BETTER LATE THAN NEVER

Although a week late, “Tax Carnival #39: Dog Days of Summer 2008” is now up over at DON’T MESS WITH TAXES. It was worth the wait, Kay!

The Carnival includes an example of my weekly WHAT’S THE BUZZ posting (every Saturday).

Be sure to check out the entry from MONEY UNDER THIRTY.

1040 FYI: CHARITABLE CONTRIBUTIONS – WHAT IS AND IS NOT DEDUCTIBLE

I often receive questions from clients and readers about what can and cannot be deducted as a charitable contribution on Schedule A.

Let us begin with a list of items that are not deductible:

* Contributions made directly to an individual or family, regardless of the recipient’s financial situation or health status. If you want to help a homeless family or a sick child you must give the money to a charitable organization that will provide the assistance in order to get a deduction.

* Contributions to an organization created to lobby for changes to federal, state or local laws.

* Contributions to political organizations or election campaigns.

* The value of blood donated.

* The value of your time to perform volunteer services.

* Contributions to non-profit homeowner or condo associations, or social or sports clubs.

* Contributions to foreign organizations.

* Raffle or “50-50” tickets. The purchase of a raffle ticket is not a contribution, even if the seller of the ticket is a charity. It is gambling! You are purchasing a chance to win a prize. Tickets purchased can, however, be deducted as gambling losses if you have any gambling winnings to report.

* The rental value of the use of a vacation property donated to charity for a “vacation auction”.

* Appraisal fees to determine the value of donated property (required if the value of the item donated is more than $5,000.00). These fees can, however, be deducted as a “miscellaneous deduction” subject to the 2% of AGI exclusion.

You can deduct:

* Cash or property given to a qualified tax-exempt organization created or organized in the United States or any possession under the laws of the United States or any state or possession.

* Out-of-pocket expenses connected with donations or volunteer service to a qualifying church or charity, such as the cost of the ingredients of homemade cookies or a cake donated to a church bake sale, or the cost and laundering of uniforms for a scoutmaster.

* Travel and transportation expenses incurred while performing a volunteer service for a qualifying church or charity. If you use your car you can deduct 14 cents per mile in lieu of actual expenses plus any parking fees and tolls. This amount is set by Congress and has not been increased for several years now.

* That portion of the cost of a ticket to a fund-raising event that is in excess of the “fair market value” of any goods or services you receive. If you buy a ticket for a fund-raising dinner for $100.00, and the cost of the dinner is valued at $35.00, you can deduct only $65.00. If you purchase a ticket to such an event and do not attend, but give the ticket back to the charity to be sold again, then you can claim a deduction. In such a case you are not receiving any value in return for your contribution. So if you bought a ticket to a fund-raising dinner and had planned to attend, but find out a week before that you will not be able to, give the ticket back to the charity and allow them to sell it again.

Of course, as we now all know, there are special rules and requirements for deducting cash and non-cash contributions.

To find out if a charity qualifies for a tax deduction go to the IRS website at www.irs.gov and enter “Search for Charities” in the Search for box and click on the first result. To check on the financial status of a charity go to www.charitynavigator.com.

TTFN

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WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* What we residents of the Garden State have known full well for a long time is now official! The AccountantsWorld.com article “Tax Foundation Study: New Jersey Edges New York for Nation's Highest State-Local Tax Burden” reports that “New Jersey taxpayers bear the heaviest state-local tax burden in 2008”.

The article goes on to say “New Jersey residents paid 11.8%, topping the charts. New Yorkers were close behind, paying 11.7%, and Connecticut was third at 11.1%. The top ten were rounded out by Maryland (10.8%), Hawaii (10.6%), California (10.5%), Ohio (10.4%), Vermont (10.3%), Wisconsin (10.2%) and Rhode Island (10.2%).”

Alaskans have the lightest tax burden at only 6.4%.

This is also discussed on the Tax Foundation’s TAX POLICY BLOG.

* An article at MarketWatch.com reports “A new calculator on Social Security's Web site gives users a much-improved picture of what their benefits could look like in retirement. And coming in October: a faster and easier way to file for Social Security benefits online.”

* FYI, the Taxpayer Advocacy Panel has issued its 2007 Annual Report.

According to TAP, “This annual report highlights important actions of the Panel and summarizes 59 new recommendations for improvement that TAP generated for IRS consideration in 2007. The Report also provides a five-year retrospective on Panel activities and an update on the status of the 305 recommendations submitted to the IRS since TAP was established in 2002, many of which have been partially or fully implemented.”

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The Panel describes itself thus – “TAP is a Federal Advisory Committee made up of citizen volunteers, representing all 50 states, the District of Columbia, and Puerto Rico, who are dedicated to helping the IRS identify ways to improve customer service and responsiveness to taxpayers needs. By analyzing a large number of issues, setting priorities and conducting research, TAP has made important recommendations to improve the IRS and reduce taxpayer burden.”

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Another FYI – The yellow rose of taxes – Kay Bell of DON’T MESS WITH TAXES fame – is a member of the panel.

* TAX GURU Kerry Kerstetter reports of a new website devoted to the new First-Time Home Buyer Credit – FederalHousingTaxCredit.com – which is run by the National Association of Home Builders (“NAHB exists to represent the building industry”). The website has a good FAQ section.

* Tax professor Jim Maule asks an excellent question – one that I have asked myself – and makes some excellent points in his post “Why This New Tax Provision?” at MAULED AGAIN. He is talking about the new additional standard deduction amount for real estate taxes for 2008 only. In response to who will claim the deduction, as I have mentioned here before I do see several of my retired senior clients receiving the very small benefit of this deduction – taxpayers who have paid off their mortgage and have an inflated standard deduction which is more than their deductions due to 2 additions for age 65 or over.

* NATP’s Taxpro Weekly email newsletter reported that “Texas Hurricane Victims Qualify for Relief”.”Following Hurricane Dolly on July 22, the federal government declared Cameron, Hildalgo, and Willacy counties Presidential disaster areas qualifying for individual assistance.As a result, the IRS is postponing certain deadlines until September 22 for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment, and other certain time-sensitive acts otherwise due between July 22, 2008 and September 22, 2008.

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In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after July 22 and on or before August 6, as long as the deposits were made by August 6. Additional details are available on the IRS website.”

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* TAX GUY Bruce McFarland discusses still more reasons to avoid like the Plague going to “the brothers” to have your taxes prepared in his post “More on ‘Finding a Pro’. .” I know I said in an earlier post somewhere that I “never say never” any more – but I think this is the exception. You should never have your tax return prepared by the minions of Henry and Richard!

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* Xin Lu adds his 2 cents to the discussion in her post “Should You Choose a Roth 401k or a Regular 401k?” at WISE BREAD. While Xin decides she “would still go with a regular 401k” the post provides good coverage of both sides of the argument.

