5 Sneaky Tax Deductions

The tax deadline is quickly approaching, and to help taxpayers keep their tax liabilities as low as possible, MSN Money put together this list of "sneaky" tax deductions. Although they may be sneaky, all of the deductions are perfectly legitimate. (As always, make sure you are entitled to each and every deduction you claim. Sorry, I’m a lawyer, I’ve got to say it.)

From MSN.com:

1. 'Depreciate' land

Depreciation is the deduction you take to expense and recover the cost of a business or investment asset. If that asset has a useful life of more than one year, normally the IRS requires you to write off the cost over that period. Depreciation, in theory, is the way you get to deduct your cost over the life of the asset.

The key words here are "life of the asset." Because land has an unlimited life, you don't qualify for expensing or depreciation. But that doesn't mean you can't suck some tax savings out of the land if you get creative.

Assume you have a piece of residential rental real estate. You know you can depreciate the cost of the building over 27.5 years. But how about the land? Here's what you do:

Set up an irrevocable trust with an independent trustee and your kids as beneficiaries.

Draft a deed that separates the land from the building. Gift the land only to the trust. You and your spouse each have an annual gift tax exclusion of $13,000 per child, plus a lifetime gift tax exclusion of $5 million each. That means no tax unless the value of the land is in excess of $10 million. In that case, call me -- you can afford my fees.

You now own a rental building on property owned by the trust. Legally, the trustee has a fiduciary obligation to offer you a choice: Either get the building off the land or pay a lease rental fee.

Assuming you have an IQ of at least two digits, you're going to pay some rent. But what are you really doing? You're now taking a deduction for the lease rental at your higher bracket while the income is taxed to your kids at their lower rates. You pocket the difference. If we're talking a rental of $1,000 a month and you're in the 28% bracket and the kids are in the 10% bracket, that's an annual family savings of $2,160. Be sure to watch out for the "kiddie" tax.

Continue reading at MSN.com...

10 Common Tax Deduction Myths Debunked

No one wants to pay more in taxes than they have to. This is why we are all rightfully obsessed with claiming every deduction and credit we can. Unfortunately, there are a lot of myths about what is a deductible expense and what isn’t. Read on to find the top tax deduction myths debunked, and avoid the nightmare of IRS troubles.

Myth 1: I can write off my mortgage payments

Actually, you can only write off interest paid on your home loan, not the full payment. You should receive an IRS Form 1098 from each of your mortgage lenders that will tell you exactly what you can deduct.

Myth 2: If I use my home phone to make work calls, I can deduct my phone bill

The IRS is very strict about not letting taxpayers deduct the cost of their home phone. If you have a second business line put in for your home office, then you can deduct that expense, but not your first home line.

Myth 3: All fees paid to an attorney can be deducted on my return

Unfortunately, most legal fees do not qualify for deductions. There are only a few types of expenses paid to an attorney that can be deducted on your return, such as alimony collection efforts, estate tax advice, business assistance, etc. Check out this article on the RDTC blog for information about deductible legal expenses.

Myth 4: I can deduct my health club fees as medical expenses

Unless a doctor prescribes a specific diet or exercise plan to treat a medical condition (meaning it is not preventable care) then you cannot deduct your gym or diet program.

Myth 5: The cost of any Energy Star product is fully deductible

Unfortunately, only some energy efficient home improvements qualify for federal credits, and even so, there are limits and restrictions. Check out EnergyStar.gov for more information.

Myth 6: I can write off training expenses for our family pet

Unless you are training a guide dog, you cannot deduct expenses related to pet care or training for your family's dog, cat, rabbit, etc. If you are raising a guide dog, then you can deduct the costs of buying, training, and maintaining these animals, but be sure to see a tax professional to ensure you claim the correct deduction.

Myth 7: All of my medical expenses are deductible

This is a very common misunderstanding. Unfortunately, you will only qualify to deduct your medical expenses if they exceed 7.5% of your adjusted gross income.

Myth 8: I can make up values for all of my charitable contributions

Over the past few years the IRS has been cracking down on non-cash charitable contributions. Be sure that you only deduct the fair market value for the goods, and of course keep receipts and proof of what you donated. For more information on the charitable contribution deduction check out this article on RDTC.com.

