Key Tax Breaks at Risk as Panel Looks at Cuts

In just a few weeks a deficit commission is planning to submit recommendations for balancing the federal budget by 2015. Experts predict that they will recommend getting rid of a handful of popular tax breaks including the mortgage interest deduction. Although they are popular among American taxpayers, the tax incentives reportedly cost the government about $1 trillion a year.

The Wall Street Journal reports

At stake, in addition to the mortgage-interest deductions are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending. It is unclear if the 18-member panel will be able to reach an agreement on any of the items by a Dec. 1 deadline.

Even if they do reach an agreement, any curbs on current tax breaks would likely face tough sledding in Congress. The banking and real-estate lobbies have fiercely rebuffed efforts to rescind the mortgage-interest deduction in the past.

Read more here

Questions for the Tax Lady: October 25th, 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: Roni, if I donate Halloween candy and costumes to a local children’s home, is that deductible?

Answer: What a fun idea and a wonderful thing to do for those kids. Dressing up for Halloween is such a big part of childhood; I love the idea of helping underprivileged kids experience that!

To answer your question, yes you should be able to deduct the contribution so long as the children’s home is a recognized tax-exempt charitable organization. If you aren’t sure, you can ask the organization or you can check out www.IRS.gov to be sure. And remember, you will need some written acknowledgement of your donation from the children’s home, like a thank you letter.

Question: What are the differences between tax credits, deductions, and exemptions?

Answer: I’m so glad you asked this question, people use these terms interchangeably, and it drives me a little nuts.

A deduction refers to something you spent money on that can be deducted from your taxable income. The amount of the deduction varies based on what the expense was, how much you spent and IRS eligibility requirements. For example: if you donate $1,000 to a recognized charity, you could deduct your taxable income by $1,000.

An exemption allows you to reduce your taxable income, much like a deduction. However, exemptions are given in set dollar amounts ($3,650 in 2010) and are not tied to your actual expenses. Instead they are generally tied to the number of people you support. For example, you can claim an exemption for yourself, one for your spouse if you file jointly, and one additional exemption for each taxable dependent you support.

The tax bill impact of deductions and credits is tied to your tax bracket. If you are in the 25% tax bracket, a $1,000 deduction results in a $250 reduction in tax your tax bill. In the same vein - still assuming a 25% tax bracket - that $3,650 exemption will result in a $912.50 reduction in tax bill.

A tax credit is a dollar for dollar reduction in your tax bill. Credits are usually tied to how you spend money, or your income and family status. So, if you have a $100 tax credit, it will result in lowering your total tax bill by $100. Tax credits are almost always more beneficial than deductions.

There are refundable and non-refundable types of credits. A refundable credit means that if the amount of your credit exceeds the amount of taxes due, you can actually get a refund check for the rest. (For example, if your tax bill is $500, and you have a refundable credit for $1,000, you could actually get a refund check for $500.). Non-refundable credits can only result in a reduction of your tax bill, but not give you a refund. For example, if you have a $500 tax bill, and a $1,000 non-refundable tax credit, your tax bill will be reduced to zero, but you would not get a check for $500.

I hope this helps clarify these tax terms for you. Understanding the differences can help you make better tax choices.

How to Claim a Charitable Contribution Deduction

Last week my team put together another great tax tip video. In this new episode our hosts, Edward and James, sat down to discuss the charitable contribution deduction. You can watch the embedded video below or visit my YouTube channel for more great tax videos.

Questions for the Tax Lady: October 4th, 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: Roni, I have a small business with about a dozen employees. If I throw a Halloween party can I deduct the expenses of the necessary supplies? Like decorations and food?

Absolutely. Your employees work hard for you, and I believe that rewarding them with a holiday -- any holiday -- party goes a long way in keeping employees feeling appreciated and happy. According to the IRS, the costs of holiday parties for your employees are 100% deductible. This includes food, decorations, entertainment and more. Just make sure to keep the expenses reasonable for the size of your staff. If you only employ 5 people, a $10,000 deduction for holiday parties will likely raise eyebrows at the IRS.

Question: What is the standard mileage rate for this year? Has it changed from 2009?

The IRS mileage standards decreased this year, since gas prices have fallen. The various mileage rates for 2010 are shown below:

• 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

These rates apply for cars, vans, pickups or even panel trucks.

Questions for the Tax Lady: September 20th, 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: can you download IRS forms online?

Answer: Absolutely! The IRS offers a vast majority of their forms online at www.IRS.gov The forms and publications library is convenient, simple and saves you a trip to your tax preparer’s office. I download IRS forms all the time. A few things to remember when downloading tax forms:

1. Make sure the form is for the correct year. Tax rules change every single year, thus each tax form is updated each year. Using last year’s form can cause some big problems! How do you know what year the form is for? All forms should have the tax year in huge print in the top left corner.
2. Make sure it prints properly! Once you’ve printed your form, take the time to compare it with the form on your computer screen. If your printer settings are a little off, the form can print incorrectly and that can cause you some pretty big tax headaches.
3. Save yourself a world of trouble, and open up the instructions for any form you are going to use. Full instructions for each form are available for download as well. You may not need to print them (they are usually pretty long), but have them open on your screen, ready for when you have a question.

Question: can you deduct overdraft fees on your tax return?

Unfortunately, the answer is, no. The IRS opinion is that banking overdraft fees are really penalties, and therefore not deductible on your tax returns.

Tax Court Denies Prof's Claimed Deductions for Research

Recently the U.S. Tax Court denied a math professor from The City University of New York an education related tax deduction. The professor attempted to write off $15,397 in expenses related to research and writing activities. However, the judge felt he failed to adequately substantiate his deductions. Check out the following snippet of the ruling courtesy of the Tax Prof Blog, or click here for a PDF of the court’s ruling.

