Here are my last ASK THE TAX PRO answers until I “return” at the end of April – after the end of the tax filing season. Any appropriate ATTP submissions that remain unanswered, as well as any that I receive during the season, will be held in a file until after April 15th.
I realize that there are a few appropriate submissions that I have not gotten to, including several very good questions, but I just don’t have the time right now to prepare a proper response.
Q. Your website is amazing and it is so nice of you to dedicate your time and energy toward helping confused tax payers in this confusing state that we live in. I do have one question for you that is annoying me this tax season.
I realize that there are a few appropriate submissions that I have not gotten to, including several very good questions, but I just don’t have the time right now to prepare a proper response.
Q. Your website is amazing and it is so nice of you to dedicate your time and energy toward helping confused tax payers in this confusing state that we live in. I do have one question for you that is annoying me this tax season.
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I live in New Jersey, am married filing jointly, and received $881 in a Homestead Tax Rebate in August, 2007. 2007 was the first full year in my home, which I purchased in June, 2006. My question is: Do I have to report that Homestead Rebate as income on my federal taxes if I itemized deductions this year? Should it effect my state income taxes at all? If I do need to report it as federal income, which line should it end up on on the 1040 form?
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A. First of all, the NJ Homestead Rebate is not taxed by the State of New Jersey. According to the NJ Division of Taxation website, “Homestead rebates, property tax reimbursement payments, FAIR rebates, and NJ SAVER rebates are not taxable for New Jersey gross income tax purposes, and should not be reported on the New Jersey income tax return.”
A. First of all, the NJ Homestead Rebate is not taxed by the State of New Jersey. According to the NJ Division of Taxation website, “Homestead rebates, property tax reimbursement payments, FAIR rebates, and NJ SAVER rebates are not taxable for New Jersey gross income tax purposes, and should not be reported on the New Jersey income tax return.”
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As for “Sam”, according to IRS News Release NJ-1001-15, "For taxpayers that claimed itemized deductions, including property taxes, on last year's [2006] Federal income tax return, it will be necessary to report the rebate as income.
Rebates of this type are called 'recoveries'. A recovery is a return of an amount you deducted or took credit for in an earlier tax year. Taxpayers who itemized last year enjoyed a benefit of taking a deduction for the entire amount of their property tax payment. However, since they received part of that deduction back in the form of a property tax rebate, after they filed their return, these taxpayers will have to report that rebate as income on this year's return."
The rebate will be included on the 2007 Form 1040 to the extent of the "tax benefit" received from the 2006 deduction of real estate taxes, similar to the way a state income tax refund is treated. It is possible that only a portion of the rebate will be taxed. In your situation, if your 2006 itemized deductions exceeded the standard deduction for a joint return by only $600.00, then only $600.00 of your $881.00 rebate will be taxable on the 2007 return.
If you claimed the Standard Deduction in 2006, and did not itemize on Schedule A, the rebate does not have to be included on your 2007 return. The NJ Homestead Rebate received by a tenant also does not have to be reported.
The IRS release instructs taxpayers to report the taxable amount, if any, of the rebate(s) as "Other Income" on Line 21 of Form 1040.
Q. If my employer has a "formal" policy of reimbursement, but I have a few conferences that I went to they did not reimburse me for would they contact the conference sponsor and ask for proof of my attendance? Also, if I have lunches for business (much of which my company doesn’t reimburse but it helps build my customer base) would they then ask for verification from the person with whom I lunched? Finally they ask if our policy is accountable or non-accountable. What does that mean? I can get a letter from my employer that says they only reimburse for X, but not Y.
As for “Sam”, according to IRS News Release NJ-1001-15, "For taxpayers that claimed itemized deductions, including property taxes, on last year's [2006] Federal income tax return, it will be necessary to report the rebate as income.
Rebates of this type are called 'recoveries'. A recovery is a return of an amount you deducted or took credit for in an earlier tax year. Taxpayers who itemized last year enjoyed a benefit of taking a deduction for the entire amount of their property tax payment. However, since they received part of that deduction back in the form of a property tax rebate, after they filed their return, these taxpayers will have to report that rebate as income on this year's return."
The rebate will be included on the 2007 Form 1040 to the extent of the "tax benefit" received from the 2006 deduction of real estate taxes, similar to the way a state income tax refund is treated. It is possible that only a portion of the rebate will be taxed. In your situation, if your 2006 itemized deductions exceeded the standard deduction for a joint return by only $600.00, then only $600.00 of your $881.00 rebate will be taxable on the 2007 return.
If you claimed the Standard Deduction in 2006, and did not itemize on Schedule A, the rebate does not have to be included on your 2007 return. The NJ Homestead Rebate received by a tenant also does not have to be reported.
The IRS release instructs taxpayers to report the taxable amount, if any, of the rebate(s) as "Other Income" on Line 21 of Form 1040.