Myth 9: My DMV registration fees are fully deductible

You can only deduct a specific part of your yearly DMV registration fees. According to IRS Topic 503, "deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year." Your registration papers should identify which portion of the total can be deducted.

Myth 10: I can deduct the cost of the clothing I bought for my new job

Unfortunately the IRS is very strict on the unreimbursed job expenses you can deduct, and unless the clothing you purchase is a required uniform that is not to be worn outside of work, it will not qualify. For example, if you have to buy shirts with the company's logo, they may qualify, but a new suit you buy for an office job most definitely cannot be deducted on your return.

Party On for a Tax Break

My latest article for WomenEntrepreneur.com has been published. Read on where I discuss the tax benefits of a seasonal office party. You can get a valuable tax deduction by showing your appreciation for clients, customers, and employees this holiday season.

Holiday Parties

Who doesn't love a party? Holiday office parties are a fantastic way to show your employees you appreciate them. Showing appreciation for the people you work with every day is especially crucial during challenging economic times. And with holiday bonus checks shrinking every year, a holiday party is a nice alternative. Let me get to the best part: The cost of throwing parties for your employees is 100 percent deductible. The food, the beverages, the decorations -- all those expenses can be deducted. The only caveats: The expenses must not be overly extravagant (e.g., champagne, caviar and lobster for a holiday luncheon), and the parties must be infrequent (weekly parties are likely to raise an eyebrow or two at the IRS and could invite an audit).

Another common business practice is hosting holiday events for clients. Some choose to throw one big party; others opt to take individual clients out for a meal. Either way, when you entertain clients and potential clients, the tax benefit is the same: You may deduct 50 percent of the cost. The requirements here are that the expenses not be extravagant, and business must be discussed or conducted either during or adjacent to the meal (e.g., going out to dinner after a meeting).

Gift Giving

Many business owners reward their employees with small gifts, tokens of appreciation at the holidays. These can be part of a holiday party or a stand-alone gift. The key here is to keep the value of these gifts in a reasonable range or, as the IRS says, "of nominal value." Doing so allows you to give these gifts and claim deductions for nonwage work business expenses. Even better, these "de minimis" gifts are not subject to the standard 50 percent deduction limit that usually applies to meal and entertainment expenses.

Continue reading at WomenEntrepreneur.com...

Questions for the Tax Lady: November 1st, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Tax-Related Question: Can I claim my daughter who is 34 and has had no income for 3 years, I have been supporting her and not claimed her before. I was wondering if I could use her for a tax deduction .

Answer: You might be surprised how many people are asking this question these days. With the economy still stalled out and new jobs tough to find, more families are turning toward multi-generational living. Of course, there are tax consequences for every life choice, and helping to support financially your adult daughter is certainly no exception.

Let’s get down to brass tacks. Of course, like all tax questions, before you make a move you are not sure about, you need to speak with a tax professional who is familiar with your specific situation. That being said, you should be able to claim a dependent exemption for your adult daughter under the “Qualifying Relative” rules.

The requirements are:

• The person you are claiming as a dependent cannot be your qualifying child or the qualifying child of any other taxpayer. (Since your daughter is over the age of 24, she is not your qualifying child for tax purposes. Instead she is a qualifying relative see the IRS Publication 501 http://www.irs.gov/publications/p501/ar02.html#en_US_publink1000220868 for more information.)
• The person either (a) must be related to you, or (b) must live with you all year as a member of your household² (and your relationship must not violate local law).
• The person's gross income for the year must be less than $3,650.
• You must provide more than half of the person's total support for the year.

From the information you provided, looks like you will be able to claim a dependent exemption for your daughter, valued at $3,650 of exempted income for 2010. This means you may also be able to claim deductions for certain expenses incurred in supporting her. Check with a tax professional to see what you may claim.

