Monday, July 27, 2009

Questions for the Tax Lady: July 27th, 2009

Every Monday I am going to post a set of answers to tax questions I’ve received over the past week. Additionally, I also seek out a few general tax questions from other users in the social communities I am active in. If you have a question you would like to ask me then check out the following links to my profiles. You can send me either a direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Hey Roni, I am thinking about moving to Oregon as property values are lower there. I am hoping my income tax and property tax situation will be better as well as my business. I have one part time employee, and costs here in California are killing me! Would Oregon be better for me personal and/or business-wise?

This is tricky question as there are a lot of things you are going to want to consider in making your decision. First of all, I am going to assume that you have a business that can easily be moved to Oregon without suffering any reduction in revenue. Depending on where you move to you might find a property in Oregon cheaper then the average home in California. However, according to Wikipedia, the minimum wage in Oregon is actually 40 cents higher then in California.

As far as taxes, Oregon has no state sales tax while California levies a hefty 8% sales tax (the highest in the country). According to reports, business tax rates are lower in Oregon then they are in most places in the country. However, the type of taxes you are going to pay will depend on the type of business structure you have (sole proprietorship, corporation, etc). With regard to income taxes, California has a very progressive income tax range of between 1% and 10.3%. California’s 9% tax rate is only for taxpayers making between $47,056 and $1,000,000 per year, and the 10.3% rate is only for those making over a million dollars a year. On the other hand, Oregon’s income tax rates are much less progressive. The top tax rate is 9%, but it’s assessed on all taxpayers making $7,601 or more per year.

No matter what, moving to a different state is a big decision. To better understand if it would be a good financial move, I would recommend researching tax rates and property values in cities you are thinking about moving to.

Question #2: What are the tax and legal complications of either short selling or a foreclosure? Do I have to claim to the difference from sales price to loan amount as income on my taxes?

No. Whether you go with a short sale or foreclosure, you will not need to claim the difference between the sales price and new value as income. Unlike forgiven credit card debt, the Mortgage Debt Relief Act of 2007 prevents the IRS from taxing you on forgiven mortgage debt. If you do get a 1099 next January from your mortgage company then you will simply need to file Form 982 with the IRS to exclude the debt from your taxable income.

Question #3: Food blog tax deduction question… Someone told me they write off all their grocery expenses because they blog - is that possible?

Probably not. Moreover, the person could actually get in trouble with the IRS for writing off all of their grocery expenses.

People often make the mistake of assuming that just because they do something for a little extra income means then can deduct all kinds of unrelated expenses. Although your friend might be able to deduct certain qualifying expenses related to their blogging (if they are in fact earning income), they must be able to verify the expenses claimed were ordinary and necessary for the type of business he or she was in. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and appropriate for the trade or business. An expense does not have to be indispensable to be considered necessary. Thus, if your friend blogs about food or cooking as a source of income, then he or she may be able to claim the grocery bills.

It is important to note that the IRS auditors are very aggressive with the self-employed and independent contractors when it comes to claiming business expenses. So, your friend should definitely seek professional advice if he or she plans on deducting any expenses related to his or her blog.

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