Questions for the Tax Lady: January 31st, 2011

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: Roni, is it worth it to hire someone to prepare my return? I usually file on my own, but I bought a house in 2010 and since I'm probably going to itemize I was thinking about getting professional help. Do you have any advice on finding a good tax person?

Answer: The tax system was designed so that everyone can prepare and file their tax returns, all by themselves. The reality is our tax system has grown so complex that the vast majority of taxpayers either hire a tax professional, or use guided tax software to prepare their tax returns. The IRS estimates that fewer than 20% of taxpayers actually do their taxes by themselves. In fact, the commissioner of the IRS, Doug Shulman, uses a tax professional to prepare his taxes.

I would absolutely recommend you use a tax professional to ensure you prepare your taxes properly, and to make sure you claim every single deduction and credit you have coming. This is especially important when something in your life changes, like buying a new home.

The best advice I have for finding a good tax professional:

• Get recommendations! Don’t just blindly pick someone out of the phone book. Ask your friends, coworkers, business associates who they use, and whether they would recommend them.
• Cheapest/Most Expensive are not always the best. Bargain hunting can be a bad idea when it comes to taxes. On the other hand, just because someone charges you a lot, does not mean they are the best. Focus less on how much they charge, and more on their expertise and experience.
• Find someone who is available year round. Remember, tax issues spring up all year long, not just during tax season. This is why having a tax professional who is available in July is absolutely crucial.
• Your tax professional should have a lot of questions for you. They need to know about every aspect of your life: how many kids you have, how old they are, are they in daycare, are they in college, where you keep your money, if you’ve done any home repairs this year…. The list goes on and on. If your preparer does not have dozens of questions for you, they might not be getting the right information to help get you the maximum tax savings.
• Don’t Rush! Interview a few tax professionals before you hire one. Give yourself plenty of time to find the right tax professional, one who will take the time to answer your questions, and who you feel comfortable with. This person will know a lot about you, at the end of the day, so it’s absolutely necessary that you feel good about the person who holds the keys to your tax return.

Question: My husband and I just had a baby, and are already thinking about his education. What are the tax benefits of starting a college saving account for my new son?

Answer: First of all, Congratulations! Is there anything more incredible than holding a brand new baby? I can’t think of one. Second of all, good for you! With tuitions rising sky high, now is absolutely the time to start saving for Junior’s college. The good news is, if you put your money in a tax-friendly college savings account, you’ll be more than prepared by the time the tuition bills roll in.

There are a handful of different kinds of college savings vehicles (e.g., 529b plans, Coverdell Savings, etc), each one has slightly different rules, but for the most part, they function similarly. You contribute your after-tax dollars to the account. Any earnings from the account are tax-free, so long as the funds are spent on qualified school expenses, such as tuition, housing, school fees, etc.

This is a better deal than just socking the money into a standard savings account. In a savings account, or a mutual fund, you would be on the hook for taxes on the gains. Over 18 years, and potentially thousands in gains, this can add up to a hefty tax bill.

Your best bet is to speak with your financial advisor to see which college savings vehicle is the best option for you, your family and your kid.

No Claw Back on Estate Taxes, Say Experts

According to experts, the tax deal and extension of the estate tax will not create a retroactive gift tax liability. Thank heavens for small favors, am I right?

From AccountingToday.com:

The recent extension of the estate tax at a 35 percent rate will not result in a "claw back" tax obligation for people who make gifts in 2011 and 2012 that exceed their post 2012 estate tax exemption allowance, according to a trio of tax experts.

In a new BNA Tax & Accounting webinar that will be held on Feb. 10, 2011, Estate Tax Changes, noted tax authors and commentators Jerry Hesch, Alan Gassman, and Christopher Denicolo will present analysis concluding that the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 does not cause this type of "claw back" tax obligation.

“Their analysis comes at a time when many commentators have speculated that a reduction in the estate tax allowance for 2013 could cause "retroactive gift tax liability for deaths after 2012,” said BNA Tax & Accounting managing editor Harry Pskowski.

The new $5 million exemption, together with a 35 percent tax rate, applies to estates of those dying in 2011 and 2012, as well as to gifts and generation-skipping transfers made in those years. Then, in 2013, the pre-EGTRRA law will return, with a $1 million exclusion and a maximum 55 percent tax rate.

The presentation will allow participants to focus on the opportunities offered for planners by these changes, and bring clarity where there has been much confusion.

Hesch, Gassman and colleague Christopher Denicolo will show how many estates of wealthy taxpayers who died during 2010 may elect to be subject to the estate tax in order to have new taxable basis in the assets they leave to facilitate having new depreciable basis and less capital gains liability for their families.

Continue reading at AccountingToday.com...

Workers Urged to Check Eligibility for EITC

On Friday the IRS and partners across the nation encouraged taxpayers across the country to check to see if they qualify for the Earned Income Tax Credit. It marked the 5th annual EITC awareness day. This credit is both one of the most missed and most abused tax breaks on the books, precisely because it is so complicated to determine eligibility and the credit amounts.

IRS.gov reports:

The American Recovery and Reinvestment Act of 2009 created a new category of families with three or more children and increased the maximum benefit of EITC for tax years 2009 and 2010. The Tax Relief and Job Creation Act of 2010 extended these changes through 2012.