Question: Isn't paying taxes voluntary?. I haven't files a tax return since 2004. I've done research on the Internet on how many cases the IRS has lost because that cant prove in writing or any law that says the government can tax someones labor. Nor can the IRS prove in writing the law that says one MUST file a tax return. I'm thinking of filing a law suit against them and use the precedent regarding the FEDX pilot and others I've seen on the Internet. Can you help me. The IRS levied my bank account on 10/27 and my kids are hungry.

Answer: I’m glad you asked this question.

Every so often I run into someone who is under the misconception that they do not have to pay taxes. Here’s the bottom line: we all have to pay taxes.

But let me clear up some essential facts:

The word "voluntary," as used in IRS publications, refers to our system of allowing taxpayers to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them. According to the IRS:

The requirement to pay taxes is not voluntary and is clearly set forth in section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts as determined by the tables set forth in that section. (Section 11 imposes a tax on the taxable income of corporations.)

Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the noncomplying individual to criminal penalties, including fines and imprisonment, as well as civil penalties.

As to fighting in court, regardless of what information you are finding on the internet, let me tell you that IRS Criminal prosecutions boast a conviction rate over 80%. For a prime example of how tax protesters fare in court, look at Irwin Schiff. Mr. Schiff is currently serving 13 years in prison on a number of tax charges resulting from his protesting the legality of income taxes.

While there is nothing stopping you from filing a lawsuit against the government, assuming you can afford to hire an attorney, or even find an attorney willing to take your case, please think again. Honestly, it is highly unlikely that you would win. People with far more resources have tried and failed repeatedly.

Your best course of action is to work with the IRS to find a workable resolution to your tax debts. To file a tax return every year, pay what you owe, and get compliant as soon as possible. As you have stated, the IRS has already levied your bank account, and they have the power to do more, like garnish your wages, or seize your personal property. You write that your “kids are hungry”, so it appears your family is already suffering. I would advise you not to gamble with their well being by pursuing this further..

For more information on tax protester arguments and the legality of income tax, please review the IRS’s positions on each one found here: http://www.irs.gov/taxpros/article/0,,id=159853,00.html

How “Going Green” with Building & Maintenance can Put Your Company in the Black

Last Friday Examiner.com posted an interesting article on the advantages of going green. An article from the RDTC Tax Help Blog was even quoted towards the end of the article, for a post from earlier in the year that explained the tax advantages of going green in 2010. You can find a section of the Examiner.com article below, or click here for the full text.

Improved customer image

Customers are influenced in their purchasing decisions by whether a business shows environmental consciousness. For instance, Environmental Leader reported in 2007 that 72 percent of rental customers wanted hybrid vehicles included among rental car options, according to a survey conducted by Priceline.com. Nearly half of all cell phone customers consider a mobile carrier provider's "green" credentials, according to a 2009 ABI Research report cited by Green Electronics Daily. In a tough housing market, 70 percent of potential home buyers were more inclined to purchase homes with "green" features, according to LOHAS Online, (Lifestyles of Health and Sustainability) quoting the 2008 Green SmartMarket Report from McGraw-Hill Construction Analytics entitled "The Green Home Consumer: Driving Demand for Green Homes." Customers also and tend to remain loyal to "green" companies during economic downturns, MoreBusiness.com claims.

Enhanced worker productivity

The U.S. Environmental Protection Agency (EPA) defines "sick building syndrome" to refer to health-related complaints by workers that cannot be attributed to a particular cause. A similar condition, "building related illness," applies to health-related complaints directly related to airborne contaminants. Symptoms of "sick building syndrome" and "building related illness" include respiratory distress, headache, fatigue and dizziness, according to the EPA. A survey of 100 office workers revealed that 23 percent suffered symptoms related to "sick building syndrome," according to the New York Real Estate Journal, citing research from the ASHRAE Journal (American Society of Heating, Refrigerating, and Air-Conditioning Engineers).

The nationwide cost in lost productivity related to "sick building syndrome" amounts to 2 percent annually, according to New York Real Estate Journal. Increasing indoor ventilation and reducing the indoor concentration of carbon dioxide to meet the standards established by LEED V3 (Leadership in Energy and Environmental Design), diminishes complaints related to "sick building syndrome," claims Just Venting, citing research conducted by Lawrence Berkeley National Laboratory in California. LEED V3 standards for indoor ventilation call for a 30 percent increase above the 2007 ASHRAE 62.1 ventilation standard of 20 cubic feet per minute (CFM) per person. Substituting nontoxic building materials, cleaning supplies and office equipment that do not emit volatile organic compounds (VOCs) greatly reduces airborne contaminants related to "building related illness."

