TaxMamas TaxQuips: Tax Quips

Separate While Incarcerated

Eva Rosenberg — Wed, 22 May 2013 08:06:00 -0500

Today TaxMama® hears from AShepherd in the TaxQuips Forum, with a sensible question. “I filed married filing separately this year because, at the time, my husband was incarcerated. He is out now. Can we file jointly still and if so, how can we ( will a 1040x do the job)? I couldn’t claim anything, our kids the EIC etc…. I only got 56 bucks back. Please help we really need the money.”

Dear AShepherd,

Mike Reed, EA explains.

Yes, Per Pub 501 you can change from MFS to MFJ – you must file within 3 years of the original due date. This will be an amended return, thus you do not “return” the $56, the 1040X will compute any balance or refund due.

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

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IRS Missed It

Eva Rosenberg — Mon, 20 May 2013 08:06:00 -0500

Today TaxMama® hears from Jack in the TaxQuips Forum, who is frustrated. Let me summarize. After not filing for a while, he got caught up. Now, the IRS has sent his wife a notice saying she didn’t report the sales of her stock. Jack says all that information was right there on their joint return. Why is he getting a threatening, registered letter now?

Dear Jack,

Mike Reed, EA explains what is probably going on.

As you are finding out, the world operates much simpler when things are filed on time and refunds are timely refunded. Late filings result in more “looks” and more “questions” causing more time and stress – as you said, above.

I seriously doubt the IRS “lost your records” – in the end I bet you’ll find the “mistakes” are right there in black & white – the wrong forms, the wrong entries, the wrong expectations. The IRS is pretty efficient – over 124 Mil returns filed last year.

Make yourself a promise to be prompt in the future. If necessary enlist an EA to help with your taxes – in the end you’ll pay less, sleep better and enjoy life more.

Rita Lewis, EA points out that the notice may be a result of a Substitute for Return that the IRS filed on your behalf when you didn’t originally file a tax return.

TaxMama® adds this. After not filing for years, the IRS doesn’t really have a record of your wife’s tax return. Believe it or not, even in the 21^st century, the IRS computers only look at the first Social Security Number on the tax return – unless you have a history of filing jointly. That’s why the IRS computers never saw a tax return filed under your wife’s SSN. You may well be able to resolve this with a phone call. Be sure to follow up in writing – after getting the IRS agent’s name and employee ID# – to confirm your conversation.

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

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Undetermined 1099R

Eva Rosenberg — Wed, 15 May 2013 08:02:00 -0500

Today TaxMama® hears from Laura in the TaxQuips Forum, with a tough question. “In 2011 my Elderly client (78) pulled all the money out of a retirement account which his wife had set up for him some years back. My client learned about the account upon her passing and withdrew all the funds not knowing there would be tax implications.

The 1099R has the box checked (TAXABLE AMOUNT NOT DETERMINED with a DISTRIBUTION CODE 7). I am trying to figure out the client’s basis. The contact at the bank has no idea what I am talking about. What should I do? Is there anything I can do to reduce my client’s taxable income?”

Dear Laura,

What is the source of this 1099R? Is it company retirement account, an IRA or an annuity?

With an annuity, the company should know the original cost paid for the annuity.
That would be the basis.

With a company retirement account, his former employer might know if there was any after-tax money contributed.

The IRA, on the other hand? First see if their tax return contains a Form 8606 – NonDeductible IRAs. That form is designed to track the basis. Not everyone includes it in the return – especially for older IRAs.

You would need to dig out prior year tax returns as far back as you can go to determine if there were any non-deductible contributions. On the other hand, you can ask him if he was aware of any. Most likely there were no such contributions made, so the whole thing is taxable.

Mike Reed, EA adds, if your client does not have past returns, possibly you can get a transcript.