The maximum credit for 2010 tax returns is $5,666 for workers with three or more qualifying children. However, workers without qualifying children may also be eligible for a smaller credit amount.

"Millions of workers who did not earn high incomes claimed the EITC last year," said Doug Shulman, IRS commissioner. "The IRS encourages all eligible taxpayers to claim this valuable credit. Together with our partners, we can help taxpayers file their returns and get the EITC."

Workers who earned $48,362 or less from wages, self-employment or farm income last year could receive larger refunds if they qualify for the EITC. Four out of five eligible taxpayers claimed the EITC last year obtaining an extra $2,200 from the credit on average. This represents a critical financial boost to over 26 million workers who earn low to moderate incomes.

Eligibility for the EITC is determined based on a number of factors including earnings, filing status and eligible children. Many people who experienced a change in these factors will qualify for the first time this year and may not be aware of the credit.

Read more at IRS.gov

GDP Report: Consumers Boost Economy at Year-End

Some good news to start the week! According to reports, American consumers loosened their purse strings during the fourth quarter of 2010, giving the economy a sizable boost. Good News? Certainly. However, the jump is still lower than economists were predicting.

CNN reports:

Gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of 3.2% in the last three months of the year, a significant increase from a 2.6% rise in the previous quarter, the government said Friday.

But that's still weaker than expectations. A group of 27 economists surveyed by CNNMoney had predicted GDP growth of 3.5%.

"The U.S. economy is finally, after three years, producing as much as it did before the Great Recession hit. But this is by no means 'mission accomplished,'" Economic Policy Institute economist Josh Bivens said in a research note.

"The 3.2% growth registered in the last quarter of 2010 would, if sustained over the next year, provide almost no downward push to the unemployment rate," he said.

The faster pace came mainly on the backs of American consumers, who headed back to the shopping malls during the holiday season. Personal consumption, a measure of consumer spending, jumped by 4.4% in the fourth quarter -- the strongest increase in that reading in at least four years.

Read more here

Latest Good Reads

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Republican "spending reduction act of 2011"

Set your business up for success: how getting help will keep you on track for the future

Paying interest alone does not foreclose Treasury default

Surprising new findings on gender wage gap in IT

7 Tips For Negotiating With The IRS

I’ve spent decades negotiating with the IRS, so take it from me, these tips are solid.

From Fox Business.com:

From time to time every taxpayer will have to go head to toe with the IRS. Whether you are setting up an installment agreement, facing the auditor from hell, resolving a misunderstanding, or dealing with collectors on the phone or worse yet, on your doorstep, you would be well advised to heed the following suggestions.

1. You get more flies with honey. Dealing with bureaucracy can be very frustrating, but park your bad attitude and anger at the door. Take a deep breath, demonstrate a cooperative attitude, and proceed in an orderly fashion to resolving your issue. In my 28 years of dealing with the IRS, I have found that most IRS personnel are compassionate humans that bend over backward to find ways to resolve issues and help taxpayers. Of course you are going to run into that power-hungry, condescending, surly agent from time to time, but if you do, you can always trade up to a more understanding and respectful model by asking for the manager.

2. Use IRS lingo. When you use IRS lingo the agent you are speaking with will find you knowledgeable and may treat you with a little more respect. Here is some verbiage you may find useful:

• Ask for penalties to be “abated” rather than removed.

• Tell them, if it’s the case, that your failure to (pay or file or comply with a document request) was due to “reasonable cause.” Use this term if you didn’t just flake and have a good reason, which could include such things as unemployment, losing your records, losing your home, health problems, etc.

• If you can’t pay a tax bill because you are suffering financial reversals, you can ask to be deemed “currently not collectible.” If you are granted this status, they will leave you alone for an entire year while you get it together.

• If you feel a spouse or former spouse should be responsible for a tax matter, ask to be treated as an “innocent spouse.” There are certain criteria to this status; do some research or discuss the issues with your tax pro.

• If defending business deductions during an audit, the term “ordinary and necessary” business expense will help--but only if that’s really the case.

Read more here

GM: Never Mind That $14.4 Billion Loan

More good news for American automakers! The Department of Energy was due to loan General Motors $14.4 billion for production of fuel-efficient vehicles, but the automaker is saying it doesn't need the money. Citing improved financial performance, GM has withdrawn its loan application.

CNN reports:

"This decision is based on our confidence in GM's overall progress and strong, global business performance," Chris Liddell, GM's vice chairman and Chief Financial Officer said in a statement.

GM's loan application predated the automaker's federal bail-out and bankruptcy. It was to be part of the DOE's Advanced Technology Vehicles Manufacturing Loan Program authorized by Congress in December, 2007.

That program was set up to help cash-strapped automakers build new highly fuel-efficient cars and comply with new stricter fuel economy rules.

The application process was "almost completed," GM spokesman Tom Wilkinson said, but the loan had still not been approved and GM never received any of the money.

Read more here

Jobless Claims Jump

According to new reports, the number of jobless claims have surged to 454,000 last week, up from 403,000 the week prior. One of the largest increases we've seen lately.

Should it be cause for worry? Time magazine author Rana Foroohar says no, not yet.

Terrible weather throughout the Midwest and East Coast has skewed the figures, and the underlying data shows the labor market to be steady as she goes, on track to generate the 100-125,000 jobs a month that we need to at least hold the unemployment rate steady. Getting it down will require around 135,000 new jobs a month for quite some time, a questionable proposition - companies are still sitting on cash, and there's even evidence that despite all the Immelt chatter about bringing jobs home, a number of American multinationals are actually speeding up outsourcing to emerging market nations post recession.

