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Tax Information With A Mother's Touch Published by Eva Rosenberg, MBA, EA |
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Volume 2, Issue #56, March 23, 2000 Please, if you like this publication, invite at least a half a dozen friends to subscribe ... Give them our Subscription Page ( OutRageousFlirt ... GiftSurf ) Ask TaxMama is sent to you for FREE every Friday (And subscribers get it earlier than websurfers.) ------------------------------------------------ Dear Family, There is a great volume of questions coming in. I wish I could help you all, but there aren't enough hours in the day. Some of the questions coming in involve large sums of money and require some specific expertise and immediate responses. Really, folks, you should not be relying on a free resource like this for issues like that. You need to be meeting with a good tax professional who understands that specific issue, sometimes, in your own state. If you need help locating someone, go to this article for guidance on how to locate a tax professional. Why Your Business Needs A Tax Pro Don't be miserly about paying for competent advice - too often trying to cut corners will cost you 10 times what the advice would. Be good to yourself. Best wishes, Eva Rosenberg, EA Your TaxMama is watching ... out for you. <NOTE TO TAX PROFESSIONALS - Join a weekly discussion list just for tax professionals, please read and sign up at our Submission Guidelines page> Moving On ---------------------- From arid Arizona ... Hi TaxMama, I am a 70 yr.-old widow who just sold a 37 yr.-old house in Long Beach, CA for $415,000 and bought a 5yr.-old house in Sun Lakes, AZ (Phoenix area) for $162,000. Is there a place on the Internet or elsewhere where I can get an idea of what my capital gains will be and what I can deduct so far as improvements I've made on this house through the years? Please help. D. T <TaxMama Replies> Hi D. Tribble. Under the current law, you may have a gain of $250,000 on the house without facing any taxes. You no longer need to replace the house with another one to avoid the taxes. Figure your gain as follows: Original cost of the home, Plus Improvements (pool, driveway, air-conditioning, remodeling, etc) + Appliances and upgrades you left behind (Washer/Dryer, curtains, rugs etc). Add all the selling costs (commissions, fees, required repairs, etc.) Deduct any depreciation taken for office in home or use a rental, casualty losses you deducted for earthquakes, floods, fires, riots or other damages. This should essentially give you your total 'Basis' or tax cost. Deduct this from the $415,000 and you will get your profit. However, if you are a widow(er) and your spouse died during this time. You home may have received, what's called a stepped-up basis (depending on how you held title). This means, its tax value would have increased to the fair market value at the date of the death. If this is the case, add your selling costs and improvements to that value instead of the cost. Your profit would be much lower under this scenario. (Talk to a professional to get this right - there's a lot at stake.) Most likely, unless you had some major improvements, if the house is 37 years old, it cost you no more than about $10,000. You might have put another $20,000 in improvements (not repairs) in over the years. And with a full 6% commission and high closing costs for the sale, you spent, perhaps $30,000. So, with a basis of about $50,000, your profit is about $365,000 - $250,000 exclusion ($500,000 if you are married?) = $115,000. With a 20% limit on long term capital gains (as long as the property was not rental property), between IRS and Calif. FTB, your worst case scenario is a combined tax of under $35,000. This should leave you plenty of money to enjoy Arizona. For more information, read: Publication 523 - Selling Your Home Enjoy your new home. Best wishes Eva Rosenberg TaxMama Home Run ---------------------------- Just too clever ... Dear TaxMama, I have been running a home based residential design firm since 1990. I have always taken the home office deduction. Last night at a chapter meeting of our design association (AIBD), a fellow designer and an engineer both told me that they have been leasing office space to themselves in lieu of the office deduction. They pay themselves for a percentage of the home that they use for business and then report this income as rental income instead of on Schedule C, thereby reducing their SS self employment tax liability. They are both sole proprietors. I am also a sole proprietor and I would like start leasing but will the IRS accept this? -------- <TaxMama Replies> Don't even think of it. I just read a tax court case where the decision went as follows: A couple whose business paid rent on an office building owned by the couple found their rental income suddenly subject to self-employment tax. This is a very annoying and unfair decision - but, for now. It stands. And as long as it does, this will be a lucrative source of income to the IRS on audits. Heck, if I were an IRS audit manager, I'd set up the search parameters to find just this sort of thing. Stick with your office in home deduction, but use every reasonable inch of home, garage and yard space as a business expense - and TAKE PICTURES to prove the business use. Put them in your permanent file in case you're ever audited. Best wishes - and keep trying ... sometimes, you come up with the right strategies. Eva Rosenberg Your TaxMama Sold on Time ----------------------- We entered into a signed agreement for an installment sale of our business within the last month (no money has exchanged hands yet) with the unknown knowledge of the tax law that went into effect in December. Our account was not aware of this law , so I need to know from an expert what are our options at this point? I hear this law may be reversed, but how soon? Our buyer is very willing to work with us, so is there another way to go about this so that we as sellers have some protection also? Anxious for your reply. Thank You! Nancy B -------- <TaxMama Replies> Hi Nancy, Right now, there is now way to predict IF the law will be reversed or WHEN. Most likely, it will. It was poorly conceived and very unreasonable. In the meantime, is there anyway that your buyer could get financing? If you've worked with a bank that knows your business, they might be happy to get acquainted with your new buyer. They may have other ways to get financing? Regardless, work out the numbers with your accountant for the tax cost of this sale. Try to collect at least that much cash in the current year, so you can cover the taxes. On the other hand, if your sale took place in 2000, it's very possible by April 15, 2001 the law will be reversed - and if it is, it will most likely be reversed retroactively. Check with someone locally who's an expert in business