* As a “companion piece” to my recent 1040 FYI on charitable contributions, the IRS has issued a “Summertime Tax Tip” on the topic.

* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG brings good news for taxpayers who received “free” shares of stock in insurance companies as a result of something called “demutualization” in his post “IRS Loses Demutualization Argument in Court of Claims”. While I do believe much of the “demutualization” took place more than three (3) years ago, this decision will still prompt lots of 1040X filings – more money for us tax preparers!

I will not have enough time this week-end to properly review this issue (due to personal activities – a wedding Friday evening 8/8/08, a post-wedding lunch cruise later today, and a day trip to PA to see a show tomorrow) – but I will definitely devote more blog space to this issue in the near future.

TTFN

1040 FYI: DONATING A CAR TO CHARITY

Congress changed the rules for deducting the contributions of a vehicle to charity a few years back.

In order to claim a deduction of more than $500 for donating a motor vehicle (car, motorcycle, boat, or airplane) to charity, you must attach Copy B of the IRS Form 1098-C, which has been provided by the charity, to the Form 8283 that is included in your 1040.

The Form 1098-C will include the name and Taxpayer Identification Number of the charity to whom the car has been donated, the vehicle identification number of the auto, and the date of contribution. Form 1098-C must be issued within 30 days of either the date of the contribution or the date of the disposition of the vehicle by the charity.

If you donated, or will donate, a car to charity in 2008 that is worth more than $500 make sure to get Copy B of Form 1098-C from the charity before the end of the year. If you have not received it by the middle of December you should call the charity and ask for it. The charity can give you a statement in lieu of Form 1098-C as long as it contains all the necessary information discussed below.

It is possible that you donate a car to charity in late 2008 and the car is not sold by the charity at auction until 2009. Just note that if you want to claim a deduction of more than $500.00 for the car you must have a Form 1098-C to include with the mailing of your 2008 Form 1040.

Besides the items listed above, additional information will be included on the Form 1098-C depending on what the charity does with the donated car.

(1) If the charity sells the car without significant interim use or material improvement, the Form 1098-C will include the date the vehicle was sold by the charity, certification that the sale was an "arm's length" transaction among unrelated parties, and the gross proceeds from the sale. Your tax deduction is limited to the gross proceeds from the sale.

(2) If the charity intends to temporarily or permanently use the car in its operations, or intends to make "material" improvements to the vehicle before selling it, the Form 1098-C will include a certification and description of either the significant interim use and intended duration of such use or the intended material improvement and a certification that the vehicle will not be sold before such use or improvement is completed.

(3) If the charity intends to sell the car to a "needy" individual at a price that is significantly below "fair market value", or give the car to such an individual, the Form 1098-C will include a certification that the charity will make such a sale or transfer of the vehicle, and that the sale or transfer will be in direct furtherance of the organization's charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.

In situations (2) and (3) you can deduct the "fair market value" of the vehicle. You can use the "private party value" for the vehicle, adjusted for mileage and condition, as listed in the Kelly Blue Book or a similar established used vehicle pricing guide. If the fair market value is more than $5,000 you must obtain a formal appraisal, a copy of which must also be attached to your Form 8283. In these situations the charity will not provide a value - the taxpayer making the contribution must provide and substantiate the fair market value of the car donated.

To recap - in situation (1) the donee charity will tell you what you can deduct. In situations (2) and (3) the donor taxpayer must determine the amount of the deduction, subject to audit by the IRS.

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FYI, check out TAX GIRL's post "IRS Car Charity Rules Drives Donations Down".

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TTFN

1040 FYI: MULTIPLE SUPPORT AGREEMENT

This post first appeared here at TWTP in August of 2007 – but I felt it was appropriate to repeat it as a “1040 FYI”.

Generally in order to claim someone as a dependent on your tax return you must provide more than half of the person’s total support (there are other requirements – see IRS Publication 501 - Exemptions, Standard Deduction, and Filing Information).

If you do not provide more than half of the total support for a qualifying family member, an elderly parent for example, but you do pay more than 10% of the person’s support, and you and other members of your family together pay more than half of the person’s total support you can claim the family member as a dependent under a multiple support agreement. Only one of the family members who provide at least 10% of the person’s support can claim the person being supported as a dependent. A different qualifying family member can claim the dependency exemption each year.

The qualifying persons who are not claiming the exemption must sign a Form 2120 (Multiple Support Declaration), which is attached to the tax return of the person claiming the exemption. Here are some examples from IRS Publication 501:

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“Example 1 - You, your sister, and your two brothers provide the entire support of your mother for the year. You provide 45%, your sister 35%, and your two brothers each provide 10%. Either you or your sister can claim an exemption for your mother. The other must sign a statement agreeing not to take an exemption for your mother. The one who claims the exemption must attach Form 2120, or a similar declaration, to his or her return and must keep the statement signed by the other for his or her records. Because neither brother provides more than 10% of the support, neither can take the exemption and neither has to sign a statement.

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Example 2 - You and your brother each provide 20% of your mother's support for the year. The remaining 60% of her support is provided equally by two persons who are not related to her. She does not live with them. Because more than half of her support is provided by persons who cannot claim an exemption for her, no one can take the exemption.

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Example 3 - Your father lives with you and receives 25% of his support from social security, 40% from you, 24% from his brother (your uncle), and 11% from a friend. Either you or your uncle can take the exemption for your father if the other signs a statement agreeing not to. The one who takes the exemption must attach Form 2120, or a similar declaration, to his return and must keep for his records the signed statement from the one agreeing not to take the exemption.”

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Jane Q Taxpayer and her three brothers each provide 20% of the total support for their mother, who lives in an assisted living facility. The remaining 20% is provided by Social Security. Each year at tax time they get together and compare situations to determine which sibling would receive the most overall federal, state and local income tax benefit by claiming the mother as a dependent. When the refunds come, the person claiming the exemption gives each of his/her siblings a check for ¼ of the total tax benefit.

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TTFN

10 MID-YEAR TAX MOVES

I apologize for taking the lazy way out with today’s posting – but, knowing how much bloggers like lists, here are 10 mid-year tax moves courtesy of the National Association of Tax Professionals (I have been a member for 20+ years and I occasionally write for their quarterly journal). I have added a few of my own comments in bold italics -

“What is more exasperating than having to pay taxes? Understanding the constantly changing legislation affecting them! Yet, not fully understanding rights and how provisions work together costs taxpayers significantly every year. A mid-year tax review with an expert will help you. Here is why. Following are some common areas fraught with complex rules that cause taxpayers to miss valuable opportunities to leverage their options and lower their tax bills. Financial advisors and tax preparers are experts in these areas so you don’t need to be. Call your tax advisor for your mid-year review soon to discuss your financial plans and learn how you can save on your next tax return.