For a sense of where the economy is headed, the number to watch is next week's unemployment report, out on Friday. That's going to include the annual revision to historic jobs data. If that revision shows that even fewer jobs were created during the recovery than we thought (a distinct possibility), it could have important effects – not so much on the unemployment rate itself, which will probably be flat or only slightly up – but on the direction of economic policy in the U.S. As Paul Dales of Capital Economics notes, fewer jobs created will mean the Fed will probably push full steam ahead with “quantitative easing,” or the buying up of stocks and bonds—the very thing that inflation hawks worry could lead us down a 1970s style path of stagflation.

Continue reading at Time.com...

New US Home Sales Surge in December

According to new data from the commerce department, home sales in the US jumped by 17.5% last month. This number shattered expectations of the modest 3.5% increase that many economists had expected. Hooray for more signs of recovery, now let’s keep it going!

From Yahoo! News:

The Commerce Department said sales jumped 17.5 percent to a seasonally adjusted 329,000 unit annual rate after a downwardly revised 280,000-unit pace in November.

Economists polled by Reuters had forecast new home sales rising to a 300,000-unit pace in December from a previously reported 290,000 unit rate.

Compared to December last year, sales were down 7.6 percent. Overall 2010 sales dropped 14.4 percent to a record 321,000-unit rate.

Data last week showed a surge in sales of previously owned home in December, but progress could be frustrated by a glut of homes from an unrelenting wave of foreclosures. The housing market has remained on the margins even as the broader economy shows signs of gaining strength and broadening out.

Read More at Yahoo! News

How Obama's Agenda Could Affect Personal Finances

In addition to President Obama's push for corporate tax reform, the priorities outlines in his state of the union address could have a significant impact on the finances of millions of American taxpayers. But, hey, the good news is President Obama is thinking “tax reform.” Let’s keep our fingers crossed that something substantive can be done to fix our broken tax system.

ABC News reports:

He hit several broad themes including, curtailing government spending, revising the tax code, and promoting clean energy and education initiatives.

Although many programs lacked specifics, here are some of the key proposals and how they might affect your household finances.

EDUCATION

—Obama: "To compete, higher education must be within the reach of every American....And this year, I ask Congress to go further, and make permanent our tuition tax credit — worth $10,000 for four years of college."

—Where we are: Obama proposed last year making the American Opportunity Tax Credit permanent but Congress didn?t act. It will expire after 2012 if not made permanent.

—Impact: Program provides a tax credit of up to $2,500 for each of the four years of college. About 9.4 million families will claim the credit this year.

MEDICARE/MEDICAID

— Obama: "The health insurance law we passed last year will slow these rising costs, which is part of the reason that nonpartisan economists have said that repealing the health care law would add a quarter of a trillion dollars to our deficit."

— Where we are: Rising health care costs are a serious threat to retirees maintaining a pre-retirement lifestyle. A 65-year-old couple retiring in 2010 needed an estimated $250,000 for medical expenses through their retirement, said a study by Fidelity Investments.

— Impact: Studies show retired workers are bearing a significant portion of their medical expenses. More than half of retirees surveyed by Fidelity are paying out-of-pocket for health care costs not covered by Medicare, and 44 percent said health care costs are having a negative effect on their retirement budget.

Read more here

CBO: Tax Cut Deal to Push 2011 Federal Deficit to $1.5T

From International Business Times:

This morning the CBO (Congressional Budget Office) reported that the "compromise" that the Dems and Reps passed in the closing moments of 2010 (remember compromise in our government means when both sides get what they want), pushed the CBO's estimate of the 2011 deficit from just over $1T to $1.48T. To put this in perspective, when the economy was in near total freefall in fiscal 2009 (i.e. revenues were damaged as economic output was awful), the budget deficit was $1.42T. That INCLUDED $142B for TARP... so essentially with 6% more revenue than we had in fiscal 2009 AND without the cost of TARP, we will a significantly higher deficit. Pretty impressive work by Washington D.C.

I am chuckling as the financial infotainment TeeVee crew is clucking that this massive deficit will have the market worried. Are you kidding? As I've written countless times, the equity market loves bigger and bigger deficits because it takes from the future to give to today. The market does not worry about implications years (or even quarters) in the future. Long term is next week. Do you think the market was 'worried' when every worker was given a 2% pay raise Jan 1, 2011 via the payroll tax deduction? No, that will only spur consumption over and above what it would be. More iPads to be sold! If payroll taxes were cut to 0%, it would have celebrated even more. Who cares if the empty Social Security lockbox (already empty) became even more empty - that's a problem for another quarter, year, or decade. Same goes for any spending program - I am just using the social security payroll tax as an example. Any program (tax cut or spending increase) that draws money into the today from the tomorrow, is a reason for celebration on 'the Street'. Indeed I think the market would celebrate annual $4T deficits - can you imagine how high GDP would be? Perhaps 6%! So once more we are looking at an annual deficit of 10%ish of GDP. Even as the "recovery" rolls on.

