Tax Tips Blog

Joe asks:

Can multiple purchases be grouped together for itemized deduction of sales tax for major purchases (multiple small Home Depot and Lowes purchases for landscaping or remodel)?

My reply:

Hello Joe!

You have the option of taking either your State Income Taxes or Sales Taxes as an itemized deduction. If you choose to take the Sales Tax deduction then you have the option of adding up all the sales tax you paid for the year (this would require you keeping every single receipt for the year) and deducting that amount OR using the IRS tax tables plus “big-ticket” items.

Big Ticket items are just that - a car, a boat, etc. There is no specific deduction for landscaping or remodeling. It would have to be considered a substantial addition or major renovation.

A substantial addition to your home or major renovation is considered a big ticket item IF the tax rate was the same as the general sales tax rate AND any of the following applies:
1. Your state or locality charges a general sales tax on the sale of a home, substantial addition to a home or major renovation of a home.

2. You purchased the materials to build the substantial addition or major renovation yourself and paid the general sales tax directly.

3. Under your state law your contractor is considered your agent in the substantial addition or major renovation of your home.

4. None of these items were used in your trade or business.

Assuming you qualify, then yes, you may add up all the sales tax associated with the substantial addition or major renovation.

Best wishes,

Gina

Dave writes:

I have a couple questions regarding the dreaded kiddie tax changes….I can’t find where they give better details on this to help me with some clients whose children are students and may be “on the border” in this tax situation.

An example is: A client of mine has a child in college who has a fair amount of investment & unearned income. This income comes in the form of dividends and Schedule E earnings from a Corporation. He has some earned income from wages, but not much in consideration to his other income. He is 22 years old and claimed himself last year because he lives away for college in an apartment & claims that with his earnings from the Corporation, dividends and wages, he is able to provide more than half of his own support. For 2008, I see it that he will be subject to the kiddie tax because he is under 24, a full time student, and whose earned income may not be more than half of his support. If he is not considered a dependent by the dependency rules, could he be exempted from this?

Another situation is a child who is actually old enough to claim himself, but is a dependent because his is handicap. A client of mine has a child who is over 24 but is claimed as a dependent on his return due to a disability. Is he subject to the kiddie tax? I know when it comes to tax laws, there is a lot of reading between the lines. I hope you can help me out on this a bit.

Thank you,

Dave

My reply:

Hello Dave, thanks for visiting.

Regarding your first Kiddie Tax example:

You said that your client has W-2 wages and Schedule E earnings. Is the Schedule E earnings “earned income”? Did he materially participate? Was the income subject to self-employment taxes? If so, then it’s earned income and he may have paid over half his support. I’d check to make sure that you’re properly determining his total support and who is contributing what.

Whether or not he is a dependent does not change the fact that he may be subject to the Kiddie tax.

Please be aware that children’s returns may also be subject to AMT.

Regarding your second Kiddie Tax question:
Again, whether or not your client will be subject to the Kiddie tax rules are completely different than whether or not they can be claimed as a dependent. Perhaps your confusion comes into play because the determination of “support” uses the same definitions in both tax provisions. If your client is over the age of 24 the Kiddie Tax does not come into play.

I hope I answered your questions.

Best wishes,
Gina

Anne writes:

Hello Gina,

I have some clients who may benefit from the new 0% capital gains starting in 2008. I have some clients that are sole proprietors, giving them some room to potentially get themselves into the required tax bracket needed to obtain this capital gain rate. So, my question arises from the “too good to be true” thought. Here is one example of my client situation. He has an LLC, which will more than likely show a loss, rental units that usually show a loss, reported on schedule E pg 1, and a Sch C which could show income, although they have purchased a fair amount of equipment that could be written off, due to the 50% bonus depreciation & S179 deductions. So, I think he could easily get his income down to a point that he falls into the 10-15% tax bracket. It seems too good to be true that he can take all this depreciation in order to get into the bracket, so I’m thinking there must be some rules that I’m not seeing. What are your thoughts?

My reply:

Hello Anne, it’s great to talk to another professional!

The main thing that I’d watch out for with the Long-Term Capital Gains (LTCG) rate is Alternative Minimum Tax (AMT). As you’re probably aware LTCGs can phase out the AMT exemption and personal exemptions triggering additional Federal tax liability. In addition, there may be issues with the state and local taxes. If your client will incur a large LTCG for state tax purposes they will most likely want to itemize their deductions on their Federal return. This may reduce their Federal liability, but state and local tax payments need to be added back when computing Alternative Minimum Taxable Income (AMTI); thus most of the value of the state and local tax is lost for AMT purposes. So when you run your tax projection for them don’t forget to calculate AMT.

Best wishes,

Gina

Lucille writes:
Dear Mrs. Gina,

I hope that you can give me some advice. I have a Roth IRA (not converted from a traditional) and it has slowly been losing value. What I would like to know if there is a penalty if I withdraw the funds and reinvest funds into an Roth IRA certificate at my local credit union.

Sincerely,
Lucille

My reply:
Lucille,

Hello! Thanks for visiting.