1) Overpayment or underpayment of taxes. Did you receive a big refund last year? If so, you overpaid and the government kept your money as a tax-free loan while you could have invested it and earned interest. Did you owe? Worse, were you stuck paying {the dreaded - rdf} Alternative Minimum Tax? A mid-year review will help determine where you are and allow you to adjust your withholding now to avoid penalties later. {Federal income tax withholding is treated as occurring evenly throughout the year for purposes of the penalty for underpayment of estimated taxes – regardless of when the money was actually withheld. If you have missed an estimated tax payment, or a special event has caused you to need to make estimated tax payments, you can increase your federal withholding during the 2nd half of the year and have the additional monies treated as being paid in evenly over the 4 estimated tax quarters – rdf}

2) Saving for retirement – IRAs, 401(k)s, profit-sharing, pensions, employer-sponsored plans, etc. Many changes have taken place in the last few years regarding retirement savings plans. The plan you originally began with may have been advantageous when you started it, but it might not be anymore. So much has changed with these plans that it’s important to review them to see if they are still performing as you intended, and to find out if there are new products available that you are not taking advantage of.

Many taxpayers do not have an Individual Retirement Account (IRA) and are missing an opportunity to defray their taxes and save for their own future. One of the primary reasons for not having an IRA is not starting one. Begin now, even if it is only a few dollars a paycheck. The government has increased the amounts IRA holders can save, and those over age 50 can place additional catch-up amounts into their IRAs.

3) Medical savings accounts and health savings accounts. Try comparing your high premium medical insurance plan against a high-deductible plan combined with a health savings account (HSA). You may be surprised at not only which one is less expensive, but reap tax savings besides. And are you using any available flexible spending accounts through your employer? They are another way to reduce taxable income.

4) Estimated tax payments. Adjusting these payments now will avoid underpayment penalties at year-end. {see my comment above under item #1 – rdf}

5) Take advantage of deduction bunching. Some itemized deductions must meet certain thresholds before you can claim them. By being aware of these and managing your expenditures to fall primarily in one year, rather than spread over two years, you may realize significant tax savings. This applies to several expenditures, especially to medical expenses, property tax payments, and charitable donations.

6) Getting married? Or divorced? These life-changing events have very significant tax implications. A divorce or change in child custody arrangements can mean tax implications in several areas. Attempting to reach a divorce settlement or filing taxes without expert financial advice will most likely not be to your advantage. {In light of a situation that I described in a recent post, if you have married and you are changing your name – i.e. the wife taking on her husband’s last name – it is very important that you change your name with the Social Security Administration as the SSA website – rdf}

7) Beneficiary designations, Powers of Attorney, wills, estate planning. Are these working advantageously for you? Do you even have them in place? This is the time to get your plans in order and be sure that tax changes have not changed how you intended these contracts to work.

8) Buying or selling stocks, bonds, real estate, or other investments. Many tax rules apply to all of these transactions. For example, a real estate like-kind exchange may work to your advantage. If you’re selling a residence, perhaps the exclusion for selling a principal residence applies to you. There are capital gains and losses, wash sale rules, long-term gains and losses, and a whole array of other rules when it comes to stocks and bonds. And don’t forget, investment expenses count as miscellaneous itemized deductions when used for the production of income. Handling these transactions wisely, rebalancing, and making changes are the name of the game with investments. Your financial adviser is worth his or her weight in gold here. {Time is extremely precious for your tax preparer during the tax-filing season. I am sure that he/she, like I, would jump at any opportunity to save time during this period. If you sell a vacation or rental property, or stock that you received through a spin-off or merger, especially stock that originally came from a Bell company, or a mutual fund acquired over the years through dividend investment, let your tax preparer work-up the profit or loss now while he/she has the time, rather than waiting till next year’s tax season when time is tight. Send your tax pro the details and documentation for these types of transactions after they have been completed and give him/her something to do during the year. rdf}

9) Financial planning is important when you have children and teens. Coverdell Education Savings Accounts (ESAs) and Section 529 plans are two ways to begin tax-deferred savings for a child’s education. Children grow up quickly, so begin these accounts early, and know how much you can add to them. Discipline yourself to save, and you help both yourself and your child.

Self-employed parents can hire their children or grandchildren and lower the overall family tax bill. The business also may benefit from hiring children under age 18, as their wages are exempt from social security and unemployment taxes paid from a parent’s sole proprietorship. Teens with earned income can make IRA contributions as well. However, if children plan to attend college, it is important to structure savings carefully to best work with college financial aid programs. When children are in college, remember to claim the education credits or the tuition and fees deduction.

10) Self-employed taxpayers and those with small businesses have many ways to plan for tax savings. This is another area where tax preparers prove their value. Several changes in recent years allow flexibility with carrybacks, carryforwards, employee benefit plans, expense deductions, etc. Certain small businesses that start retirement plans for their employees may even qualify for a tax credit to help recover the costs of starting up. The number-one rule-of-thumb here is to carefully document, backup, and substantiate all expenses in order to claim them on tax returns. If you have not done that, you will miss deductions. Timing of purchases and assets can make big differences on your tax return, and some of these things need to take place before year-end to qualify. Work closely with your tax preparer and plan carefully, using his or her advice.”

Any questions on either the NATP suggestions or my comments?

TTFN

UPDATES

Here is some updated information on recently discussed topics -

* Well it seems that one of my questions has been answered with regard to the economic “stimulus” rebate.

In my Monday posting “Something To Think About” I asked if the rebate amount allowed on the 2008 Form 1040 can be used to offset self-employment tax. The answer is “yes”! It appears that the strategy discussed in the post is “workable”.

The current draft version of the 2008 Form 1040 (as of 7/1/2008) indicates that the “Recovery rebate credit” adjustment, determined by using a worksheet that will be included in the instruction booklet, is entered on Line 71 (Page 2) under the category of “Payments”. So it is treated the same as withholding, estimated tax or the Earned Income Credit.

If you received a 2008 rebate check that is more than you will be entitled to based on the information on your 2008 tax return, i.e. you were overpaid, then the amount on this Line 71 would be “0” and not a negative number.

Of course this draft of the 1040 is not the final one. There will have to be additions to the form for the provisions of the recently passed housing bill – i.e. the first-time homebuyer credit and the additional standard deduction for real estate taxes. This draft version also does not have lines for the “adjustment to income” for educator expenses or tuition and fees, as these “above-the-line” deductions have not yet been extended for 2008.

We can only hope that Congress will get off their arses and pass the “extenders” in time for the deductions to be included on the final 2008 Form 1040 and 1040A. This must be done by October!

FYI, you can click here to check out the current “draft” copies of other IRS forms.

* Here is some more information on the credit for “first-time homebuyers” that was included in the recently passed housing bill –

· The credit does not apply if you purchase the residence from a “related party” – i.e. a spouse, an ancestor, or a lineal descendant.

· If you are building the principal residence you must occupy the residence by the July 1, 2009 deadline in order to qualify for the credit.

· The home must be located in the United States for the purchase to qualify for the credit.

