TaxMamas TaxQuips: Tax Quips

Sloppy 1099ing

Eva Rosenberg — Thu, 23 Feb 2012 03:30:00 -0600

Today TaxMama® hears from Gary in the TaxQuips Forum who has this problem. Let me paraphrase: “Gary has already filed his LLC’s tax return, reporting all his income properly. Suddenly, nearly three weeks past the 1099 deadline, he gets a 1099 showing income he received, plus reimbursements for materials and supplies – that were not income to him. That’s sloppy 1099ing. The client’s accountant won’t correct the 1099-MISC. What should he do?”

Dear Gary and other freelancers,

This is an important concept – and one that has caused a lot of trouble for people in business for themselves, who provide services and get reimbursed for supplies, material, travel and other things. This turns into a 1099 battle every year. And often results in audits where IRS makes unpleasant assessments on one side or the other.

Let me make this perfectly clear. Anything your client or customer pays you is INCOME to you. Period.

Account for it on your books. If they are reimbursing you for your expenses, or the supplies you bought, or the materials you used in the course of making something, building something or fixing something, it’s still income to you. Those reimbursements become part of your total Gross Income.

But wait. Never fear! You won’t have to pay tax on that income. You will deduct the cost of those things for which you are being reimbursed. Be sure to keep a copy of the invoices you submitted for those reimbursements. You will take deductions for the expenses on your own tax return.

So, yes, the 1099-MISC IS supposed to include the total amount paid to you by your client or customer. In fact, if you read the instructions for the 1099-MISC, you will see that it specifically says so. On the very first page, under “Specific Instructions”, it says

· At least $600 in rents, services (including parts and materials).

So please, stop yelling at the poor accountant who issued the 1099 to you – and start recording all your income on your books. OK?

And remember, you can find answers to all kinds of questions about small businesses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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2010 401k Rollover

Eva Rosenberg — Wed, 22 Feb 2012 06:48:00 -0600

Today TaxMama® hears from Tom in the TaxQuips Forum with this issue. “I rolled over a 401k directly to a Roth IRA in 2010. I received a 1099 for this, but did not fill out an 8606 when I submitted my 2010 return. The plan was to report half of the taxable amount in 2011 and half in 2012. Do I need to amend my 2010 return or should I just write in the amounts on line 16B of the 2011 Form 1040, and hope they don’t get too excited about it?”

Gee Thomas,

The IRS doesn’t just shrug off a major missing form like that.

I really, really hate to tell you this. The ONLY way to get the right to defer the taxes on the rollover to 2011 and 2012 was to file that Form 8606 with a TIMELY FILED 2010 tax return.

If you didn’t include that form last year, I don’t believe you can just amend the 2010 tax return and request the privilege now. You can certainly try and see what IRS does.

Put this year’s tax return on extension and wait for IRS to give you a decision after you file the 2010 amended return with the Form 8606. Read chapter 2 of the 2010 IRS Publication 590 for the rules for that 2010 rollover.

I truly hope you are not faced with all the taxes being due in 2010, along with late payment penalties.

And remember, you can find answers to all kinds of questions about Roth Rollovers and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Mobile Home Rental

Eva Rosenberg — Tue, 21 Feb 2012 03:30:00 -0600

Today TaxMama® hears from Klondike in the TaxQuips Forum with this question. “In March, I purchased a new mobile home and placed it on property I own. It is skirted with wheels removed and set on cement pillars. My son lives in the home and pays rent. Is it best to depreciate the home for S/L 27.5 years and break out the land improvements (septic, water and electrical, wooden deck) for 15 years? Also, is it eligible for bonus depreciation or Sec 179?”

Hi Klondike,

This IS a good question.

The wooden deck and attachments to the land will be depreciated at the 27.5 years MACRS SL mid-month rate.

But the mobile home…aaah…let’s see what that will be. Hmmm…no kidding? IRS specifically says that this IS depreciated just like residential rental property – over 27.5 years!

Residential rental property. This is any building or structure, such as a rental home (including a mobile home), if 80% or more of its gross rental income for the tax year is from dwelling units. A dwelling unit is a house or apartment used to provide living accommodations in a building or structure. It does not include a unit in a hotel, motel, or other establishment where more than half the units are used on a transient basis. If you occupy any part of the building or structure for personal use, its gross rental income includes the fair rental value of the part you occupy.

As to the septic and utility improvements, that’s not entirely clear to me. There are a couple of categories (20-year and 25-year) when it comes to municipal sewage systems and utilities. But these are not municipal. They are on your property.

And they are certainly designed to be used for more than 25 years (even if they must be inspected with some regularity). However, the question is, are they part of the land (non-depreciable) or building improvements – depreciate over 27.5 years?