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

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Research Grants

Eva Rosenberg — Mon, 13 May 2013 08:07:00 -0500

Today TaxMama® hears from a couple of people in the TaxQuips Forum, with similar questions. The second one combines both person’s concerns. “My wife is a graduate student who received a few research grants this year. Some of them want to give the money directly to her instead of through the university, and have asked for a W9. This money will be used entirely for lab equipment, field work, etc., None of it will be used for personal income to her. How is this handled? Do we include it in our income? Are the lab supplies and travel and such deductible as education expenses (my guess is not)? Or would I be able to set this up as a business and handle the income and expenses that way?”

Dear Beagle and JMG,

In order to get the grant, you must submit a proposal involving doing certain research or performing certain actions. Clearly, personal services are involved in order to merit the grant. So, yes, it does go on Schedule C.

Your wife would report ALL the income. She can report it on Schedule C. She can claim a deduction for the directly-related expenses. She can deduct the reimbursed expenses – since they will be included in her 1099-MISC.

Track all her income AND all her expenses. Read IRS Publication 334 to learn more about allowable expenses.

And if she pays anyone, have her be sure to get a signed Form W-9 from them when she engages their services – OR put them on payroll if they are her employees.

And for the answer to the question about employee business expenses, please read the reply in the TaxQuips Forum.

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

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No Per Diem

Eva Rosenberg — Wed, 08 May 2013 08:07:00 -0500

Today TaxMama® hears from Angel in the TaxQuips Forum, with a naive question. “I travel out of the country, on average, 6 months a year. My company handles everything pretty well, but I do have one question. If we take a day off for whatever reason, we lose our per diem for that day. Is this legal as we are still out of the country on business? We work 6 days a week and are off most Sundays; but we get per diem on Sundays even though we don’t work. Just wanted to get someone else’s opinion as this doesn’t make sense to me.”

Dear Angel,

How your company chooses to pay you is strictly company policy. There is nothing legal or illegal about it. And if they do the same thing for everyone in your position, it’s not even discriminatory.

I know, it’s not the answer you want. This is not a tax question. It’s a labor law issue, right?

I bring this up because it’s important to understand the difference between company policy and labor laws. In most states, a company is required to provide break times when you work more than a certain number of hours. Unless there is a union contract, they are not required to provide paid sick leave or vacation, if they don’t want to. Most companies do, because employees expect it and they want to attract employees who stay with them for the long term. So, the time to complain, or negotiate for better benefits is when you get hired. Or, once you start doing an outstanding job, you can lobby for more perks – for yourself and others in your position.

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

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Living Tax-Free

Eva Rosenberg — Mon, 06 May 2013 08:05:00 -0500

Today TaxMama® hears from Clifford in the TaxQuips Forum, with an excellent question. “I was told in an investment class that dividend income and social security income could be “blended ” to reduce taxes. We were told that up to $70,700 dollars could be sheltered from taxes. When we asked how this could be done, they said to speak to our tax accountant. Mine doesn’t seem to know anything about this, and he worked for the IRS as an auditor for many years.”

Hi Clifford,

As it happens, when you are married filing jointly, you are in the 15% tax bracket
until your taxable income reaches $70,700. In that tax bracket, qualified dividends are tax-free.

Suppose you have $70,700 worth of qualified dividend income. All your dividends would be tax-free.

As h2os points out, since you also have Social Security income, up to 80% of
your SS income will be taxable. That will raise your adjusted gross income (AGI).

However, if you have enough itemized deductions (like mortgage interest, medical expense and charitable contributions) to offset your SS income, you could, conceivably, pay no income tax whatsoever.

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

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Homebuyer Credit is Broken - Again

Eva Rosenberg — Wed, 01 May 2013 08:04:00 -0500

Today TaxMama® hears from MelissaMarie in the TaxQuips Forum, with a new problem. Let me summarize. She sold her home at a loss last year. She had bought it in 2008 using the Homebuyers Credit – which was required to be repaid – unless she sold the home at a loss. This year, the IRS is holding up her refund because she didn’t include the annual $500 repayment on her tax return – which she did not owe! What can she do?

Dear MelissaMarie,

You have my deepest sympathy. The whole first time homebuyers credit thing was so messed up when they set it up, I am not surprised that there is such mess at the back end.