The 2011 figure reflects 3.1% GDP for the year, which is in line with the 3-3.5% a lot of economists' project. Then in 2012 they see the deficit dropping to "only" $1.1 Trillion (again, half a decade ago $400B was a record), and then the figures drop dramatically because the CBO has to assume all the supports in the economy go away - i.e. the entire Bush tax package goes away. Fat chance. :) Hence, every projection post 2012 is useless and indeed I would not be surprised to see a package of aid to the states at some point in the next 18 months which will push up the '12 deficit as well.

Continue reading here

Financial Meltdown Was 'Avoidable,' Crisis Panel Finds

According to a new report written by Democrats on a panel that investigated the financial collapse and bailouts, the meltdown could have been avoided. In fact, the group is blaming both Washington and top financial firms for the crisis. Small comfort for people who lost everything…

Huffington Post reports:

The Democratic majority of the 10-member Financial Crisis Inquiry Commission spreads the blame widely to regulators, politicians, financial firms and credit rating agencies.

"We conclude this financial crisis was avoidable," the report said.

It said regulators failed to adequately police financial markets, that financial firms had poor risk management and corporate governance practices, and that government was ill-prepared to handle the fallout from excessive borrowing when loans soured.

"The crisis was the result of human action and inaction, not Mother Nature or computer models gone haywire," the draft report reads. "The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public."

The report will be officially released on Thursday but it has been endorsed only by the congressionally appointed panel's six Democratic commissioners. Three Republican members will release a separate minority report and a fourth Republican plans to unveil a report of his own that will focus on government housing policies.

Continue reading here

The Short and Long Term Effects of Bankruptcy

Since my law firm began offering Chapter 7 and 13 bankruptcy filing services to residents of Northern California a few months ago, I have been more focused on bankruptcy on my blog. There is a lot of misinformation about bankruptcy out there, so I wanted to explain some of ther short and long term effects of filing for bankruptcy.

Short Term:

Discharge or Restructuring of Debt

Filing for bankruptcy can be a difficult and stressful process, but once it’s done, you can have a fresh financial start. Depending on what type of bankruptcy you filed (Chapter 7 or 13) you will either have your debts discharged or restructured, both giving you the opportunity to get your finances back on track.

Expenses

Filing for bankruptcy will eliminate or restructure your debts, but there are some expenses involved. If you hire an attorney, you should expect to pay a fee to retain their services, and you may also need to pay a trustee fee. It seems odd, having to spend money to declare bankruptcy, but these expenses are simply unavoidable, and can help ensure your case is filed properly.

Difficulty Obtaining Credit

Because bankruptcy shows up on your credit report, you will likely find it harder to get credit. And when you are approved, you will find you must pay higher interest rates than before you filed. This can make it difficult to buy a car, a home or even get a simple credit card for a while, but you must be patient. Your credit will improve over time as you work toward a better financial future.

No More Hassling Calls

One of the best short-term effects of filing bankruptcy is that you will no longer have to deal with harassing calls from creditors. As soon as you hire an attorney to handle your case, creditors are legally required to stop contacting you. This can reduce your stress level immensely; some even say this effect alone makes filing for bankruptcy worth it.

Long Term:

Credit Report

Depending on what type of bankruptcy you file for, it will show up on your credit report for either 7 or 10 years. Lenders, employers and new landlords will often check your credit report to get information about you. You may be able to lessen the impact by filing a letter with credit agencies explaining the extenuating circumstances that lead to your decision to file for bankruptcy.

Job Applications

Some employers will ask if you have ever filed for bankruptcy when you are applying for a new job. Even though it may not show up on your credit score any longer, for some positions you will still be required to let your employer know that you filed for bankruptcy in your lifetime. However, since bankruptcy filing is becoming more common, a reasonable explanation for why you needed to file can help an employer see past the bankruptcy.

Life Insurance

For some reason many life insurance applications will ask if you have ever filed for bankruptcy in your life. Even if ten years have passed, you will still be obligated to answer "yes." This can affect your policy and rates, and being dishonest is technically committing fraud. Again, this is where a tough economy can work in your favor, as more people file for bankruptcy, the stigma will lessen as will the negative impact.

2011 Job Forecast

According to reports, more employers plan to add full-time permanent jobs in 2011 as compared to 2010. Good news for the millions of unemployed. Now let’s see those unemployment numbers drop!

From AOL.com:

The survey included more than 2,400 hiring managers and human resource professionals across several industries and a range of company sizes. Here's what the survey revealed.

Full-time hiring

Twenty-four percent of employers surveyed plan to hire full-time, permanent employees in 2011, up from 20 percent in 2010, and 14 percent in 2009. Only 7 percent plan to decrease headcount, an improvement from 9 percent in 2010 and 16 percent in 2009. Fifty-eight percent anticipate no change in their staff levels while 11 percent are unsure.

Part-time hiring

Thirteen percent of these employers expect to hire part-time employees in the next 12 months, up from 11 percent in 2010, and 9 percent in 2009. Five percent plan to decrease part-time help, an improvement from 8 percent in 2010, and 14 percent in 2009. Seventy-one percent anticipate no change in their staff levels while 12 percent are unsure.

Contract/temporary hiring

Thirty-four percent of those hiring reported they will hire contract or temporary workers in 2011, up from 30 percent last year, and 28 percent in 2009. Of those hiring, 24 percent expect to add more staff than last year. Thirty-nine percent of employers plan to transition some contract or temporary staff into full-time, permanent employees.