· If the purchase of your residence is financed by a mortgage provided with tax-free financing you do not qualify for the credit.

· Married couples who claim the credit on a joint return are treated as each claiming one-half (1/2) of the total credit allowed – in case of a subsequent death or divorce.

· With regards to the three-year “look-back” period – according to the NATP analysis of the bill “If the individual is married, neither the individual nor his spouse may have had a present ownership interest in a principal residence during that three-year period.”

· I mentioned in my initial post that if you make a qualifying purchase in calendar year 2009 (by July 1st) after you have filed your 2008 tax return you can file an amended 2008 return to claim the credit. To clarify, if you make a qualifying purchase in, say, January or February of 2009, before filing your 2008 tax return, you can claim the credit for the 2009 purchase on your 2008 Form 1040.

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* The Tax Foundation’s TAX POLICY BLOG wonders, with the new credit and deduction from the housing bill and the need to reconcile the economic “stimulus” rebate check, “Will the 1040 Be 3 Pages Next Year?”

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* We welcome Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG back from vacation. BTW, I like his definition of "bipartisan" - “We're all screwed regardless of party affiliation.”

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And thanks for reminding us in the post “Iowa’s Sales Tax Holiday Runs Today and Tomorrow” to “mark your calendar to go to South Carolina in November to get accessories during their new sales tax holiday for guns.”

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* Theodore Seto, the professor of tax law and policy at Loyola Law School Los Angeles who writes the blog UNDERSTANDING TAX, makes some interesting points in the first posts in a series “Who Pays Taxes: The Concept of "Incidence," Part I”. I like his example of the “luxury” tax on yachts. As he correctly points out – “The ‘rich’, it turns out, can do without yachts. Yacht makers, on the other hand, cannot do without customers. And yacht makers’ workers have no choices at all.”

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* Walter Antoniotti, a retired accounting teacher, has created Free Internet Libraries for students, teachers, and professionals – including one for the accounting profession. He has included TWTP in the Interesting Accounting Sites, Accounting Organizations and Blogs, Teacher Sites section.

* The opening paragraph of Friday’s “News and Tip of the Day” posting at the Small Business Taxes and Management website reads –

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“Because the Senate has again failed to begin consideration of the extenders tax bill, it's anticipated that no action will be taken until Senators return after the August recess.”

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Oi vey! Looks like it will be “down to the wire” again this year.

* We tax professionals love our acronyms!

Speaking of the Small Business Taxes and Management website’s “News and Tip of the Day”, an earlier entry discussed a Revenue Proclamation that concerned a CLUT – a Charitable Lead Unitrust. As opposed to a Charitable Lead Overseas Trust, or a Charitable Lead Investment Trust? (Sorry – I couldn’t resist!)

A few years ago at my previous host I blogged about the LUST Tax, which has nothing to do with the recent talks of taxing pornography or a “pole tax” on “exotic dancers”. It actually refers to a Leaking Underground Storage Tank.

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* In my “wanderings” on the web I have come across THE TAX PROTESTER FAQ, created by Philadelphia lawyer Daniel B. Evans to debunk all the ridiculous arguments that the federal income tax is unconstitutional, the income tax does not apply to individual citizens, the government cannot tax wages, etc.

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According to Evans - “The purpose of this FAQ is to provide concise, authoritative rebuttals to nonsense about the U.S. tax system that is frequently posted on web sites scattered throughout the Internet, by a variety of fanatics, idiots, charlatans, and dupes, frequently referred to by the courts as ‘tax protesters’. This ‘FAQ’ is therefore not a collection of frequently asked questions, but a collection of frequently made assertions, together with an explanation of why each assertion is false.”

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TTFN

WHAT DID I TELL YOU!

As I expected, and as has been done in past years, the deadline for filing the NJ Homestead Rebate and the Property Tax Reimbursement (aka Senior Freeze – Forms PTR-1 and PTR-2) applications has been extended again from August 15 to October 31, 2008.

The Governor has also announced that the Homestead Rebate checks for eligible senior and disabled homeowners, and all tenants, who filed their application by June 2nd are in the mail!

NJ Homestead Rebate checks for eligible non-senior and non-disabled homeowners who file their application by August 15th are scheduled to be mailed out in the fall.

Click here to read the Press Release.

The NJDOT website has also updated its “Where’s My Rebate” service. You can now check on the status of your 2007, 2006 and 2005 rebate checks, which will be or were issued in 2008, 2007 and 2006, online. Click here.

YOU LIKE ME! YOU REALLY LIKE ME!

Fellow tax blogger Bruce McFarland of L & R Tax Preparation in Grandview, Missouri asked me to write a guest post on the “stimulus” rebate situation for his TAX GUY blog.

I am truly honored by the request – it is my first guest post!

So check out my guest post “That Was The Economic Stimulus Rebate That Was”, which is currently up and running.

While you are over at TAX GUY take a look at Monday’s guest post by Kevin of No Debt Plan who wrote about the stimulus plan’s “Good Intentions, Terrible Execution”. He provided an excellent alternative to the rebate – “If the government directly pushes spending into bridge infrastructure across the nation, that creates jobs. The employed workers spend their earnings in the economy. Everyone wins.” Remember your history – it was government programs like the WPA that got us out of the depression.

And be sure to check out the “achieves”, especially these postings-

· Audit Insurance
· Avoid A Tax Audit With These Tips
· Are You Having Enough Withheld

You might also enjoy his Fun With Math posts. And Bruce also does a WHAT’S THE BUZZ type week in review on Sundays.

FYI – I am available for quest posts on tax topics of your choosing at other tax and non-tax blogs (and welcome guest posters here at TWTP as well as ASK THE TAX PRO and THE FLACH REPORT). I am also available, for a fee, to write 1040-related articles, columns and Q+As for your print or online newsletter. You can contact me at rdftaxpro@mail.com with details if you are interested.

TTFN

THE HOUSING BILL AND THE 1040

On Wednesday President Bush signed into law the Housing and Economic Recovery Act of 2008 (HERA), described in the various news articles as “a massive housing bill intended to provide mortgage relief for 400,000 struggling homeowners and stabilize financial markets”.

For purposes of THE WANDERING TAX PRO I am only interested in the provisions of the bill that directly apply to the federal Form 1040. These are included in the Housing Assistance Tax Act of 2008, a part of the bigger bill, and provide $15.1 Billion in tax incentives that are fully offset.

There are two major tax benefits for 1040 filers – a first-time homebuyer credit and a property tax deduction for “non-itemizers”.

(1) A “refundable” credit (if the credit is more than your total tax liability Sam will send you the difference - like with the Earned Income Credit) equal to 10% of the purchase price, up to a maximum of $7,500 ($3,750 if Married Filing Separately), is provided to a “first-time homebuyer” who purchases a new personal residence on or after April 9, 2008, and before July 1, 2009. To qualify as a “first-time homebuyer” the taxpayer(s) must have had no ownership interest in a principal residence during the three (3) year period prior to the date of closing on the purchase of the new home.