Petitioner has, potentially, two trades or businesses. He is employed as a professor of mathematics, and he is engaged in research and writing on mathematical issues. He "wears two hats" but the "hats" are so similar in appearance that it is difficult to tell the difference between them. Because of this circumstance, it is particularly important that petitioner distinguish his research and writing activity from his activity as college professor as well as from his personal activities. ...

Petitioner's testimony is reasonable; however, he has failed to provide the Court with any adequate records or sufficient evidence to corroborate his own testimony. ... Petitioner has failed to show that he is entitled to Schedule C deductions in excess of those respondent allowed. Because petitioner has failed to adequately substantiate his deductions, the Court need not address the profit objective, trade or business, and startup issues respondent raised in his pretrial memorandum.

Shpilrain v. Commissioner, T.C. Summ. Op. 2010-133 (Sept. 9, 2010).

Questions for the Tax Lady: August 2nd, 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: I recently got divorced from my spouse and am required to make alimony payments. Can I deduct these funds on my federal tax return?

Yes, as long as you meet the IRS’ requirements you should be able to deduct alimony payments paid to a former spouse. To learn more about the alimony payment deduction, check out this article from the Roni Deutch Tax Center – Tax Help Blog.

Question #2: I had to pay late penalties to the IRS, can I deduct these expenses?

No. According to IRS.gov, interest and penalties paid to the IRS on federal taxes are not deductible.

Questions for the Tax Lady: July 26th, 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: Do all states have a sales tax?

No. Actually only 45 states, as well as the District of Columbia levy a general sale and use tax. Alaska, Montana, Delaware, New Hampshire, and Oregon do not impose a state sales tax. However, Alaska does allow for local sales taxes, and a few other states have a variety of specific excise taxes.

Question #2: If I have to move to a different state for a new job, can I deduct all of my moving expenses?

Depending on how far you have to move for the new job, and how long you work for the new employer, you may qualify to deduct qualifying expenses. Some of these expenses include packing, transportation, shipping costs, and storage bills. For more information on the job relocation deduction, check out this article on the Roni Deutch Tax Center – Tax Help Blog.

Charities and Deductions

My YouTube team shot another tax tips video last week. In this episode, host Edward Lester shares some tips on claiming charitable contributions on your return. Be sure to enjoy the embedded video below and check out my YouTube channel and subscribe to my future videos.

IRS Taxes Personal Calls On Work Cell Phones

Almost everyone has a cell phone these days. But if you're among the people who make personal calls on a company mobile phone, the Internal Revenue Service may want to talk with you.

As previously mentioned – and quoted here – in the LA Times, the IRS puts cell phones in the listed property category — right along with company-issued motor vehicles and use of the corporate plane. And they consider little perks like cell phone calls from your work BlackBerry to be taxable as an extension of your compensation package. So either you or your employer is supposed to pay up.

The law for taxing cell phones was written 20 years ago, when the wireless industry was in its infancy and mobile phones were about the size and weight of a brick. Back in the day, if you wanted one of those big Motorolas with the 2-foot antenna (visualize Michael Douglas on the beach in the 1987 movie Wall Street), you — or more likely, your company — would have shelled out about $4,000. So of course, they were reserved for top-level executives.

Fast-forward 20 years, and now everybody has cell phones. They're smaller, lighter and faster. Instead of just calling on them, you can watch the news, listen to music and scan your e-mail. The CEO, the IT guy and the facilities manager each have one. Doctors and reporters would be lost without them. And how else would that real estate agent know whether you've blown her off or you're stuck — again — on the freeway en route to meeting her?

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Expensive Tax Mistakes To Avoid

CNN.com has added a helpful article with advice on some expensive tax mistakes to avoid when preparing your tax returns this year. Some of their advice includes: avoid paying taxes with a credit card, avoiding refund anticipation loans, setting up an installment agreement, and paying on time. You can read the full article by clicking here.

Energy Savings = Tax Savings

If you have made recent upgrades to your house then you may qualify for additional tax credits. There are many different home improvements that qualify for the energy credits including insulation, water heaters, air conditioners, fans, furnaces, skylights, windows, doors, solar panels, and certain roofs. The credit is usually around ten percent of the cost, but can vary depending on the type of upgrades. Keep in mind that only home improvements that reduce a home’s "heat loss or gain" are eligible for the credit. Thus, the credit may not apply to common household appliances such as dishwashers or refrigerators even if they bear the Energy Star label. For more details on getting an energy credit, visit DailyNews.com.

Getting A Tax Refund For Driving

There are numerous different ways to get a tax refund from driving in your car. Although you cannot deduct expenses for your regular commute to work there are some other deductions that may be of value to many people. The tax laws regarding driving deductions are somewhat complicated, but USNews.com has an article detailing how to easily claim driving related deductions on your tax returns. Some of the deductions include driving to get medical care, driving to volunteer for a charity, and driving to relocate for a new job. For a full explanation of the driving related deductions, check out USNews.com

Certain Deductions May Delay the Processing of Your Return

The IRS announced that due to recent changes in the law they announced that a certain percentage of returns would be delayed in their processing. In particular, returns with a state and local sales tax deduction, higher education tuition and fees deduction, and educator expenses deduction. If you will be claiming any of these deductions and would like to have your return processed faster you should e-file your return. Returns that are e-filed tend to have fewer errors and are processed faster which means that if you are entitled to a refund you will get that faster too! You can read all of the IRS’s advice at www.IRS.gov.