Continue reading at AOL.com...

Oprah Hates Writing Checks to the IRS

During her interview with Piers Morgan, Oprah admitted that the most difficult check she has to write each year goes to the IRS. Apparently her accountants bring tequila when it's time to write the checks to Uncle Sam. Whatever gets you through the night, Oprah!

Accounting Today reports:

“It would knock your socks off,” she told Morgan. “Millions are going out.”

Morgan asked if that was painful. “The most pain I feel — and my accountants will tell you this — is every time I write a check to the IRS, it’s a ceremony. For years they came in with wine. Now they come in with tequila. It’s a tequila-signing ceremony.”

Morgan asked her what was the most painful check she ever had to write to the IRS, but Winfrey cannily ducked the question, teasing Morgan, “You’re good. You think I’m going to give you the number. No, no, no, no, no.”

Morgan noted that Forbes magazine estimates that Winfrey is worth $2.7 billion, and asked if the figure was accurate. She responded, “I knew you were going to go there sooner or later. I’m not sitting around counting it.” However, she added that she knows how much she’s worth “because I already had counted it.”

Read more here

Dilbert on Tax Policy

Via TaxProf Blog

Obama Calls for Overhaul of Corporate Taxes

As expected, President Obama called for an overhaul of corporate taxes during his State Of The Union Address. He proposed eliminating many loopholes and deductions, in exchange for reduced corporate rates. Will this be the incentive corporations need to keep their profits in the US?

From the Associated Press:

Obama says he wants the changes to result in the same level of revenue as current corporate taxes. Obama says he would oppose changes that increase the deficit.

The president has in the past called for "revenue neutral" changes in corporate taxes. A deficit commission he appointed recommended a wholesale change in individual and corporate taxes that would lower rates but also raise additional revenue by eliminating loopholes and, thus, help reduce the deficit.

White House officials say the president doesn't want an overhaul of the corporate tax system to raise additional revenue.

Read more here

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.

Mortgage Giants Leave Legal Bills to the Taxpayers

According to newly released documents, mortgage giants Fannie Mae and Freddie Mac have spent more than $160 million of taxpayer's money defending former executives in civil lawsuits. Raise your hand if that sounds like a good use of your tax dollars. Didn’t think so.

NYTimes.com reports:

The bulk of those expenditures — $132 million — went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

Late last year, Randy Neugebauer, Republican of Texas and now chairman of the oversight subcommittee of the House Financial Services Committee, requested the figures from the Federal Housing Finance Agency. It is the regulator charged with overseeing the mortgage finance companies and acts as their conservator, trying to preserve the company’s assets on behalf of taxpayers.

“One of the things I feel very strongly about is we need to be doing everything we can to minimize any further exposure to the taxpayers associated with these companies,” Mr. Neugebauer said in an interview last week.

Continue reading at NYTimes.com...

Will Obama Talk Tax Reform in State of the Union?

We can only hope he will…

From Reuters.com:

President Barack Obama has proposed revamping the dizzying U.S. tax code and many observers are eyeing his State of the Union address on Tuesday for signs of his commitment.

Presidential leadership is essential for such a politically and economically complex task, last successful after Republican President Ronald Reagan struck a deal with congressional Democrats for a major code rewrite in 1986.

Reagan used a State of the Union address to publicly direct advisers to make recommendations for a tax code rewrite and made it a top priority.

With Obama half way through his first term and a new election campaign looming, many see the next two years as a ground-laying phase, leaving legislation for a second term.

Here are some key questions and elements of the debate.

WHY ARE PEOPLE TALKING ABOUT TAX REFORM NOW?

The fledgling economic recovery and concerns about annual deficits topping $1 trillion have pushed a tax overhaul up the economic agenda. Many budget experts note that both individual and corporate taxpayers are spending more money each year to prepare taxes -- while the government is getting less efficient at collecting it all.

Among the loudest voices of complaint are from big corporations, who blast the top marginal 35 percent rate, the highest in the industrialized world. Many economists and Obama officials agree with their argument that the high rate makes the U.S. less attractive relative to its peers.

Continue reading at Reuters.com...

IRS Launches the IRS2Go App for iPhone and Android

The IRS is going mobile! Taxpayers can now check their refund status, and get tax information from their smart phones!

In their newest press release the IRS unveiled IRS2Go, its first mobile application that for devices like iPhones and Androids.

"This new smart phone app reflects our commitment to modernizing the agency and engaging taxpayers where they want when they want it," said IRS Commissioner Doug Shulman. "As technology evolves and younger taxpayers get their information in new ways, we will keep innovating to make it easy for all taxpayers to access helpful information."

The IRS2Go phone app gives people a convenient way of checking on their federal refund. It also gives people a quick way of obtaining easy-to-understand tax tips.

Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.

"This phone app is a first step for us," Shulman said. "We will look for additional ways to expand and refine our use of smartphones and other new technologies to help meet the needs of taxpayers."

Read more at IRS.gov

10 Ways to Avoid a Tax Audit

Worried about an IRS audit this tax season? You can never be 100% audit-proof, but there are a few actions you can take to greatly reduce your chances of being red flagged.