If I’m understanding you correctly, what you’re really asking is if you can change the location of your Roth IRA from wherever it is to your local credit union AND change what you are invested in, both without penalty.

If so, the answer is YES. You can do what is called a “trustee-to-trustee” transfer to transfer your IRA from wherever it is now to your local credit union. Once it has been transfer you can change your investment.

Simply tell your local credit union trustee what you would like to accomplish and they should be very familiar with the rules.

I hope this answers your question.

Best wishes,
Gina

Dominic writes: Hello my name is Dominic. I live in Arizona. I just have couple of questions for you. In what page of any law book stipulates Americans must pay an income tax? I have been trying  to conduct research and i can not not find anything saying it is illegal to not pay your income taxes. In my opinion our taxes don’t even go to the American government. I believe all of our income taxes go strait to the Illuminati. Please help.

Sincerely,
Dominic D.

My reply:

Hello, thanks for visiting.  This is a question that is frequently asked on the Internet.  To make is extremely clear, the answer is, “YES”.

In 1913, Congress passed a constitutional amendment allowing the U.S. government to collect income tax.  Any law book (or history book for that matter) that contains the 16th Amendment to the Constitution will state the following,  “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

The Underwood Tariff Act of 1913 contains a section on the income tax.  This act initiated the system we use today.

Best wishes,
Gina

Rick writes: Hello Gina,

Found your website doing a google search. I’m looking for a good list of deductible items for an independent contractor. I am a pharmacist with a regular job, but also do some relief work.
I only do extra work about 8 times per year, but I don’t have a good handle on what I can deduct. Would your book, WORTH MORE THAN RUBIES be of any help with that?

Thanks for any help,
Rick

My reply:

Rick,

Thanks so much for visiting my website and writing me.

First, I did not write the book, “Worth More Than Rubies”. Second, I don’t think that is the book you are looking for in this situation. That book is more for “stay-at-home” parents who are afraid to work from home. It gives them encouragement to go ahead and try.

As for what you can deduct - there is no real list anywhere because what is deductible depends on your specific business needs. What I usually tell my clients is when they incur an expense they need to ask themselves these two questions:

• What was the business purpose of this expense?
• Would someone else who is in the same line of business also incur this expense?

If there is a valid business purposes and someone else in your line of business would also incur the expense then it’s deductible.

Having said that there are exclusions (these are not exceptions, but certain items or part of the items expense is “excluded” or not deductible no matter what your business). The exclusions relate to meals & entertainment, travel and what I like to call “walk away” devices (cell phones, PDAs, laptops, etc.).

Please let me know if you need help with something more specific.

Best wishes,
Gina

Ruth asks:

My father died recently, and I’m trying to organize his financial affairs. I’m the only heir, and executor of his estate. He had a lot of debt and very few assets, so there will not be enough money to pay everything. He has a small amount of money in a bank account, and that’s it. No real estate, no investment accounts, his car wasn’t paid off, and there are no other assets. I will have to prepare his tax return for this year, and he’ll owe at least some income tax. He had a pension, which was taxable, and even though some federal tax was withheld, he always owed a few hundred in taxes at the end of each year. I know the IRS is high on the list of priorities of who gets paid first. (I”m still working my way through the Nolo Press book on estates, but the book seems to assume everyone who dies has money left over, so it’s not always helpful.) I want to make sure there’s enough money to pay the taxes. But funeral expenses are also at the top of the list, and I paid out of pocket for his cremation (they wouldn’t release his ashes to me until I paid, so I had to just write a check out of my own bank account, since his estate hasn’t been probated yet). I think, legally, I can be reimbursed for that. My question is, who gets paid first out of an estate. If I use up all of his money to pay for funeral expenses, and there’s not enough to pay the IRS, what happens? Do any other bills get priority over the IRS? His car is going to be sent back to the lien holder, and I’m going to hold off on reimbursing myself for the funeral expenses until I see how much money is available - I think there will be enough for both that and the IRS, but I can’t be sure until I get his W2 forms. I just wanted to be sure before I did anything, because I know the IRS can (at least theoretically) come after the executor if the tax isn’t handled correctly. If for some reason he owes a lot of taxes (if he changed his withholding, for example), I don’t want the IRS to come after me. What about medical expenses? Where do they fall in the hierarchy of creditors? I haven’t received any bills, but I saw a preliminary accounting at the hospital when I picked up his things, and his final hospital bill will be over $100,000. I know there won’t be enough money to cover all of it, but if there’s some left over after the funeral expenses and the IRS, I’ll have to use it for something. Since the estate is so small, I’d rather not pay a lawyer or tax accountant if I don’t have to - his taxes were always very simple (1040EZ) so hopefully I can do it myself.

Thank you, Ruth

My reply:

My condolences on your loss. Since real estate is not involved and there are no assets, my first thought is whether or not probate would be required and even if required if there was an express option available in your state. Theses questions are best answered by a lawyer, since these laws vary by state.

I realize, due to the estate’s lack of funds you do not want to contact a lawyer, but a short consultation with a local lawyer would be in your best interest. Your county should have a lawyer referral service of some kind. Even if you must pay for it, an hour of legal advice will be worth it.