Business Use of a Vehicle

Last week the RDTC – Tax Help Blog posted a new article in their deduction of the week series. The entry explains how to deduct expenses related to the business use of a vehicle. You can find a section of the article below, or click here for the full text.

Actual Expense Method

The first option for calculating your deduction is the actual expense method, where you calculate the exact cost of your business use. Expenses include depreciation, licenses, lease payments, gas, insurance, repairs, garage rent, etc. However, in order to calculate this deduction you will have to determine the exact percent of your car usage that was business related, which can very quickly become a huge headache. For more information on the actual expense method, check out IRS Publication 463.

Standard Mileage Rate Method

The second and less complicated way to calculate your deduction is called the standard mileage rate method. You deduct a certain value for every mile driven for business. In 2010 the standard mileage rate is $0.50 for every mile driven, plus all business related tolls and parking fees. This does mean you need to track every mile used for business. This can be done by keeping a logbook to show the date, purpose of the travel and the number of miles driven.

Claiming the Deduction

In order to claim a deduction for the business use of your vehicle you will need to file an itemized return. The costs can be included on Schedule A of your IRS Form 1040. This deduction is part of the miscellaneous itemized deductions, and so subject to the 2% Adjusted Gross Income floor. For more information read Topic 508 on IRS.gov.

BP's Tax Deductions from the Gulf Oil Spill

The Congressional Research Service issued a new report earlier this week titled Tax Deductible Expenses: The BP Case. You can find the text of the introduction below, or download a PDF of the full report here, courtesy of the Tax Prof Blog.

Following the release of BP’s second quarter earning statement, which showed a $10 billion reduction in tax liability for oil-spill-related cleanup and expenses, media headlines have generated public concern, and in some cases outrage, over these tax savings. Further, the ability of BP to realize these tax savings has generated a number of inquiries as to how and why BP is entitled to this reduction in tax liability.

BP’s reduction in tax liability is the result of standard business expense deductions and the general ability of taxpayers to claim refunds for previously paid taxes when realizing a net operating loss (NOL) or carrying the loss forward to offset future tax liabilities. Business expense deductions and NOLs play a significant role in enhancing economic efficiency by reducing business-cycle-induced fluctuations and spreading risk. BP has reportedly incurred, or expects to incur, $32 billion in cleanup-related costs and settlements over a multiyear period. Under current law, these costs can be used to offset business income and reduce tax liability. To the extent that these costs generate an NOL, these costs can be used to collect a refund for taxes paid in previous years or carried forward to offset tax liability in future years.

The $10 billion “credit” that appears on BP’s second quarter earnings statement is a financial account of BP’s anticipated tax savings associated with legitimate cleanup-related expenses. The figure does not reflect a tax credit as typically defined in the tax code. The $10 billion reduction in tax liability relates to a multiyear period, over which the $32 billion will be spent. The $32 billion was reported in 2010 for financial reporting purposes, but reflects cleanup spending costs in the current year as well as costs the company expects to incur in future years. The financial account and financial reports do not directly correspond to current year tax liabilities. Actual oilspill- related expenditures will be made over multiple years. Consequently, the associated tax savings will not be realized until the year expenditures are made.

7 Most Popular Business Tax Deductions

The Roni Deutch Tax Center submitted another quest blog to be published on the Franchise Business Review blog. The new entry explains the 7 most popular business tax deductions. I have included a segment of the article below, but you can find the full story at FranchiseBusinessReview.com.

1. Startup Expenses

IRS rules allow you to deduct up to $5,000 of your expenses in starting a business. These expenses are known as capital expenses and you can deduct them during the first year you are in business. If your total startup costs exceed $5,000 then the remaining amount must be deducted over the next fifteen years.