Many people and tax pros are running into problems with it. Since this is affecting so many people, I suspect that the Taxpayers Advocate Service may not be willing to take it on. But ask them. They did a great job on the front end.

You can call them at 1-877-777-4778. And since it’s been this long – and you have been tracking it (keep notes), they may be willing to step in.

NOTE TO READERS: If you or your clients are having problems with the Homebuyers Credit this year, please let me know. I am working on an article (and talking to the IRS) to find ways to help avoid this problem in the future. (Please post your responses in the TaxQuips Forum – here.)

And remember, you can find answers to all kinds of questions about the first time homebuyers credit and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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Value of Exemption

Eva Rosenberg — Mon, 29 Apr 2013 09:37:00 -0500

Today TaxMama® hears from BBall in the TaxQuips Forum, with a common issue. He is trying to understand whether he should claim zero or 1 on his W-4 – and what affect that will have on his paycheck.

Dear BBall,

Ah yes, the mystery of the wages. That can be confusing. Add to that the effect of being claimed as a dependent on someone else’s tax return – and the waters are further muddied.

There are any number of exemption or withholding calculators out there. The IRS has one, as does TurboTax, as does H&R Block, as does Kiplinger etc. You can certainly play around with those to help you determine your potential total liability and the number of exemptions to claim.

Or, you can go directly to the source – IRS Publication 15 – the Employer’s Tax Guide. Look at the right tax table that relates to your payment frequency for SINGLE or MARRIED taxpayers. (It could be weekly, monthly, semi-monthly, etc.) That will tell you exactly how much each of those exemption selections will deduct from your paychecks.

Of course, if your wages are higher than the maximum amount in the tax tables, you’ll have to go to the tax rate charts. Those are not nearly as easy to figure out. But, at least that means you’re earning enough to have someone help you!

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

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Very Late 1099

Eva Rosenberg — Wed, 24 Apr 2013 03:30:00 -0500

Today TaxMama® hears from BigDog in the TaxQuips Forum, with an odd occurrence. “I received a 1099 for 2006 on 04/01/2013. This 1099 is from an old employer, who has in the past accused me of receiving more money than I earned. However I did file a 2006 tax return. Is there a statute of limitations, and should I just ignore the 1099? It was done by hand with his Social Security number not his employer ID number. It also was whited out and written over.”

Dear Dog,

You filed your 2006 tax return in 2007. You showed a substantial amount of income.

If you reported all your income, the IRS can re-open that year until 2010.

That is long gone. But, save that 1099. Just the look of it shows that that is utter nonsense – and probably fraudulent. I have no idea what woke up that dope after all these years, but I wouldn’t do a thing with it – as far as filing goes. If he’s being audited, it’s his problem.

However, there’s just one warning – if you did not report all your income, if you left out more than 25% of your income, the IRS has 6 years to re-open your tax return for audit. So, that time may have passed…or there may still be time if you used an extension for 2006.

And remember, you can find answers to all kinds of questions about bizarre 1099s and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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Interest on Refund

Eva Rosenberg — Mon, 22 Apr 2013 07:53:00 -0500

Today TaxMama® hears from Stan in the TaxQuips Forum, with a valid question. “In October 2011, an amended Estate Tax return was filed. The IRS did not complete their review until the beginning of April 2013. However, they are only showing interest payable for 53 days.”

Dear Stan,

Bill Porter, our EA from the Twin Cities, MN asks, why did it take over 18 months for the IRS to process it?

IRM 20.2.4.3(2) states: “Interest on payments made on or after the return due date is allowed from the received date of the payment, delinquent return received date or return processible date, whichever is later.”

If it took over 18 months, I suspect that the amended return was not ‘processible’ for most of that time period. The interest payable for 53 days was for after it became ‘processible’.

On the other hand, the IRS is known to make mistakes when it comes to interest and penalty computations. So, if it wasn’t a matter of your having filed an incomplete return that needed more clarification, follow some of the steps TaxMama® provided in her reply.

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

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

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