48,362 if married, and $43,352 for other filing statuses. This is a slight increase over the 2009 amounts.
Friday, January 7, 2011
College Savings Iowa Deduction Increases for 2011
The amount of deduction you can take for contributions to a "College Savings Iowa" program has increased by $54 for 2011. The maximum deduction is now $2,865 per child, up from $2,811 in 2010. The deduction limit is per parent, per child, so a married couple with two kids could deduct up to $11,460 in 2011 (4 x $2,865).
College Savings Iowa is Iowa's form of a "529 plan" that lets you save for college expenses. Distributions from the plan are tax-free as long as the money is used for college expenses. I wrote more about College Savings Iowa in this article.
Thanks to my friends at Radio Iowa for tipping me off to this story.
College Savings Iowa is Iowa's form of a "529 plan" that lets you save for college expenses. Distributions from the plan are tax-free as long as the money is used for college expenses. I wrote more about College Savings Iowa in this article.
Thanks to my friends at Radio Iowa for tipping me off to this story.
Special Iowa Charitable Credits
I spent quite a bit of time in December talking about charitable contributions and the deductions that taxpayers can take for those contributions. Today, I'm going to talk about several tax credits that are available for certain charitable contributions made by Iowans.
School Tuition Organization Tax Credit
Certain donations made to "School Tuition Organizations" may be eligible for a credit of up to 65% of the donation. This credit is for contributions to qualifying private-school tuition organizations. Chances are, you'll only consider taking this credit if your child attends a private school. The school tuition organization will issue you a certificate, which must be attached to your tax return when you claim the credit.
Endow Iowa Credit
Donations made to certain community foundations in Iowa can be eligible for a tax credit of 25% of the donation. The credit is non-refundable but any unused credit in the current year can be carried forward for up to 5 years. This credit is administered by the Iowa Department of Economic Development and you have to file forms with them in order to claim it. It is probably best to talk to a tax advisor before trying to claim this credit.
Charitable Conservation Contribution Credit
This credit definitely requires some planning and thought before it is claimed. Iowans who donate land to a qualified organization for conservation purposes (such as donating land to a county conservation board) can claim a credit of up to 50% of the fair-market value of the land. The maximum credit allowed is $100,000. The credit is nonrefundable but any unused credit in the current year can be carried forward for up to 20 years. It should be noted that the donation of land for conservation purposes is NOT always better than a sale of the land, in terms of net "cash in hand" after the transaction, even with the credit. For this reason, it's important to talk to your tax advisor about your goals to make sure the transaction accomplishes what you want it to accomplish.
School Tuition Organization Tax Credit
Certain donations made to "School Tuition Organizations" may be eligible for a credit of up to 65% of the donation. This credit is for contributions to qualifying private-school tuition organizations. Chances are, you'll only consider taking this credit if your child attends a private school. The school tuition organization will issue you a certificate, which must be attached to your tax return when you claim the credit.
Endow Iowa Credit
Donations made to certain community foundations in Iowa can be eligible for a tax credit of 25% of the donation. The credit is non-refundable but any unused credit in the current year can be carried forward for up to 5 years. This credit is administered by the Iowa Department of Economic Development and you have to file forms with them in order to claim it. It is probably best to talk to a tax advisor before trying to claim this credit.
Charitable Conservation Contribution Credit
This credit definitely requires some planning and thought before it is claimed. Iowans who donate land to a qualified organization for conservation purposes (such as donating land to a county conservation board) can claim a credit of up to 50% of the fair-market value of the land. The maximum credit allowed is $100,000. The credit is nonrefundable but any unused credit in the current year can be carried forward for up to 20 years. It should be noted that the donation of land for conservation purposes is NOT always better than a sale of the land, in terms of net "cash in hand" after the transaction, even with the credit. For this reason, it's important to talk to your tax advisor about your goals to make sure the transaction accomplishes what you want it to accomplish.
Wednesday, January 5, 2011
Federal Tax Due Date is April 18
Tax season will last a little longer this year thanks to a holiday being celebrated in Washington, DC. The deadline for filing your 2010 tax return will be Monday, April 18, 2011. The due date is normally April 15, but this year, the 15th falls on a holiday called "Emancipation Day" that is celebrated by Washington, DC. Even though the holiday is only celebrated in Washington, DC, we all benefit from it by getting 3 extra days to file our tax returns.