The 3-year look-back period involves ownership of a “principal residence” only. A renter who currently owns, or has owned during the 3-year period, a vacation property may qualify for the credit because the property was not his/her principal residence

The credit is phased out for joint filers with a “modified” Adjusted Gross Income (AGI) of between $150,000 and $170,000 and between $75,000 and $85,000 for single taxpayers.

Generally the credit is claimed on the tax return for the year in which the home is purchased. So if John Q Taxpayer closed on a residence in May of 2008 he will have to wait until early 2009 when he files his tax return to get the $7,500. However, if a taxpayer who already has filed a 2008 Form 1040 makes a qualifying purchase in, say, May of 2009 he/she can elect to file an amended 2008 return to claim the credit – and not have to wait until he/she files the 2009 Form 1040.

The amount of the credit allowed must be paid back to the IRS (on the annual Form 1040) in equal installments over a 15-year period beginning in the second year after the year for which the credit is claimed – 2010 for 2008 and 2011 for 2009.

CCH provides the following example –

“Eduardo and Trisha, a married couple, are new homebuyers. They have never owned any other real property as a residence. Their combined modified AGI is $66,400 {I assume they do not live in New Jersey – rdf}. Their first-time home purchase qualifies for the full $7,500 credit. They purchase their home in June 2009. They may file an amended 2008 return to claim the credit. Repayments of the $7,500 credit would be at $500/year in 2010 and end in 2020.”

If the residence is sold, or is no longer used as a principal residence, before the credit has been fully repaid the balance is due on the tax return for the year in which the sale occurs or the use changes. In such a case the credit repayment claimed in that year will not be more than the amount of gain from the sale of the property to an “unrelated” person.

The balance of the credit does not have to be repaid if the homeowner dies. Special rules exist for an “involuntary conversion” or the transfer of the residence in a divorce.

If two unmarried individuals purchase a principal residence together they may each claim a credit appropriate to their individual situation, if they qualify, the total of which cannot be more than the $7,500 maximum.

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(2) Taxpayers who own real property and pay real estate taxes, but who do not or are unable to itemize, can claim an “increased standard deduction” of the lessor of the amount of the real estate taxes actually paid during the year or $500, $1,000 if married and filing a joint return (if the total amount of real estate taxes you are paying is less than $500 or $1,000 - unless you purchased the property later in the year - you certainly do not live in New Jersey). This deduction, tough, is effective only for the 2008 tax year.

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As stated above this is an addition to your standard deduction, much like the addition for being age 65 or older or blind, and not an “above-the-line” adjustment to income – so it will not reduce your AGI.

For 2008, if this applies, the maximum standard deduction (for a person under age 65 and not blind) would be increased to $11,900 for Married Filing Joint, to $5,950 for Single (or Married Filing Separate, I assume), and to $8,500 for Head of Household.

I see this special deduction as benefiting many of my senior citizen clients - whose mortgage has been paid off and who do not itemize because the standard deduction, enhanced by the additional amount for 2 individuals age 65 or older, provides a greater tax benefit.

One of the ways the tax savings from these two items is being “paid for” is by changing somewhat the rules for excluding gain on the sale of a personal residence. This “offset” has been tacked on to various unsuccessful bills in the past – and has finally made in into the Tax Code.

Effective with the sale of a principal residence after December 31, 2008, you can no longer exclude from gross taxable income under Internal Revenue Code Section 121 gain on the sale of such a home for any periods that it was not used as a principal residence. This applies to a previous vacation home or rental property that was converted to a principal residence or a once principal residence that is rented out prior to sale. The new law applies to “unqualified periods” that begin on or after January 1, 2009. This does not affect any sales that have already taken place or will take place in calendar year 2008.

Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG discusses this change, and provides an example, in his post “FANNIE MAE Bailout Bill Restricts Home Sale Exclusion For Former Vacation Homes”.

Another method to compensate the budget for the loss of tax revenue is increased credit card information reporting. Effective for sales made on or after January 1, 2011, banks and other credit and debit card processors are required to report a merchant’s total annual card receipts to the IRS, and to the merchant, much like a business would report payments that total over $600 for the year to a non-employee sub-contractor on Form 1099-MISC.

More specific details, or any corrections if the above contains any FUs on my part, will be posted here when they become available or as I get more information.

Any questions?

TTFN

SOMETIMES SIZE DOES MATTER

I couldn’t resist commenting on this recent post to a tax blog.

Babyboomer11852 discusses a client who was a “professional exotic dancer” in the post “To Strip or Not to Strip!” at TAX RESOLUTIONARIES.

When it came to deductions the client brought up her “$12,000 breast augmentation”. Boomer concluded “But the breast augmentation could not be deducted as this was considered cosmetic surgery”.

It ain’t necessarily so, Boomer! While I agree that breast augmentation cannot be deducted as a medical expense because it is elective cosmetic surgery (unless it involved a severe psychological difficulty), there is a Tax Court precedent here that involves the client’s specific “industry”.

The article “10 Craziest Tax Deductions” from AOL Money and Finance reports-

“To get more tips, a stripper with the stage name ‘Chesty Love’ decided to get breast implants to make her a size 56-FF. A tax court judge allowed Chesty to write off the cost of her operation, equating her new, um, assets to a stage prop.”

This deduction has also been referenced in many other online and print articles and columns about “weird” tax deductions.

The Tax Court in this case stated that in order to be deductible as a business expense the size of the breast implants must be large enough that no girl would ordinarily get them for purely cosmetic reasons, the girl must work in a business where larger breasts would have a positive effect on income (i.e. dancer, actress, model, even waitress), and the breast implants were large enough in comparison to the girl's physique that they would pose more of a "burden" than a "benefit" in real life (i.e. big enough that guys spot them instantly from across the street).

So, as with just about any other tax deduction, “facts and circumstances” are important. I doubt that a girl going from 34B to 38C would qualify. Although if one could show that the surgery was directly related to the “enlargee’s” business as a dancer, actress, model or waitress (?–Hooter’s perhaps) and that it did indeed result in increased bookings and increased income it might be worth a try.

Over the years I have “done” (the tax returns for) a couple of “professional exotic dancers” (you might say a “handful” of dancers), among the few who actually declare their income. (I vividly remember a day during a tax season back when I had an office in Union when included in the day’s mail was an envelope with the tax “stuff” of a “go-go dancer” from New York, which included a copy of her recent pictorial in a Playboy publication, and an envelope with the tax “stuff” of an ordained Lutheran minister from Massachusetts.) But, alas, I never claimed a tax deduction for breast implants for any of my clients.

TTFN

ROYALLY SCREWED!

The story you are about to read is true. The names have been changed to protect the screwed.