Personally, I would treat them as part of the land. I may be wrong. This is where your own tax pro would make the final determination.

Now, on to your question about the Section 179 depreciation.

Nope. If you were renting a motor home (not attached), it would be personal property. It would be depreciate like a car or truck (over 5 years) subject to the Section 179. Since this is regarded as residential rental property, alas, no Section 179 or Bonus depreciation.

And remember, you can find answers to all kinds of questions about depreciation and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Overseas Freelancer

Eva Rosenberg — Thu, 16 Feb 2012 07:29:00 -0600

Today TaxMama® hears from Jim in the TaxQuips Forum with this question. “I live in Thailand and do some freelance work. I can’t put that income on Form 2555 for the Foreign Earned Income Exclusion because I had to return to the US for 60 + days for an operation. How do I report this income?”

Hi Jim,

I hope you’re feeling much better! And perhaps this will help. There are two ways to get the Foreign Earned Income Exclusion.

1) Is to live/work outside the US for 330 days out of 365.
2) Is to be a bona fide resident of the foreign country.

So, if your regular place of residence is in Thailand, you can use that option. Then, it doesn’t matter if you were back here for health reasons.

But remember, even though the income will be excluded for income tax purposes, you must still pay self-employment taxes on it, unless you were on a payroll with that company.

Suppose the bona fide resident option doesn’t work for you? You can also use foreign tax credits to offset your US taxes. If you paid taxes on that income in Thailand, you can use Form 1116 the Foreign Tax Credit form to reduce your US taxes.

Aaah, but if you didn’t pay taxes in Thailand, either? Then you get no break. You have to pay taxes somewhere!

And remember, you can find answers to all kinds of questions about working overseas and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Calling all Tax Nerds

Eva Rosenberg — Wed, 15 Feb 2012 07:22:00 -0600

TaxMama® is searching for the Ultimate Tax Nerd. Tax season brings out uncontrollable tax passions. Mild mannered individuals turn into rabid tax fanatics. Does that happen to you? Enter the Ultimate Tax Nerd Contest online beginning Wednesday, February 15th, 2012. The contest will run until midnight, Sunday April 1, 2012. Over $4,000 in prizes. Tax Nerds will win tax software each. One lucky grand prize winner will be announced on Monday, April 9, 2012 at midnight. Join us over at TaxMama’s Facebook Page

TaxMama.com’s Eva Rosenberg, EA admits. “I hated taxes with a passion when I was in college. I was determined to avoid ever dealing with them at all. But dealing with taxes is all about solving puzzles or unraveling mysteries. I got hooked – and built my life and career around taxes.”

Do you bring your receipts and calculator to the beach or ski lodge? Do you count exemptions instead of sheep? Do you badger every Enrolled Agent and CPA you meet? Do you have endless tax questions that will not keep?

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For more information on this event visit our special FaceBook page .

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Stepchild in Divorce

Eva Rosenberg — Tue, 14 Feb 2012 03:30:00 -0600

Today TaxMama® hears from Susan in the TaxQuips Forum with a divorce question for Valentine’s Day. “What happens, taxwise, to the relationship of stepchildren when the parents divorce and the stepchild stays with the stepparent? Do they go back to just being the girlfriend’s kid again? I hear about stepparents adopting their spouse’s children. Is that necessary to maintain the relationship test after divorce?”

Hi Susan,

Relationships that are created in marriage stay intact, even after a divorce.

There is a question on the EIC page:

What is a foster child for EITC purposes? Some of my “clients” attempt to claim various children as a foster child or stepchild.

IRS Replies:

A step relationship formed by a legal marriage according to state law is not dissolved by divorce or death. Treasury Regulations section 1.152-2(d) currently provides that “the relationship of affinity once existing will not terminate by divorce or the death of a spouse.”

See,…even with a Reg citation.

And this is a good time to remind you of our upcoming course, a Tax Checklist for Knotty Divorces. http://www.cpelink.com/product/detail.php?p=3459&s=85iz6kg

And remember, you can find answers to all kinds of questions about divorces, dependents and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Across State Lines

Eva Rosenberg — Mon, 13 Feb 2012 07:07:00 -0600

Today TaxMama® hears from John in the TaxQuips Forum about an inequity. “My father & I both worked in PA, but both lived in NJ for the entire 2011. However on my W-2, I paid state taxes to NJ. On his W-2 He paid state taxes to PA. Is this correct? Also he worked inside of Philadelphia and paid local city taxes – are these refundable at all? I worked outside of the city and was not subject to these taxes.”

Hi John

Interesting about the different treatment. Aaah…this treatment has more to do with his employer than with the tax laws. His employer is not set up to deal with NJ payroll issues. John, your father needs to sit down with someone who really IS familiar with the reciprocity laws between NJ and PA.