Here are 10 ways to avoid a tax audit, courtesy of the Wall Street Journal:

1. Choose your tax return preparer with care. Today, according to the recent National Taxpayer Advocate report, 60% of individuals and even a greater percentage of businesses use paid preparers to do their income tax returns. Yet, preparers now face more intense IRS review. If the IRS believes a preparer is claiming unwarranted deductions or taking other fraudulent steps on clients' returns, then the preparer's clients are at risk for audit.

The IRS has eight tips for choosing a tax preparer. Key among them is to check the preparer's history to see if there has been any disciplinary action. For example, if you use an enrolled agent, check with the IRS' office of Professional Responsibility at opr@irs.gov (include the preparer's name and address).

2. Report all of your income. The IRS uses information returns, such as W-2s and 1099s, to cross-check income reporting. Under its document-matching program, the IRS' computers compare information on the forms with the income reported by taxpayers on their returns. If the information doesn't match, this leads to an automatic audit. But don't panic; it's merely a correspondence asking about the discrepancy. It can be easily cleared up by submitting an explanation by mail if you think you are correct, or paying the tax owed if the omission was your oversight and the IRS is correct.

Sole proprietors, freelancers and independent contractors who use the cash method of accounting may be vulnerable to year-end payment problems. For instance, a sole proprietor that performed work for a client may have received a payment in early January – but the client might have mailed (and recorded) the payment in December. The client will include the payment on Form 1099-MISC for 2010, but it isn't taxable until 2011. What to do: Include the payment as it is reported on the 2010 return, but then subtract the payment and attach an explanation with the return. Then include the payment on the 2011 return, even though no 1099 will be issued for this year.

3. Provide complete information. All questions should be answered and all required information should be included on the forms and schedules necessary for your return. That means if you're a sole proprietor, include your business code number, accounting method, and, where applicable, inventory valuation method on Schedule C. If information is missing, it could trigger a more extensive look at the return.

Read more here

IRS Targets Income Tricks

Tax avoidance: Legal. Tax evasion: illegal. Seems pretty clear, but some classic “tricks” to reduce tax liabilities are coming under fire. The most recent: funneling your wages through an S Corporation to avoid payroll taxes.

From the Wall Street Journal:

There's a saying: Pigs get fed and hogs get slaughtered. The Internal Revenue Service surely hopes that includes tax hogs.

That is the message of a recent U.S. district court case won by the IRS against David Watson, a CPA in West Des Moines, Iowa. At issue: a common tax-cutting maneuver available to the owners of millions of closely held businesses.

The case, David E. Watson P.C. v. U.S., revolved around Mr. Watson's low pay as the sole owner and shareholder of a so-called S Corporation. Such companies, often called "Sub-Ss" after the subchapter of the tax code governing them, is a popular choice of entity for private firms. Unlike C corporations, Sub-Ss have no more than 100 shareholders, and they pass profits to owners without an extra layer of tax. There are nearly 4 million Sub-Ss in the U.S. today.

Mr. Watson's Sub-S was, in turn, one of four principals in LWBJ, an accounting firm. According to the decision, the firm made profit distributions of $203,651 and $175,470 to Mr. Watson through his Sub-S for 2002 and 2003, respectively, the years in question.

Mr. Watson, who had a graduate degree in tax and 20 years' experience, received only $24,000 of salary for each of those years, far less than the $40,000 a year earned by recent graduates in accounting with no experience, according to one expert for the IRS.

Read more here

9 Great American Companies That Aren't Recovering

Few companies escaped the last few years completely unscathed, but most are at least showing signs of improvement. Not so for these nine former All Stars. Check out Huffington Post’s great article taking a look at the 9 companies that have yet to achieve a corporate turnaround. You may be surprised to see some of the national brands that made the list!

1. Borders

Borders Group Inc. (NYSE: BGP) may have a financial white knight, or it may not. Reports were out late last week that GE's finance arm held talks about providing a financial lifeline. Then came word that Borders hired restructuring lawyers. It recently began delaying payments to vendors to conserve cash. Let's pretend that Borders does get a last-ditch financing pact and that it gets its debt refinanced. What really changes? Borders has faced eroding sales and the last sales gain for a year was in calendar 2006 (fiscal year ending Feb. 3, 2007). The new figure was down roughly 30% by even a year ago since then. Borders just trimmed 45 jobs at the corporate headquarters in Michigan and that is on the heels of a fresh plan to close a Tennessee distribution center to cut 310 more jobs.

Borders is now a penny stock and its market cap is a mere $64 million. With shares back under the $1.00 mark, a delisting notice is a risk and more problems may be coming its way. For some reason, the Fahrenheit 451 analogy keeps coming to mind.

2. Boston Scientific

Boston Scientific Corporation (NYSE: BSX) is one that we (and many others) keep thinking will make a comeback. The medical device maker has been riddled with device issues and recalls. Its prior 3-year run of roughly $8 billion in revenues is expected to fall to $7.79 billion in 2010 and $7.91 billion in 2011, according to Thomson Reuters. The only saving grace is that the earnings estimates of $0.39 EPS for 2010 and $0.43 EPS for 2011. We see little risk to an implosion here, but the company is lost in space.

Competition from Johnson & Johnson (NYSE: JNJ), Medtronic (NYSE: MDT), St. Jude Medical (NYSE: STJ) is fierce, and its acquisition of Guidant for almost $27 billion has never really paid off despite Abbott Laboratories (NYSE: ABT) participating in that merger. At $7.33, shares are less than half and then some since its Guidant deal was completed.