One of my clients is a couple who has been married and filing joint returns for probably close to 20 years – many of them with me. Each year they have filed as Alfred and Jane Wiedersein. They filed their 2007 Form 1040 requesting a substantial refund. When they got the check they noticed that it was less than the amount that we asked for on the 1040.

Alf called the IRS and found out that the problem was that Jane did not change her last name with the Social Security Administration when she married. The SSA still shows her Social Security number as belonging to Jane Taxpayer.

FYI, as I have been telling clients and readers for years now (below from my posting “Getting Ready to Prepare Your Return” from January 2007) -

“The IRS is very picky about matching names to Social Security numbers. If a Social Security number and name reported on your tax return does not match exactly the name in the files of the Social Security Administration the IRS will remove the name and dependency exemption of that person and automatically recalculate the tax liability as Head of Household, Married Filing Separately or Single.

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If you have changed your last name as a result of marriage or divorce during {the year} make sure to notify the Social Security Administration of the change before filing your tax return. You do this by submitting a Form SS-5 to request a new Social Security card. Go to www.ssa.gov/ssnumber.”

After all these years of filing joint returns with Alf under her married name the IRS picks 2007 as the year to question the issue!

Anyway Alf straightened things out regarding his 2007 Form 1040 with the IRS and received an additional refund. Jane subsequently changed her last name with the Social Security Administration.

But this is not the problem. Alf and Jane are now told by the IRS that they will not be getting an economic “stimulus” rebate check because a Social Security number on the 2007 Form 1040 does not agree with the records of the Social Security Administration!

As Alf had done, I, too, went to “Where’s My Stimulus Payment” on the IRS website and entered the appropriate information. Here is what I was told –

“You did not qualify for the Stimulus payment because the Taxpayer Identification Number shown on your tax return for yourself or your spouse was not valid. Your last name and/or Social Security Number did not agree with either our records or those of the Social Security Administration, or you used an IRS issued number such as an Individual Taxpayer Identification Number or IRS number. You must have a valid Social Security Number to qualify for the Stimulus payment.

Helpful Information:

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The 2008 tax instructions will include a worksheet to help those who did not qualify for a payment or those who received a reduced amount determine if they can obtain a benefit when they file their 2008 tax returns next year.”

In addition to the above response to his online inquiry, Alf was also told by an IRS representative over the phone that he would not be getting a stimulus check because of the Social Security number.

The IRS did not just reduce the rebate by the amount that would have applied to Jane – they disallowed the entire rebate check! And the check would have been substantial as Alf and Jane have three dependent children under age 17.

It is true that when I file Alf and Jane’s 2008 Form 1040 I will be able to get them the entire amount of the rebate to which they are entitled based on 2008 information. But why should they have to wait until 2009 to get this money? The whole purpose of the meshuga rebate is to get money into the economy now! And what if one of the 3 kids who were under age 17 in 2007 turn 17 in 2008. Alf and Jane will be screwed out of $300!

Jane is not a foreign citizen without a Social Security number who married an American serviceman. She is a native born American citizen. Now even Americans who marry foreigners with no Social Security number can get the rebate – but not Alf and Jane.

It apparently does not matter that the issue with the Social Security number has been resolved with the IRS for purposes of the 2007 Form 1040 refund – or that Jane has changed her name with SSA. They still do not qualify for the rebate!

I am at a loss as to what to do. I will probably write to my Congress persons, since the IRS has blamed Congress for screwing the Wiederseins, but who knows if this will do any good.

Any suggestions?

TTFN

FYI, my “sitemeter” reports that THE WANDERING TAX PRO has exceeded 75,000 visits since returning to Blogger as its host (I am not quite sure if sitemeter started on the first post or was added a few days or weeks later). A pat on the back to me!

AS THE CONGRESS TURNS

CCH reports in “Baucus Unveils Enhanced Extenders Package” that “Senate Finance Committee Chairman Max Baucus, D-Mont., on July 24 introduced the Jobs, Energy, Families and Disaster Relief Bill of 2008 (Sen 3335), a revised $123 billion tax extender bill” which “extends tax incentives that expired at the end of 2007 or are set to expire at the end of 2008, such as the research and development tax credit, college tuition deduction and the state and local sales tax deduction”.

The bill also provides for a one-year “fix” for the dreaded Alternative Minimum Tax (AMT) and “creates mandatory basis reporting by brokers for transactions involving publicly traded securities such as stock, debt, commodities, derivatives and other items” – in other words requires brokers to report cost basis information on the Form 1099-B (hurray!!!!).

SOMETHING TO THINK ABOUT

There are three (3) things that we know about the current economic “stimulus” rebate -

(1) Part or all of your payment can be used to offset past-due federal or state income taxes or non-tax federal debt such as student loans and child support.

(2) The rebate currently being issued is an advance on a special credit on your 2008 federal income tax return. It is calculated based on the information on your 2007 Form 1040 (or 1040A). You will reconcile your advance to your 2008 information on the 2008 Form 1040. If your situation has changed and you are entitled to a rebate that is greater than the amount you already received you can claim the additional amount on your 2008 tax return. If you got more then you are entitled to you do not have to pay back the difference.

(3) You must file by October 15, 2008 in order to get your advance payment this year.

Consider this situation -

John Q Taxpayer owes “Sam” about $10,000 in back federal income taxes from 2001 through 2004. He has been current with his 1040 payments since 2005. If he files a 2007 federal income tax return by October 15th he will not receive a “stimulus” rebate check, as the entire amount of the rebate will be applied toward his outstanding tax debt. He also will not be able to claim the rebate amount on his 2008 Form 1040 because technically he received the advance.

What if JQ filed a 2007 Form 4868 (Automatic Extension) in early April of 2008 and paid in full his anticipated federal income tax liability with the extension request. And what it JQ does not file his actual 2007 Form 1040 until December of 2008. Since he paid the entire 2007 tax liability in full with his extension there will be no penalty for late filing or late payment.

Because JQ filed his 2007 Form 1040 after October 15, 2008, he will not be eligible for an “advance” rebate.

When JQ files his 2008 Form 1040 he indicates that he is entitled to a $600 rebate, but did not receive an advance payment in 2008. The reason he did not receive an advance payment was not because the money was taken to pay back taxes. Because he submitted his 2007 income tax return after October 15th no advance payment was processed.

Will JQ be able to apply his $600 rebate against his 2008 tax liability on the 2008 Form 1040? Say his 2008 tax liability is $2,000 and he has $1,300 in federal income tax paid in either via withholding or estimated tax payments. Can JQ add the $600 rebate for which he qualifies, and which he did not receive as an advance in 2008, to the $1,300 in payments and only need to send “Sam” $100 when he files the 2008 Form 1040 in early 2009?

By following this strategy will JQ be able to avoid having his $600 rebate taken to offset past tax debts and be able to reduce his 2009 “out of pocket” payments for 2008 federal income taxes by the amount of the rebate if he wants to remain “current” with his 1040 filings?