It took me less than a minute to find this page that describes the rules. He should be able to get a refund for the taxes paid to PA. He should also check with his employer’s payroll department and see if they can change the way his withholding is taken out.

Clearly, he will be facing underpayment penalties in NJ. If there are enough people working for his employer who live in NJ, perhaps they will resolve this for 2012 at the employer level. If not, your father will need to be making estimated taxes to NJ. Also:

Meanwhile, to stop the withholding of Pennsylvania income tax, New Jersey residents, like your father, who receive compensation from Pennsylvania must complete Form REV-419, Employee’s Nonwithholding Application Certificate and turn this in to his employer.

And remember, you can find answers to all kinds of questions about state tax reciprocity, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Cannot Get W-2

Eva Rosenberg — Thu, 09 Feb 2012 04:08:00 -0600

Today TaxMama® hears from Nico out in the world, with this tough situation. “Have you ever had a client who never received a W-2 because the company went belly up? I know it is illegal to use the last year’s W-2 to prepare the return. What do you suggest I do?”

Dear Nico,

You bet I’ve seen this. During the decades of working people who had not filed tax returns, I came across this regularly. In fact, this is one of reasons someone becomes a non-filer. They are stumped about how to proceed. Once they don’t file for one year, they are afraid to file for the next year because they didn’t file last year…and a cycle starts.

However, the solution is relatively easy. Especially when you know the trick. There’s even a form for this. Here’s what you do, in two easy steps:

1) Use Form 4852 – Substitute for W-2
http://www.irs.gov/pub/irs-pdf/f4852.pdf

2) Recreate the earnings and withholdings. Here are some ways to do that:

a) Use the final paystub, if your client has it, and it has year-to-date information.
b) If not, you mention the prior year W-2.
If the client worked for the company all year and the income was the same – use that.
c) Or if the client only worked for the company for several months, you
can prorate that 2010 W-2 to reflect the number of days/weeks/or months worked.
d) Or if you know how much the client was earning per hour/week/month, or whatever and can reconstruct earnings and withholding – do that.

Whatever you do to arrive at your computations, just explain your logic to IRS.
You can probably use the same form for the State, now that IRS has added
state withholding fields to the form.

And remember, you can find answers to all kinds of questions about missing W-2s, and other tax issues, free. Where? Where else? At www.TaxMama.com.

Please post all Comments and Replies in the new TaxQuips Forum .

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Timing of Purchase

Eva Rosenberg — Wed, 08 Feb 2012 04:05:00 -0600

Today TaxMama® hears from Insha in the TaxQuips Forum with this question. “I run a daycare center in my home. I file a Schedule C on the cash basis. In February 2011, I bought an asset for my business that cost $2,000. I’m making payments of $100 per month on it. So, on my 2011 tax return, how do I list it as an asset for depreciation? Do I use the whole $2,000? Or do I use what I’ve paid on it this year; and just keep adding what I pay each year to the asset?

Dear Insha,

That’s a sensible question. I can see how that would be unclear. So, here’s how it works.

When you buy something on credit, whether via credit card or a loan, your ownership date is the date of the original purchase. You have bought it. You are now officially obligated to pay for it. So enter the item into your depreciation schedule on February 2011, with a value of $2,000.

You can depreciate it over time, or take Section 179 depreciation, all at once. Only use Section 179 depreciation if you will be using that asset for longer than the depreciable life; otherwise, you will have to pay back the depreciation.

You can also claim a deduction for the interest on the loan. But not the principal – since you are picking up the purchase price all at one time. IRS Publication 946 explains How to Depreciate Property if you want to learn more.

And remember, you can find answers to all kinds of questions about assets, depreciation, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Blind or Over 65

Eva Rosenberg — Tue, 07 Feb 2012 08:03:00 -0600

Today TaxMama® hears from Alice in the TaxQuips Forum with a valid question. “On line 39a of the Form 1040, if a box is checked, resulting in a deduction for those over 65 years old, where do we put the amount? And what line is it deducted on from?

Hi Alice,

The overall amount will go into box 40. Checking that box determines how much you will enter as a standard deduction.

These are the regular standard deductions:

Single $ 5,700
MFJ or QW $11,400
HOH $ 8,400

When you check box 39a, you get to add these additional deductions, which depend on the filing status:

Blind or 65 or older – add, per instance:

MFJ, MFS, QW $1,100

HOH or Single $1,400

So, if you are looking at single man who is over 65, his standard deduction would be:

5700 + 1400 = $7,100. If he were also blind, it would increase to $8,500.

Oh yes, line 40 is deducted from line 38, which is the line for the Adjusted Gross Income.

And remember, you can find answers to all kinds of questions about standard deductions and other tax issues, free. Where? Where else? At www.TaxMama.com.

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