2. Auto Expenses

If you use a vehicle for business purposes then you can deduct some of the associated costs. The specific rules around auto expenses are tricky to understand but basically you can either track and deduct all the business related expenses, or take the standard mileage rate.

3. Education or Learning Materials

Any costs associated with business related education can be deducted. This includes both payments made for self-improvement for you and your employees. Night classes, seminars, conferences and even books are great examples of learning expenses.

4. Advertising, Promotions & Publicity

Small business owners usually remember to write off the costs of paid advertisements. However, do not forget that you can deduct any costs related to promoting your business. These expenses vary widely from business cards, printing flyers, etc.

Tax Deduction of the Week: Business Travel & Meals

Earlier in the week the Roni Deutch Tax Center – Tax Help Blog posted a new entry in their deduction of the week series. The new article explains the travel and meal deductions available for business owners and self-employed taxpayers. You can find an excerpt of the entry below, or click here to sign up to the Tax Help Blog RSS feed.

Travel Expenses = Fully Deductible

All travel expenses that you incur as a small-business owner are tax deductible. This includes the cost of travel (plane fare, train tickets, etc.) as well as hotel charges, rental cars, taxi fares, tipping the bellboy, and even dry cleaning fees while traveling.

Food & Meals

As with typical meal and entertainment deductions, you can only write off 50% of your meal expenses. However, when you are traveling for business you do not need to be entertaining a client in order to claim the deduction. You can deduct the 50% of all food purchased, including room service, fast food, and even meals from expensive restaurants.

IRS Regulations

According to the IRS, “you cannot deduct expenses that are lavish or extravagant or that are for personal purposes.” Additionally in order to qualify as a travel deduction you must be “away from the general area of your home for a period substantially longer than an ordinary day's work.”

Claiming the Deduction

You can claim business travel and meal expenses on IRS Form 1040, Schedule A.

Tax Court Denies Charitable Deduction for $200 Cash Given to Panhandlers & $29k of Stuff Donated to Goodwill

Last Thursday, the US Tax Court ruled on Roberts v. Commissioner and denied a taxpayer’s attempt to claim a charitable deduction for $200 cash given to panhandlers and $28,655 of household items donated to Goodwill. You can check out a section of the opinion below, courtesy of the Tax Prof, or click here for the full PDF.

For 2005 petitioner claimed, on Schedule A, Itemized Deductions, a $200 cash charitable contribution, which he described as donations to panhandlers and the Salvation Army, and $28,655 of noncash charitable contributions. Included with his 2005 Federal income tax return was a self-prepared substitute Form 8283, Noncash Charitable Contributions, in which petitioner claims to have contributed more than 450 items of property consisting primarily of used clothing, but also including, among other things, towels, bedsheets, books, costume jewelry, children's toys, and glass lamps. Petitioner's descriptions of the items of property allegedly contributed to charity are vague and include self-assigned estimates of their values. Petitioner also provided copies of five receipts from Goodwill Industries (Goodwill) dated January 9, April 13, May 18, September 16, and October 1, 2005. Only one of the receipts bears a signature indicating that the donated items were received by Goodwill, and the receipts provide nothing more than vague references to the items allegedly donated; e.g., "men's boots", "ladies' clothes", "men's clothes", "boy's clothes", "women's clothing", and "4 bags of clothes". ...

With respect to the claimed $200 of cash contributions to charity, petitioner has failed to offer anything more than his self-serving testimony that he made various donations to panhandlers and the Salvation Army. ... Petitioner did not offer any canceled checks, receipts, or other reliable evidence to substantiate the claimed $200 of cash contributions to charity. Accordingly, we sustain respondent's determination to deny to petitioner a deduction for the claimed $200 of cash contributions to charity.

[P]etitioner has neither attached to his Federal income tax return nor proffered an appraisal summary to establish the values of the items allegedly donated. ... [T]he copies of the five receipts from Goodwill neither reconcile with petitioner's substitute Form 8283 nor provide anything more than vague descriptions of the items donated. Accordingly, we find that petitioner has failed to establish, by proper and adequate substantiation, entitlement to a charitable contribution deduction for the noncash items he claims to have donated to charity. We therefore sustain respondent's determination to deny petitioner a deduction for noncash contributions to charity.