Now what if JQ’s $2,000 tax liability for 2008 represents self-employment tax only? He is able to wipe out any federal income tax liability via deductions and credits. Will the amount of his rebate be applied toward self-employment tax liability? Remember, this rebate is very different from the one issued in 2001. This rebate is not an advance on a future income tax savings – but an out and out gift from the government.

So what do you think?

TTFN

AS THE CONGRESS TURNS - THIS JUST IN!

The Senate passed the Housing and Economic Recovery Bill of 2008 (HERB 2008?) discussed in my similarly titled July 24th post by a 72-13 vote in a rate Saturday session. It is expected that George W will sign the bill into law early next week.

I will provide details of how the bill affects 1040s as soon as I have digested it.

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* If I may be permitted to “toot my own horn” – check out my post “If You Want To Be a Business Then Act Like One!” at THE FLACH REPORT.

* CCH reports that “IRS Commissioner Studying Controversial Private Collection Initiative”. I have said it many times before, and I will continue to say it – having outside collection agencies doing the job of the IRS is a very bad idea for lots of reasons (only one of which is that the IRS could do it cheaper) and the practice should be terminated.

* Kay Bell discusses the 10th Anniversary of the “IRS Restructuring and Reform Act of 1998” in her post “10 Years Of a 'Kinder, Gentler' IRS. Now What?” at DON’T MESS WITH TAXES.

* Michael of BEYOND PAYCHECK TO PAYCHECK discusses his economic “stimulus” experience in “Stimulus Payments - A Braggy Uncoordinated Mess?”.

* The Wall Street Journal reports in the article “Their Fair Share” that IRS data for income tax returns filed for 2006 indicates “the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history”.

According to the article – “the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he's going to cut taxes for those at the bottom, but that's also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.”

It goes on to say, “Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts.”

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Also on this topic, Tax Foundation Fiscal Fact No. 135, "Summary of Latest Federal Individual Income Tax Data," explains that upper-income taxpayers pay federal income taxes at a rate disproportionate to their share of the nation's income. The Fiscal Fact includes detailed charts of the latest IRS data.

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* The National Association of Tax Professionals believes that “the next Congress will probably be dominated or, at least, very favorably populated by Democrats. Our discussions on the Hill lead us to believe that healthcare reform will overshadow tax reform in the coming Congress. The Joint Committee on Taxation has stated that ‘Healthcare reform is the biggest fiscal challenge facing the country and likely will push tax reform to the back burner.’”

* An article at Accountingweb.com reports that “Tax Documentary, ‘An Inconvenient Tax’, In The Works”. It will be “an unbiased, educational and entertaining look into the potential reforms that are inevitable come 2010 when the Bush administration tax cuts cease”. The film is scheduled to be released in November. TAX PROF Paul Caron also discusses the movie in his post “An Inconvenient Tax”. I don’t think I will wait until the DVD for this one.

* And for those of you who are interested, Paul also provides links to recent postings and commentary on the Presidential candidates’ tax plans in his post “More on the McCain and Obama Tax Plans”.

* On the same topic, the Tax Foundation’s TAX POLICY BLOG sets us straight on “More Bogus E-mails About Obama and Taxes” that are apparently floating around out there.

* Kelly Phillips Erb’s post “Economic Stimulus Didn’t Help Us, Most Small Business Owners Say” at TAX GIRL quotes a survey conducted by Suffolk University that says - “Almost 80% of small business owners report that the economic stimulus checks made no difference to their own business”.

* Email tax scams are not limited to the United States. UK tax professional David reports on an email allegedly from HM Revenue and Customs regarding a tax refund that is very similar to one regarding an IRS refund that has made the rounds in the US in the post “Beware: Tax Refund Scam” at his TAX REBATE BLOG (this refers to a UK rebate and not the George W “stimulus” rebate). Be warned – you must scroll down the “page” a bit before the post appears.

* Trish McIntire’s post “Chutes and Ladders” over at OUR TAXING TIMES brings up an excellent point that needs to be stressed. Various marketing campaigns and salespersons with no tax knowledge are constantly telling us casualty losses, or hybrid cars, or mortgage interest, or medical expenses or employee business expenses, etc, etc, etc are “deductible” or qualify for a “tax benefit” or “special tax treatment”. But, while technically correct, it ain’t necessarily so.

Trish’s post tells us about casualty losses. Many other items, such as mortgage interest and points, are only deductible if you are able to itemize on Schedule A and the total amount of itemized deductions before the item in question is added exceeds the Standard Deduction amount for your filing status. Even if you can itemize medical and employee business expenses are only deductible to the extent that they exceed 7½% or 2% of your AGI. If you are a victim of the dreaded Alternative Minimum Tax (AMT) you do not get any energy credit for purchasing a hybrid car.

Do not make any purchasing decisions based on a salesman’s or advertising campaign’s claims of a tax benefit. As your tax professional first!

TTFN

AS THE CONGRESS TURNS - THIS JUST IN

CCH reports that the House passed the Housing and Economic Recovery Bill of 2008 (HR 3221) by a vote of 272 to 152 on Wednesday. Swift approval by the Senate is expected. George W had initially opposed the bill, but now will sign it, and could do so as early as this week.

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I have not studied the non-tax aspects, but Kay Bell points out in her post “Housing Bill -- and New Homeowner Tax Breaks -- Back on Track” at DON’T MESS WITH TAXES that there are those “who contend it's simply a handout to irresponsible homeowners and unscrupulous lenders”. I expect that it is a typical Congressional reaction and not a thoughtful response to the problem.

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On the 1040 front the bill includes a $7,500 tax credit for first-time homebuyers – which in this case means taxpayers buying their first-ever residence as well as those who haven't owned a home for at least three years. The tax break will apply to those who purchase a home between April 9, 2008 and July 1, 2009 – so it will be available on the 2008 Form 1040. The full amount of the credit will only be available to individuals with incomes under $75,000 or couples earning less than $150,000, and it appears the credit will have to be paid back, interest-free, over 15 years.

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I have read that the bill also includes a special $500 property tax deduction for single homeowners, and $1,000 for joint filers, for those who do not itemize deductions on Schedule A.

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Once George W signs the final bill I will provide more detailed information.

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TTFN

1040 FYI: DEDUCTING GAMBLING LOSSES

Jimmie Clemons, retired, had received a 1099 reporting $44,800 in winnings from a casino. As his gambling losses for the year exceeded $44,800, he did not report any winnings or losses on his Form 1040.

The court, in Jimmie L Clemons, T.C. Summary Opinion 2005-109, upheld the IRS position that gross gambling winnings must be reported as income on Page 1 of the tax return, with losses, to the extent of winnings, allowed as an itemized deduction, which is not subject to the 2% of AGI exclusion.

While Jimmie was able to deduct $44,800 in losses to wipe out his $44,800.00 of income, the fact that the $44,800 in winnings was included in his Adjusted Gross Income caused 85% of his Social Security benefits to be taxed!