Q. If my employer has a "formal" policy of reimbursement, but I have a few conferences that I went to they did not reimburse me for would they contact the conference sponsor and ask for proof of my attendance? Also, if I have lunches for business (much of which my company doesn’t reimburse but it helps build my customer base) would they then ask for verification from the person with whom I lunched? Finally they ask if our policy is accountable or non-accountable. What does that mean? I can get a letter from my employer that says they only reimburse for X, but not Y.
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A. According to IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses) – “To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.
A. According to IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses) – “To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.
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1. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
1. Your expenses must have a business connection — that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.
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2. You must adequately account to your employer for these expenses within a reasonable period of time.
2. You must adequately account to your employer for these expenses within a reasonable period of time.
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3. You must return any excess reimbursement or allowance within a reasonable period of time.”
3. You must return any excess reimbursement or allowance within a reasonable period of time.”
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What this means is that you are reimbursed for actual business expenses which you have submitted to your employer, as opposed to getting a flat $500.00 per month expense allowance. From what you have described it appears that your employer has an “accountable plan”. If you provide the IRS with a copy of the employer’s reimbursment policy, which explains what expenses they do and do not reimburse, that should be sufficient.
What this means is that you are reimbursed for actual business expenses which you have submitted to your employer, as opposed to getting a flat $500.00 per month expense allowance. From what you have described it appears that your employer has an “accountable plan”. If you provide the IRS with a copy of the employer’s reimbursment policy, which explains what expenses they do and do not reimburse, that should be sufficient.
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As long as you can substantiate that your unreimbursed conferences and lunches were legitimate business expenses and that your employer does not reimburse those specific expenses that should be sufficient. If your employer would have reimbursed you for the expense, but you did not submit the expense to your employer for reimbursement, then it would not be deductible.
As long as you can substantiate that your unreimbursed conferences and lunches were legitimate business expenses and that your employer does not reimburse those specific expenses that should be sufficient. If your employer would have reimbursed you for the expense, but you did not submit the expense to your employer for reimbursement, then it would not be deductible.
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For the conference you would need to provide a credit card receipt or cancelled check indicating that you paid the registration fee, as well as receipts to indicate your travel to and from the conference (unless you drove), and copies of the conference workbook, agenda or hand-outs to show that you were there. Many conferences will provide you with a certificate at the completion. In my case when I attend a tax conference I get a certificate to verify the number of “Continuing Education” units I earned.
For the conference you would need to provide a credit card receipt or cancelled check indicating that you paid the registration fee, as well as receipts to indicate your travel to and from the conference (unless you drove), and copies of the conference workbook, agenda or hand-outs to show that you were there. Many conferences will provide you with a certificate at the completion. In my case when I attend a tax conference I get a certificate to verify the number of “Continuing Education” units I earned.
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For your lunches you would need to show receipts and some additional specific information (see my THE FLACH REPORT posting on “Keeping Track of Business Expenses”).
For your lunches you would need to show receipts and some additional specific information (see my THE FLACH REPORT posting on “Keeping Track of Business Expenses”).
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As far as doing a “third-party” check – i.e. if you state that you had lunch with me on August 3rd the IRS would contact me to verify that we actually did have lunch and actually did discuss business – this is rare. I have never actually seen such a third-party check in my 26 years. As this is an involved process I expect that the IRS only does this if we are talking about lots of money and they are really after you.
As far as doing a “third-party” check – i.e. if you state that you had lunch with me on August 3rd the IRS would contact me to verify that we actually did have lunch and actually did discuss business – this is rare. I have never actually seen such a third-party check in my 26 years. As this is an involved process I expect that the IRS only does this if we are talking about lots of money and they are really after you.
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Q. What is the percentage of tax one would have to pay to the IRS when selling real estate which would be viewed as an investment property? For California and the other states as well? Is there some kind of chart?
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A. If the property were held for one year or less you would pay tax at the “normal” tax rates for “ordinary income”. It would depend on your total taxable income. If the property were held more than one year the gain would be taxed as a long-term capital gain at the reduced capital gain rates of 5% and/or 15% for 2007, and 0% and/or 15% for 2008, again depending on the extent of your total taxable income.
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However, because the capital gain increases your Adjusted Gross Income (AGI) there may be some additional “back door” costs. Plus, the capital gain may increase your Adjusted Gross Income such that you fall victim to the dreaded Alternative Minimum Tax (assuming that it is still around for 2008 – fingers crossed). So one cannot truly say that the true total tax cost of the gain will be limited to the 0%, 5% or 15% rates. There is no easy answer without actual calculations.
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As for the states - they usually do not have separate capital gain rates, so the gain would be taxed at the appropriate state tax rate applicable for your total taxable income. I am not aware of any specific chart, although there probably is one somewhere on the internet (readers – please let me know if you are aware of one). You can go link to the website of a State’s Tax or Finance Department here.
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I hope my ASK THE TAX PRO postings have been helpful.
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TTFN
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