6 Beauty Products That Are Tax Deductible

When you think of tax deductions, the last thing you probably think about is health and beauty, but do not be so sure. I was recently quoted in a great SheKnows.com article discussing beauty related tax deductions. You can find a section of the article below, or read the full text here.

1. Eyewear

“Glasses and contacts can be written off. So can eye drops,” says Wells Fargo tax expert Joe Ellis, who cautions that in general clothing is not allowed to be deducted, but suggests donating the clothes when you are done with them. That is a deduction – which can lead to you having a little extra cash for new duds.

2. Magazine Subscriptions

Salon owners, take note: What’s a beauty salon without high-fashion magazines? While it is a wise investment to keep your clients abreast of all the hot new fashion trends via journals and magazines, you can also deduct the expense on this year’s tax return! As long as the subscription relates to your field and you keep accurate records of the costs, you can deduct it, says Roni Deutch, CEO and Founder of the Roni Deutch Tax Center. This also holds true for those of us who write about beauty and fashion!

3. Uniforms

If you are required to wear a uniform for work, that uniform’s purchase and its upkeep are deductible. However, don’t get too fancy. The IRS will call into question your “uniform” if it is too fashionable or so chic that you would wear it outside of work, Deutch says.

High-Income Taxpayers Should Maximize Charitable Contributions, Other Itemized Deductions in 2010

If you are a high-income taxpayer, and are considering a significant charitable donation then you should consider making it in before the end of 2010, according to the Tax Foundation. This year, a handful of restrictions on itemized deductions – including those on charitable contributions – will return beginning in 2011, after a year-long hiatus.

"The federal individual income tax has, since its inception, allowed for personal exemptions to provide tax relief to low-income filers," said Tax Foundation Chief Economist Patrick Fleenor, who authored the report. "Over time, politicians have also created itemized deductions to favor certain products and services. To raise revenue, the federal government has over the past 20 years scaled back the benefits of personal exemptions and itemized deductions by phasing them out for high-income people through the PEP and Pease provisions, which have created significant problems, raising marginal tax rates and adding to tax complexity."

Tax Foundation Special Report, No. 178, "PEP and Pease: Repealed for 2010 But Preparing a Comeback," is available online at http://www.taxfoundation.org/publications/show/26260.html.

In some cases, PEP and Pease push the marginal tax rate up substantially. Next year, under President Obama's budget, a married couple filing jointly with combined AGI of $254,550 would pay a 28 percent rate without PEP and Pease, but a 30.5 percent rate with PEP and Pease. Couples earning a little more, over $262,950 in AGI, would face a marginal effective tax rate of 39.2 percent instead of 36 percent, according to the report.

The Pease provision, named after former U.S. Representative Donald Pease (D-OH), phases out the benefits of itemized deductions -- such as deductions for mortgage interest, state and local tax paid and charitable contributions -- for high-income earners. In 1991, the first year it was in effect, the income threshold below which a taxpayer would keep the entire value of his itemized deductions was $100,000 in AGI for joint filers and $50,000 for all other filers. A taxpayer declaring income above the threshold and claiming itemized deductions that are subject to Pease would have to subtract 3 percent of the income above the threshold from the deduction amount.

In 2009, the phase-out threshold for Pease, which is indexed for inflation, was $166,800 for joint filers and $83,400 for other filers. Under President Obama's policies, the threshold for Pease would be $254,550 for married couples and $203,650 for singles.

Continue reading at TaxFoundation.org…

Which Travel Expenses Are Safe To Deduct on Your Taxes?

There are a lot of expenses that business owners can deduct from their taxable income but it is difficult trying to stay on top of all the IRS’ rules for self employed taxpayers. One of the most confusing expenses are travel expenses. If you own a small business chances are you've got enough to think about. That’s why I’m here! I recently read an article in USA Today. USA Today did a good job putting together a helpful article explaining which travel expenses are safe to deduct and which are not.

The deadline to file taxes is just around the corner and knowing what business travel and entertainment expenses you can and can't deduct is critical so you don't pay the IRS more than you should or lose a legitimate write-off because you can't document it or risk an audit because your expenses went overboard.