Unlicensed Daycare Providers Part 2 - Tax Court Ruling
In this blog post, I talked about the tax consequences of being an unlicensed, in-home daycare provider. As mentioned in that post, the unlicensed provider may or may not be able to take the deduction for "business use of the home," depending on state law. If state law requires a provider to be licensed or registered but the provider is not licensed, then the deduction is not allowed. (In Iowa, an unlicensed provider can care for up to 5 children, and thus would be able to take the deduction. If the provider added a 6th child and did not register with the state, then the deduction would NOT be allowed.)
A provider from Illinois found out that the IRS does audit daycare providers, and the disallowance of the deduction for business use of the home can be costly. (Side note: the IRS has published an Audit Technique Guide for its auditors to use when auditing daycares - and yes, I have read that guide from cover-to-cover.)
The case involved an unlicensed provider in Illinois who took sizeable deductions relating to business use of her home as a daycare. Based on Illinois law, she was required to be licensed. Because she was unlicensed when she was supposed to be licensed, the deductions -- more than $20,000 for 2004, and $22,000 for 2005 -- were disallowed.
Last month, the case went to the Tax Court, where the provider tried to argue that she thought she was exempt from licensing requirements, and that because the state had not filed a complaint against her for being unlicensed, the IRS had no right to disallow the deductions. The Tax Court disagreed, saying that the IRS can disallow a deduction taken by a provider whether or not the state has taken any action against the provider.
The provider also tried to argue that because she had taken the deduction in other years without it being questioned by the IRS, the deduction should be upheld in the years in question. The Tax Court also disagreed with that, pointing out that each tax year is considered separately.
The total cost to the provider will be more than $16,000 in taxes, plus penalties.
As always, a daycare provider with any questions about the tax reporting for their operation should contact a tax professional.
A provider from Illinois found out that the IRS does audit daycare providers, and the disallowance of the deduction for business use of the home can be costly. (Side note: the IRS has published an Audit Technique Guide for its auditors to use when auditing daycares - and yes, I have read that guide from cover-to-cover.)
The case involved an unlicensed provider in Illinois who took sizeable deductions relating to business use of her home as a daycare. Based on Illinois law, she was required to be licensed. Because she was unlicensed when she was supposed to be licensed, the deductions -- more than $20,000 for 2004, and $22,000 for 2005 -- were disallowed.
Last month, the case went to the Tax Court, where the provider tried to argue that she thought she was exempt from licensing requirements, and that because the state had not filed a complaint against her for being unlicensed, the IRS had no right to disallow the deductions. The Tax Court disagreed, saying that the IRS can disallow a deduction taken by a provider whether or not the state has taken any action against the provider.
The provider also tried to argue that because she had taken the deduction in other years without it being questioned by the IRS, the deduction should be upheld in the years in question. The Tax Court also disagreed with that, pointing out that each tax year is considered separately.
The total cost to the provider will be more than $16,000 in taxes, plus penalties.
As always, a daycare provider with any questions about the tax reporting for their operation should contact a tax professional.
Monday, January 3, 2011
Iowa Deduction Finder: College Savings Iowa
One way to save for your children's or grandchildren's college tuition is through a "529 Plan." A 529 Plan allows for tax-free earnings on investments, and distributions from the plan are tax-free as long as the distribution is used for college expenses.
As an added bonus, Iowa allows a tax deduction for contributions to an Iowa 529 Plan (in Iowa it's called "College Savings Iowa"). For 2010, you can deduct up to $2,811 per parent per child for contributions to a College Savings Iowa Plan. So a married couple with two kids could deduct up to $11,244 of contributions ($2,811 x 4).
Read more at the College Savings Iowa website.
As an added bonus, Iowa allows a tax deduction for contributions to an Iowa 529 Plan (in Iowa it's called "College Savings Iowa"). For 2010, you can deduct up to $2,811 per parent per child for contributions to a College Savings Iowa Plan. So a married couple with two kids could deduct up to $11,244 of contributions ($2,811 x 4).
Read more at the College Savings Iowa website.
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