sales. Best wishes Eva Rosenberg Your TaxMama Truculent Trucker ----------------------------- Hi TaxMama, Last March (1999), I bought a 1999 Dodge Ram pickup for personal use and driving to work. In May, I was hit by a driver who was subsequently charged with reckless driving (he hit another vehicle, and both his and other vehicle hit mine, causing over $4000 worth of damage). His insurance company paid the repair bill, and I used their repair company who guarantees their work for the life you own the vehicle except for the paint, which is guaranteed for 5 years. I got to thinking - that won't even cover the length of the loan (I have a 6 year loan)! And, if I tried to sell the vehicle, it doesn't have the same value because it has been wrecked. However, I was never compensated for that. Do I have any other resource for the depreciated value of my vehicle? Can I claim a tax deduction? Although it has been repaired, it will always be a wrecked vehicle. Any thoughts or help? thanks. Steve <TaxMama Replies> Hi Steve, If the Ram was a personal vehicle you could take a casualty loss on the truck. The only problem is, personal casualty losses are only deductible as follows: first - they must be higher than $100 PLUS 10% of your adjusted gross income (AGI), which the amount on the bottom line of page 1 of your tax return. Then, to figure out the amount of your loss, you would have to determine the fair market value of the truck before the accident, deduct the value after the accident - then deduct the insurance proceeds. For example - let's say you bought your truck for $20,000, got the insurance proceeds of $4,000 - the difference is $16,000. Then, your truck was worth $10,000 before the accident. After the accident and all the repairs, it's now worth $8,000 You have a $2,000 loss (lower of the $2,000 or $16,000) BUT - your earnings are $50,000 - so your AGI is $5,000 - even without adding the extra $100, your income is to high to qualify for a personal casualty loss. This is VERY simplified. Get a copy of Publication 584 (sorry, it's not online, at least not today ... should be at ) Publication 584 - Casualty, Disaster, and Theft Loss Workbook (I wrote to the webmaster to alert him/her. But you can find Form 4684 The first page of the form is for personal losses. If the truck is used for business (commuting is NOT business), use the second page of the form. It basically works the same way, except that you don't have to deduct your AGI from the loss. But, you do have to deduct the depreciation you have already taken on the vehicle. And while you think you've not taken depreciation because you always wrote off your miles and not actual expenses, your mileage rate includes about 11 to 13 cents per mile of depreciation. Go see a good tax pro about this - it gets a bit complicated. And, sorry Steve, there is no compensation for the lost time, anger, frustration and sheer irritation in the messy process that wastes so MUCH of the victim's time and so little of the person's who caused the accident. As to the value being reduced to less than the loan value? That's a shame. You should have negotiated that with their insurance company at the time. But in the stress of the unusual situation, who thinks to do that? Perhaps, as an alert to all people who suddenly find themselves in that position, don't settle too quickly. Perhaps meet with an attorney who specializes in this area (personal injury, auto accidents and such) and pay for a consultation to evaluate the whole offer. Most of these guys work on a contingency basis if there are injuries. They get nothing from the repair costs. But they do understand the whole picture and your options, so if you only have repair issues, offer to pay for the advice. Good luck, TaxMama Teaching Tax? --------------------- Dear TaxMama, I am a teacher in the inner city of Detroit and spend a great deal of money on my classroom and students. What is legal to write off as deductions? <TaxMama Replies> HI JTop, As longs as you keep good records of your expenditures and how you use those items, you may deduct them all, using Form 2106. The only problem is, in order to be able to use the 'employee business expenses' deduction, first you must be in a position to itemize. Second, your expenses must be more than 2% of your Adjusted Gross Income (the bottom line of page 1 of the Form 1040). For many people, unless they own a home, this is not an option. Best wishes Eva MONEY FUNNIES ----------------------- This is from Dottie Brewer of Biz-USA Chips of Laughter GOOD: BETTER: BEST: <TaxMama: I heard a version of the last one, waaaay back in 1971 when I was dispatching for the Official Police Garage - but then it was, ... "Oh, you're collecting for the Policemen's ball? No. Ma'am. First of all, I am a Highway Patrolman, not a policeman. Second of all, Highway Patrolmen do not have balls."> IRS NEWS -------------- From the IRS's bulletin to Preparers: *** Top Errors for Paid Preparers Reported *** As of February 18, 2000, the top errors for all paid preparer paper returns are: Many of these errors could be easily detected or avoided by preparing and filing your clients' returns using IRS e-file. [TaxMama: See, now you have it. Even we are not perfect. Other errors that I see later in the season, especially after the extensions have been filed : Expenses entered twice (once to get the extension estimate, later, when the tax pro gets your details) Depreciation - assets left off from last year's return Contributions - last year's contribution carryforward not used State taxes deduction - last year's 4th quarter payment not deducted on the current year return (when paid in Dec.) Capital Losses - last year's loss carryforwards are not picked up Rental Losses - unused losses from previous year not picked up IRAs cashed in - some states had taxed a portion of the IRA deduction several years ago - the state income may be lower. (Look for taxed costs of IRAs from 1980s) There are others, but these are the most common. Eva] Tooting Her Own Horn --------------------- TaxMama's goal is to help you break the code that is the U.S. Income Tax System. We will gladly entertain your questions. Please feel free to submit them to Now`s Your Chance to Ask TaxMama There's no guarantee that we'll have room for all your questions, so we'll try to address those issues that will help the most people. Some of your questions may have already been answered in the past year or so. There are a wealth of articles already in place at The Directory of TaxMama's Articles TaxMama On the WWW --------------------- You can find weekly tax tips at: Robert Sullivan's Small Business Advisor Visit Deb Nyberg's Women in Business - Cyberspace Field of Dreams, BizWomen And for all you ExPats out there ... there's Iain William's site for overseas investing. Overseas Investing Critical Dates:
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