"I always tell people, for taxes, it's the difference between what you earn and what you keep," says Barbara Weltman, a tax expert who advises small businesses. "You could earn a significant amount of money, but if you don't take legitimate deductions, then you're paying more taxes then you need to."

The truth is, you can write off everything from that suit you had dry cleaned on a business trip to the fax you sent from the hotel, as long as you have the records to back it up.

"Record keeping is so crucial," says Frank Degen, an agent licensed by the IRS to work with taxpayers and who is based in Setauket, N.Y. "You need to have records of the four 'P's' and a 'D,' and the four 'P's' are the person, the place, the purpose and the price, and the 'D' is the date. That's an easy way for business owners or self-employed people to remember what they need to do."

Continue reading at USA Today.com…

Questions for the Tax Lady: March 15th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Are moving expenses tax deductible?

Not really. If you have to relocate for a job, then you can deduct the related costs. However, you must pass the IRS’ time and distance test. Meaning you must work full time for at least 39 weeks the first year after starting the new job, and your new place of work must be at least 50 miles further from your former place of residence than the old job was. For more information on moving related deductions check out this entry on the RDTC Tax Help Blog.

Question #2: Is it true the federal tax adoption credits are going to expire at the end of the year?

No, the tax credits are not going to go away entirely at the end of the year. However, the credit will be reduced by 50% (from $12,170 in 2010 to only $6,000 in 2011) unless congress extends the Tax Relief Reconciliation Act of 2001. Although the Senate and House are busy with controversial issues like health care reform and job creation, adoption credits are very popular and I would expect that Congress will extend the full credit, and possibly even increase its dollar value.

House Votes for Faster Tax Breaks for Chile Gifts

The House of Representatives passed a bill today that would allow taxpayers to deduct Chile relief donations made by April 15th on their tax returns. The non-controversial bill, which should easily sail through the Senate, would also extend the deadline for Haiti donations to April 15th. Check out the following article on the new development courtesy of the Associated Press.

Under current law, donors would have to wait until next year, when they file their 2010 returns, to claim the deductions. The House bill would allow donations made by April 15 to be deducted on 2009 returns.

The House passed the bill Wednesday on a voice vote, with no opposition. It now goes to the Senate. Congress passed a similar bill for donations to Haiti quake victims made before the end of February. The bill would extend the deadline for Haiti donations until April 15 as well.

The House has passed a bill that would allow taxpayers to write off charitable donations to Chile earthquake relief efforts when they file their 2009 taxes this spring.

Under current law, donors would have to wait until next year, when they file their 2010 returns, to claim the deductions. The House bill would allow donations made by April 15 to be deducted on 2009 returns.

Tax Deduction of the Week: Job Relocation Expenses

Earlier in the week, I posted a new entry on the RDTC Tax Help Blog deduction of the week series. The new article explains the job relocation expense deduction and you can find a section of the text below. Checkout the RDTC Tax Help Blog to see the full entry, as well as former deduction of the week articles.

Examples of Moving Expenses that can be Deducted:

• Packing and transportation costs for moving household goods
• The cost of shipping goods from a place other than your former home (such as a storage unit)
• Any storage bills or fees for disconnecting or reconnecting utilities
• All move-related travel expenses (such as mileage, tolls, lodging, parking fees, etc.)
• Expenses of shipping and relocating your car and/or pets to your new home.
  

Expenses that can NOT be Deducted:

• License plates and registration for your car
• Any part of the purchase of a new home or expenses of leasing a new apartment
• Real estate taxes or lost security deposits

Relocation Rules

According to the IRS, “you can generally consider moving expenses incurred within one year from the date you first reported to work at the new location as closely related in time to the start of work. It isn't necessary that you arrange to work before moving to a new location, as long as you actually do go to work.”

Time Test

To qualify for the deduction you must work full time for at least 39 weeks during the first year after starting the new job. You do not necessarily have to work for the same employer, and you do not need to work for 39 weeks consecutively. However, you will need to work full time within the same commuting area for 39 full weeks.