Continue reading at Huffington Post.com...

IRS to Start Processing Delayed Returns on February 14th

On Friday the IRS announced that they aim to begin processing tax returns delayed by last month’s tax law changes on February 14th. This includes taxpayers who itemize deductions, claim the tuition fees or educator expenses deductions. At least you get three extra days to file, right?

From IRS.gov:

Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction. Based on filings last year, about nine million tax returns claimed any of these deductions on returns received by the IRS before Feb. 14.

People using e-file for these delayed forms can get a head start because many major software providers have announced they will accept these impacted returns immediately. The software providers will hold onto the returns and then electronically submit them after the IRS systems open on Feb. 14 for the delayed forms.

Taxpayers using commercial software can check with their providers for specific instructions. Those who use a paid tax preparer should check with their preparer, who also may be holding returns until the updates are complete.

Most other returns, including those claiming the Earned Income Tax Credit (EITC), education tax credits, child tax credit and other popular tax breaks, can be filed as normal, immediately.

Read more at IRS.gov

Questions for the Tax Lady: January 24th, 2011

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: Roni, do I need to have my W-2 to file my tax return? I still have not yet received mine, what should I do if it never comes?

Answer: Employers generally have until January 31 to give you the W-2. If your W-2 is mailed to you, you might be waiting a week or two longer. If mid-February rolls around and you still don’t have your W-2, call your employer, see if there’s been a delay, or if they have a bad address for you.

If February 16 arrives and you still don’t have your W-2, call the IRS at 800-829-1040. They will ask you for:

• your employer’s name and complete address,
• employer ID number,
• employer’s phone number,
• your contact and taxpayer ID info, and finally
• estimated wage amounts and federal income taxes withheld during the year.

All this information can be found on your paystubs, your best bet is to use the last paystub from 2010.

The IRS will use this information to prepare a Form 4852 Substitute for Missing Form W-2. You can use this form to complete your tax returns. This may delay the processing of your return for a bit, but will save you from the horrors of not having the proper documentation should the IRS request it. Remember, you have until April 18 to file your tax return this year.

Question: If I owe the IRS, do I have to mail them a check? Can I pay electronically using a credit card?

Answer: When you make tax payments, you can absolutely pay by credit card. The IRS uses a number of services to process credit and debit card payments. You can find all the options here. Fair warning: paying by credit or debit card involves fees. Debit card fees go up to $3.95 per transaction, and credit card convenience fees go up to 2.35% of the total amount being paid. Yes, that can be expensive, so consider whether the convenience of paying online is worth the extra expense.

If those fees have you running scared, consider this: those fees are still much less than late payment penalties. So, for those occasions when your options are: pay late, or pay online, take the hit and pay those convenience fees.

California Declares Fiscal Emergency

On Thursday Governor Jerry Brown declared a state of fiscal emergency for the government of the most populous US state. He is pressing lawmakers to finally tackle its $25.4 billion budget gap. What’s on the cut list?

CNBC reports:

Democrat Brown’s declaration follows a similar one made last month by his predecessor Arnold Schwarzenegger, the former Republican governor.

Democrats who control the legislature declined to act on Schwarzenegger’s declaration, saying they would instead wait to work on budget matters with Brown, who served two terms as California’s governor in the 1970s and 1980s.

Brown was sworn in to his third term early this month and has presented lawmakers with a plan to balance the state’s books with $12.5 billion in spending cuts and revenue from tax extensions that voters must first approve.

Brown has said he wants lawmakers to act on his plan by March.

His fiscal emergency declaration is meant to underscore that target, an official said.

Brown’s declaration, which is largely procedural, says it affirms Schwarzenegger’s December declaration, giving lawmakers 45 days to address the state’s fiscal troubles.

Read more here

Taxes on Overseas Income Take Center Stage at House Hearing

From the Wall Street Journal:

U.S. multinationals pressed their case for exempting all foreign profits from U.S. tax at a Thursday House hearing, as a congressional debate over corporate taxes got off to a contentious start.

Procter & Gamble Co. Chief Executive Robert McDonald, testifying on behalf of the trade group Business Roundtable, put the foreign profits issue front and center before the House Ways and Means Committee. He argued that U.S. companies’ competitors based in Japan and the United Kingdom have systems that exempt most profits earned abroad.

“We’re not talking about a tax break. What we’re talking about is paying the same as our foreign-based competition,” McDonald said.

But Rep. Lloyd Doggett (D., Tex.) called the idea of switching to a territorial tax system, or one that exempts profits earned outside U.S. borders, “a sure-fire way to continue the export of more American jobs.”

McDonald also said companies have asked Treasury Secretary Tim Geithner to abandon the position of the administration of President Barack Obama that a corporate rate reduction shouldn’t result in less revenue overall for the government.

McDonald said business groups asked Geithner “to take that off the table for now.” He said lawmakers and the administration should instead focus on an overhaul that is “fiscally responsible,” but that would result in a net tax cut to corporations.

Read more here

Lates

ABA tax section report on the economic substance doctrine

How regular, productive meetings will motivate your sales team

The price of insufficient tax revenue

Delaware's role as a tax haven

10 ways to be more powerful

What to give your tax preparer

Common Tax Breaks for Families and Individuals

Who doesn’t love a tax deduction? Last year the average taxpayer claimed about $8,000 in tax deductions. WashingtonPost.com put together a list of the biggest, and most expensive tax breaks from 2009, check out their list below.