I have seen many examples where a client with net gambling losses for the year is royally screwed by "Sam" -

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* Just like in the case of Jimmie Clemons, because of the way Social Security and Railroad Retirement benefits are taxed, there often exists a situation where an individual is taxed on $1.85 for every additional $1.00 in income. A taxpayer in such a situation who has $3,000 in gambling winnings reported on a Form 1099, and $4,000 in substantiated gambling losses, ends us increasing his AGI by $5,500 ($3000 x 185%). Even if he can take full advantage of an itemized deduction of $3,000 in losses, he still ends up paying $383 in federal income taxes in the 15% bracket, or $638 in the 25% bracket - all on net losses for the year of $1,000!

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* Even if a taxpayer can deduct enough losses to wipe out his gambling income, the increase in AGI caused by reporting gross winnings on Page 1 of the Form 1040 can reduce or even wipe out a multitude of deductions and credits that are affected by AGI, and could even cause one to fall victim to the dreaded Alternative Minimum Tax (AMT).

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* One can only receive the full tax benefit of deducting gambling losses if the total of his other “itemizable” deductions equals or exceeds the allowable standard deduction. What if a single taxpayer with $5,000 in winnings and $6,000 in losses in 2008 only has $2,000 in other itemized deductions (i.e. state and local income taxes and charitable contributions). While he can deduct $5,000 in gambling losses, he only gets a tax benefit on $1,550 of the losses ($5,000 losses + $2,000 other deductions = $7,000 Schedule A - $5,450 standard deduction = $1,550). If he is in the 25% bracket, he ends up paying $863 in federal income tax on $1,000 of losses!

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* While New Jersey allows one to "net" gambling winnings and losses on the state income tax return (a person with $5,000 in winnings and $6,000 in losses would have "0" taxable income), most states follow the federal return, which will increase the total tax cost of gambling losses. FYI, since NJ state lottery winnings are exempt from NJ state income tax, NJ state lottery losses cannot be deducted against other gambling winnings in calculating the net amount taxed by NJ. If, in the above example, $2,000 of the $6,000 in losses represents NJ state lottery tickets, the taxpayer must report a net of $1,000 in gambling winnings on his NJ-1040.

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I should point out that losses from any type of wagering transaction can be deducted against your gambling winnings. If you win in the slots your deduction is not limited to losses from slot machines. You can deduct losses from the lottery, 50-50s, bingo, table games such as poker and blackjack, charity raffles, horse racing, keno, etc., up to the amount of your winnings. It is a good idea to keep your losing lottery, raffle and racetrack tickets for the year, and keep track of slot activity by using a player’s card, in case you make a big score. If you are unlucky enough to be chosen for an audit of your losses here is a word of advice – make sure your losing racetrack tickets do not have footprints on them.

You should also know that winnings from a “no purchase necessary” marketing sweepstakes or contest are not considered to be gambling winnings for the purpose of calculating deductible gambling losses. The IRS defines gambling winnings as winnings from a “wagering transaction”. A recent IRS “Technical Advice Memorandum” (TAM 200417004 ) states that such winnings are not gains from a “wagering transaction” because the winner did not furnish “consideration” for the chance to win the prize. If you win the Publishers’ Clearing House sweepstakes, or a trip to Club Med by being the 10th caller to a radio station, you must report the winnings, or the market value of the trip, as income on your Form 1040, but you cannot deduct any losing lottery tickets, slot machine losses, or any other kind of gambling losses against this income.

So who said the Tax Code had to be fair?

TTFN

1040 FYI: DEDUCTING THE BUSINESS USE OF YOUR CAR

The IRS standard mileage allowance for business use of your car is 50.5 cents per mile for January 1 - June 30, 2008, and 58.5 cents per mile for July 1 – December 31, 2008. The IRS recently increased the SMA for the 2nd half of 2008 due to the large increases in the price of gas.

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This rate applies no matter where in the United States you drive, and no matter what type, model or make of car you drive. It is available for both a car that you own and a car that you lease.

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You can deduct the standard mileage allowance in lieu of the actual expenses if operating your car, which include-

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· auto club membership
· depreciation
· gasoline
· insurance
· license and registration
· lease payments
· repair and maintenance
· tires
· wash and wax

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Or you can elect to deduct the business portion of your actual expenses.

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In addition to the standard mileage allowance you can deduct any business-related parking fees and tolls. A self-employed individual can also deduct the business portion of any auto loan interest and state and local personal property taxes on Schedule C. Employees cannot deduct the business portion of auto loan interest, but they can deduct qualifying state and local personal property taxes as a tax on Schedule A.

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Employees report auto expenses on Form 2106 or 2106EZ "Employee Business Expenses". The total of all employee business expenses is deducted in the "Miscellaneous" section on Schedule A. Miscellaneous expenses are only deductible to the extent that they exceed 2% of the taxpayer's Adjusted Gross Income (AGI). Sole proprietors report auto expenses on Schedule C.

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You cannot use the standard mileage allowance if the car is used for hire, such as a taxi, if you have 5 or more vehicles in use for business at the same time, such as a fleet operation, or if you have claimed a Section 179 expense deduction and/or any method of depreciation other than straight line in the past.

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Generally to claim the standard mileage allowance you must elect to do so in the first year the car is placed in service (the year you purchased the car, or the first year you used the car for business if later). If you claim the standard mileage rate in the first year you can switch to actual expenses in a later year - but if you claim actual expenses in the first year you may not be able to change over to the standard mileage allowance in later years. If you choose to claim the standard mileage allowance on a leased car you must use it for the entire period of the lease.

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You cannot deduct commuting - the miles from your home to your place of business or your first business stop of the day and from your place of business or your last business stop of the day back to your home. You can deduct travel between different job locations, and travel from your home to a temporary (usually lasting less than one year) job location outside the metropolitan area where you live and normally work.

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Whether you claim the standard mileage allowance or actual expenses you must keep good records. You must document the total mileage on your car for the year with a breakdown of business, commuting and other personal miles, and the date and business purpose for each business trip. A pocket date book is good enough. Enter the car's mileage on the first and last day of the year, and enter the business miles and name of client visited or business purpose for each trip. You should also record parking fees and tolls in the date book.

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Of course you must reduce the deduction for business use of your car by any reimbursement you receive from your employer under an "accountable" plan. If your employer reimburses you at a rate lower than the IRS allowance, say 30 cents per mile, you can deduct the difference. However, if your employer reimburses you at a rate higher than the IRS allowance, say 60 cents per mile, you may have additional taxable income.

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If your employer gives you a flat monthly car allowance, say $100.00 per month, which is included in the taxable wages reported on your Form W-2, you do not have to reduce your deduction by this amount.

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TTFN

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BTW – My post “A Sample of Sampling” today at THE FLACH REPORT discusses a method for documenting business mileage.