Continued at RDTC.com…

The Home Office Deduction

Yesterday’s Tax Deduction of the Week blog (Roni Deutch Tax Help Blog) explained the home office deduction. Over the past few weeks, topics have included alimony payment deductions, traditional IRA contributions, and the 2009 vehicle sales tax deduction. I have included a snippet of the home office deduction entry below, but you can find the full text – as well as dozens of informative articles – at the Roni Deutch Tax Help Blog.

Designated Room or Space

In order to qualify as a home office – in the eyes of the IRS – you need to have a separate room or designated space that is used exclusively for business purposes. If it is not a room, the space needs to be separated by a room divider of some sort. Additionally, the IRS is very strict about the exclusive use rule, so if your children play in the office or your spouse uses the room as a home gym then it will not qualify.

Principal Place of Business

According to the IRS, your office must either be the principal location of that business, or a space where you meet with clients regularly. If you work exclusively from home then you can easily prove that the office is your principal place of business. However, if you have an office away from home, you will need to show that you regularly meet with clients from your home office.

Calculating the Deduction

In calculating your home office deduction you need to know both the total square footage of both your home and your designated home office. This is because your home office deduction will be based off of the percentage of your house used for business. For example, if your home is 1500 square feet and your office is 150 square feet then your deduction would be calculated using 10%. Meaning, you can deduct 10% of your rent and indirect expenses.

IRS Approves 99% of Applications for Public Charity Status

According to NY Times, the number of charities that are consider qualified non-profit groups in the eyes of the IRS has grown by over 60% in the last ten years. As an American taxpayer you can make deductible donations to over a million different charities.

Experts say nonprofits are skillfully exploiting the tax code’s broad and elastic definition of what constitutes such a charity, making it difficult for the Internal Revenue Service, which must bless them, to say no. The agency approved 99 percent of the applications for public charity status last year, according to a new study by students at Stanford University — or more than one every 10 to 15 minutes.

Take the Woohoo Sistahs, a social club that won approval last year. Its 50 or so members meet regularly over drinks and dinner in the Hampton Roads area of Virginia and raise money for cancer research and other causes through walkathons and sales held in retailers’ parking lots.

What the Sistahs do is not so different from what the Shriners have done for decades to raise money for their hospitals — except that the Sistahs can offer their donors a tax break that the Shriners cannot because decades ago they registered as a different type of charity with the I.R.S. (Direct donation to Shriners hospitals are deductible.)

The $300 billion donated to charities last year cost the federal government more than $50 billion in lost tax revenue.

“Especially during these tough economic times, it’s troubling to hear we are increasing the number of these organizations at such a rapid pace,” said Representative Xavier Becerra, a California Democrat who is one of the few members of Congress to pay attention to the nonprofit sector.

Continue reading at NY Times.com…

IRS Announces 2010 Standard Mileage Rates

In their newest press release the IRS announced the standard mileage rates for 2010. These rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

50 cents per mile for business miles driven

16.5 cents per mile driven for medical or moving purposes

14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2009-54 contains additional details regarding the standard mileage rates.

Special Sales Tax Deduction for Car Purchases Available through End of 2009

In their newest press release, the IRS is reminding taxpayers that purchasing a new car, light truck, motor home or motorcycle could qualify them for a special deduction for the state and local sales and excise taxes on their 2009 tax returns.

Purchases made before Jan. 1, 2010, will qualify for this deduction under the American Recovery & Reinvestment Act of 2009 (ARRA).

The deduction is limited to the sales and excise taxes and similar fees paid on up to $49,500 of the purchase price of a new vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.

Taxpayers who make qualifying new vehicle purchases this year can estimate the deduction with the help of Worksheet 10 in IRS Publication 919, How Do I Adjust My Withholding? Lines 10a to 10k of the worksheet show how to take into account purchases above the $49,500 limit, as well as the reduced deductions for taxpayers at higher income levels.

The special deduction is available regardless of whether taxpayers itemize deductions on their returns. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.

For those that have questions about the deduction for sales tax and other fees, these questions and answers might help. A video on the IRS Youtube.com channel and audio podcasts in English and Spanish are also available to help taxpayers take full advantage of the deduction.