Make your list of questions and keep the discussion on point.

Second, if there is equity in the car, then it maybe reasonable for you to sell it then pay off the lien holder. If there is no equity in the car, call the lien holder and notify them of his death. The lien holder gets the car and any unsecured debt joins the other unsecured creditors of the estate.

Third, although I believe I will be detailing out the order of payment correctly here, it is best to quickly review this with your attorney. Expenses of administration, including funeral expenses, get paid first. After these expenses are paid taxes should be paid with the remaining available funds, if any. If there’s no money left then the taxes go unpaid. If there is money left after paying taxes, then the unsecured creditors get paid. Medical expenses are included with the unsecured creditors.

While federal law (31 USC 191-192 (?)) gives the government absolute priority, IRS realizes that there are necessary expenses of administration, including funeral expenses, and that encumbered assets wouldn’t be in the estate without money advanced by lien holders. IRS will probably not bother you if you reimburse for the cremation and the car goes back to the lien holder.

Here’s what I would suggest regarding the taxes, assuming there isn’t enough of his money to pay them. Prepare and file the return without payment. When you get the first notice, write back and tell them he died, provide a copy of the death certificate, and tell them the estate had no assets with which to pay the tax. That should take care of it.

As for the unsecured creditors, you should have a bunch of certified copies of the death certificate. Send one copy to each creditor (and then another copy when they claim they didn’t receive the first one) and tell them there’s no money to pay them, and then ignore them.

Again, I believe you should consult with an attorney. You don’t have to hire a lawyer to do the paperwork or taxes, which they might not want to be bothered with for such a small estate, anyway, especially if there’s a simplified set of procedures available. But I think it would give you some peace of mind to get some confirmation of the overall game plan, especially to be sure you’re in compliance with any odd provisions your state might have.

Best wishes,

Gina

Mike writes:
This question is in regards to a traditional IRA account for a married couple. If both spouses have compensation income and both spouses don’t have employer sponsored 401Ks, I understand that each spouse can make a deductible $4,000 contribution.

But do they each need their own individual IRA account or can they have a joint IRA account to which they contribute $8,000.

Thanks in advance.

My reply:
Hello Mike, thanks for stopping by.

First, you are allowed to make a deductible contribution to an IRA account if you are not covered by any pension plan, not just a 401(k) plan.

Second, if you are covered by a pension plan or 401(k) plan and your joint income is less than $100,000 then your IRA contribution is at least partially deductible. The amount you can deduct begins to phase out at $80,000 for joint taxpayers.

Third, only one spouse needs to have earned income. The non-working spouse can base their IRA contribution on the working spouse’s income. In this situation their IRA is called a “spousal IRA”.

Fourth, in 2008 you are allowed to contribute up to $5,000 per individual if you’re 49 or younger and $6,000 for each individual 50 or older.

And finally, last, but not least….each individual must have their own IRA account. IRA stands for “Individual” Retirement Arrangements.

Best wishes,
Gina

Vince writes:
I was checking my IRA yesterday and couldn’t find where my broker had taken out the RMD for 2007. I called them today, and they said I did not signed up for automatic distribution. I find this hard to believe, but they are very unfeeling about the matter. The question is, is there anything I can do to avoid the 50% penalty? I think it will be something like $6,000!

Another question is, if I have to pay the penalty, is there any point in taking out now the sum that should have been taken out in 2007?

In any event, I think I will transfer my account to another broker.

Thank you,
Vince

My reply:
Hello Vince, thanks for visiting.

You can petition the IRS to refund the penalty. There’s no guarantee it will work, but it is worth the effort.

Also, do you have more than one IRA? If so, the RMD doesn’t have to be taken from each IRA. You just have to be sure that the distributions are larger than the total RMDs.

Best wishes,
Gina

Lanny writes:
I may be having a senior moment here as this is probably a stupid question, but I can’t remember the details.

I’m retired and pay estimated taxes. I sold a bunch of stock last month, mostly gains. I have carryover losses by the way and understand that I can only use $3000 of the carryover losses each yr. Does the money coming in from the sales count as income and therefore I need to adjust up my est. payments?

Appreciate the help.

My reply:
Sales proceeds are not income, though they must be reported. Net gains from sales are income. If you have carryover losses, you can use more than $3,000 of those carryover losses, if you have gains. You can use up to the amount of your gains, plus $3,000 which is used to offset other income.

For instance, lets say you have $10,000 of carryover losses and you have no other losses or gains for the year. Then you can take $3,000 against your income and continue to carry forward the other $7,000.

However, lets say now that you have $10,000 in carryover losses, and $8,000 in gains for the year (no other losses, for simplicity). You can now take $8,000 in carryover losses against your $8,000 in gains. This leaves you with $2,000 of losses, which you can use against your other income for the year.

If you happen to have a net gain, which would be added to your regular income, you may also be interested in reading my article on long-term capital gains rates.

Computing estimated tax payments are not always as easy as they may appear. It’s usually best to seek the help of a tax professional to make sure you haven’t overlooked something.

Best wishes and thanks for visiting,
Gina