-34.6 million taxpayers cut their federal income taxes by a total of nearly $77 billion by deducting the interest they paid on their home mortgages.

-36 million families saved more than $54 billion from the $1,000 per-child tax credit.

-40.7 million taxpayers cut their federal income taxes by $40 billion by deducting state and local income, sales and personal property taxes.

-33.5 million households cut their taxes by $21 billion by deducting state and local real estate taxes.

-36 million families cut their taxes by nearly $35 billion by deducting charitable donations.

-28 million taxpayers saved a total of $24 billion because their income from Social Security and railroad pensions was untaxed.

-25.7 million low-income families got a total of $55 billion from the earned income tax credit.

Continue reading here

House of Representatives Holds Tax Reform Hearing Today

Is this a start to the changes we all know are so desperately needed? According to WaysAndMeans.house.gov, the committee will host the first in a series of hearings on fundamental tax reform today. The focus of the hearing is listed below.

The hearing will examine the economic and administrative burdens imposed by the current structure of the Federal income tax. It will explore the cost of complexity borne by American families, the cost of a corporate tax system that is increasingly out-of-step with the rest of the world, and the broader cost to the U.S. economy of a tax system that fails to maximize job creation and impedes economic growth.

The following witnesses are expected to testify:

• The Honorable Nina E. Olson, National Taxpayer Advocate

• Robert A. McDonald, Chairman of the Board, President and Chief Executive Officer, The Procter & Gamble Company

• Warren S. Hudak, President, Hudak & Company, LLC

• Kevin A. Hassett, Ph.D., Senior Fellow & Director of Economic Policy Studies, American Enterprise Institute

• Martin A. Sullivan, Ph.D., Contributing Editor, Tax Analysts

What is Plan B if China Dumps its U.S. debt?

With the Chinese President's visit to the White House, some experts have begun wondering if government officials have a Plan B in case Beijing decides to dump its holdings of U.S. treasuries.

From Reuters.com:

China is officially the United States' biggest foreign creditor, with roughly $900 billion in Treasury holdings -- or over $1 trillion with Hong Kong's holdings included.

That means it could do severe damage to U.S. debt markets if it suddenly started selling large amounts.

Most experts say if there were signs of this happening, the U.S. government would go for a combination of persuading Americans to buy more U.S. debt, the same way they did in World War II, and finding friendly foreign governments to make additional purchases.

Banks could be called on to increase their holdings of treasuries, and as a last resort, the Federal Reserve could also be called on to fill the gap, though this could risk turning any dollar weakness into a slump.

"The U.S. government should have and maybe still could call on the people of the U.S. to invest in U.S. debt," said David Walker, a former U.S. comptroller general who heads an advocacy group calling on the government to curb the U.S. budget deficit and borrowings.

To be sure, the idea that China would suddenly sell its U.S. debt holdings is almost unimaginable to some.

After all, any weakening in the U.S. debt markets and the resulting global markets turmoil, including likely weakness in the dollar, would bounce back on China and could hurt its economy badly, especially as the United States is such a huge Chinese export market.

Continue reading at Reuters.com...

Average Tax Refund in 2010: $3,003

According to new figures, the average taxpayer received a refund of $3,000 last year, which is up 5% from the previous year. Overall the IRS gave out $328 billion in refunds. Remember, that is YOUR money! Adjust your withholdings and enjoy that money all year long.

CNN reports:

The jump was one of the biggest in years, thanks in part to several tax credits introduced as part of the American Recovery and Reinvestment Act.

The Homebuyer Tax Credit -- which gave buyers up to $8,000 for purchasing a home -- was expanded to include more taxpayers.

Meanwhile, the refundable American Opportunity Credit helped more students and parents pay for college tuition and course materials. It temporarily replaced the $700 non-refundable Hope Credit and gave students with income of $80,000 or less a credit of up to $2,500 a year.

(The Making Work Pay credit was part of the ARRA as well, but it didn't show up in refunds. Instead, it was distributed in paychecks.)

Refunds also likely received a boost from the sluggish unemployment picture, said Roberton Williams, a senior fellow at the Tax Policy Center.

Read more here

IRS and Telemundo Host Tax Information Program in Spanish

In their newest press release, the IRS announced they are going to team up with national TV network Telemundo for a special one-hour tax program for Spanish-speaking taxpayers set to air on Sunday, January 30. Be sure to check your local listings for exact times.

“Los Impuestos y Usted” will help viewers determine whether they qualify for many tax benefits, including the Earned Income Tax Credit or EITC. Workers who earned $48,362 or less from wages, self-employment or farming last year could receive larger refunds if they qualify to receive EITC.

IRS estimates four of five eligible taxpayers claimed their EITC last year, obtaining an average $2,200 from the credit. To qualify, taxpayers must meet certain criteria and file a tax return, even if they do not have a filing requirement.

Among other topics, the program features Free File, a program that allows individuals to file their taxes online at no cost, how to get free tax help at local community centers and other services available at www.irs.gov/espanol.

Mónica Noguera, host for many of Telemundo’s specials, will present the IRS program, which features in-studio interviews with IRS tax experts. IRS tax experts will also be available during the airing of the program to answer questions.

Continue reading at IRS.gov…