Tax Time Help
February 3, 2009
Tax time is here and do you have questions. Tim Wright of Pool & Wright accounts will answer tax questions. Submit your questions now.
Moderator: Welcome. Today's guest is Tim Wright, a Certified Public Accountant with Pool & Wright Chartered, who will answer questions about taxes. We have already received a number of questions and will get through as many as we can today. If you have a question for our guest, please submit it soon to avoid being left out. Our first question is from the owner of a small business.
Mommy_15: I own a daycare, what kind of information will I need to bring in to get my taxes done. Thanks!
Tim Wright: First - you need to bring in the normal stuff that any business has to report - information about income and deductions. The general rule for which expenses are deductible for a business - is that "all reasonable and necessary" expenses are deductible. This basically means that any direct expenses you have related to your business are deductible. Often times business clients ask "Can I deduct the cost of postage?" or "Can I deduct the cost of copies I make for my business?" The answer is "YES!" Any reasonable expenses are deductible. You have to get pretty "unreasonable" or have expenses which aren't that related to the business for them not to be considered "reasonable." There may also be expenses you paid before you were in business - that are now deductible business expenses. An example would be part of the cost of a cell phone, if you use it for business calls. When you begin with the "reasonable" business expenses, then you just have to learn the exceptions. One exception is that the IRS standard mileage rate can be used to account for vehicle expenses - if you document the business miles. The mileage rate for business travel for 2008 was 50 1/2 cents per mile from 1/1 to 6/30, and 58 1/2 cents per mile from 7/1 to 12/31. The 2009 rate is 55 cents per mile. Another special rule is that business meals and entertainment are only 50% deductible. Another special rule related to daycare business is the calculation of the home office deduction - for expenses related to the business use of your home. You need to have totals of your household expenses (mortgage interest, real estate taxes, utilities, repairs, insurance, etc) to calculate the total cost of maintaining your home. Next you need information to calculate the portion of your home used for the daycare kids (to calculate the percentage of square footage used) and the total hours during the year that you were in operation as a day care (to calculate the portion of the total hours in the year that the business was operating). Another special day care rule is that you need to calculate the cost of food that was served as meals to the kids. Most day care providers keep track of the number of breakfasts, lunches, and suppers that were served as use cost estimates (like those provided by the state food program) to figure the overall cost of meals provided. These meals are 100% deductible.
orlando: I have heard that long term capital gains on investment are not taxed for 2008. Is that correct?
Tim Wright: Not exactly. For several years the maximum tax rates applicable to long-term capital gains and qualified dividends have been lower than the regular tax rates - a maximum of 15%. The portion of long-term capital gains and qualified dividends that "fill up" the lower two tax brackets (10% and 15%) are taxed at "zero" percent for Federal purposes in 2008, 2009, and 2010. This is the only "zero" tax rate I've ever heard of in over 24 years as a practicing accountant. This means that you figure the rest of your taxable income first. Then you add on the long-term capital gains and qualified dividends. The portion of them that are still in the 10% and 15% brackets are taxed at zero percent. The portion of them that is up into the 15% or higher tax brackets is taxed at 15%. State taxes would also apply. Clear as mud?
slamb: My friend and her child have been stayin with me most of the year. She has not worked, can I claim her child?
Tim Wright: The rules for claiming dependents have become very complicated. It would not be uncommon for a client with these circumstances to need to sit and discuss the issues with a CPA for 15 or 20 minutes - just to figure out this one question. I will try to summarize the hi-lights. A dependency exemption can be claimed for someone who meets the definition of a "qualifying child" or "qualifiying relative." To be a qualifying "child" they must meet a relationship test, an age test, share a home with the taxpayer for more than one-half of the year, and the child must not provide more than one-half of their own support. Your friend's child would not meet the "relationship" test for you - assuming they're not related. To claim someone as a "qualifying relative" they must meet a relationship test (with an exception for non-relatives), must have gross income of less than $3,500, the taxpayer must have provided more than one-half of their support for the year, AND they must not be a "qualifying child" of another taxpayer. The relationship exception is for non-relatives who shared the home with the taxpayer for the entire year. There is another exception! An unrelated child that lives with (for the entire year) and is supported by the taxpayer may be claimed by the taxpayer if the other individual for whom the child is a qualifying child does not file a return or files only to claim a refund (pays no income tax). This means that a boyfriend would be allowed to claim a dependency exemption for his girlfriend's unrelated child if she meets the other requirements. It sounds like you might meet this exception for your friend and the child - if they lived with you the entire year. There are many exceptions and rules to decipher. You probably should talk to a tax professional.
moderator: What are some mistakes that most people make when trying to fill out their taxes on their own?
Tim Wright: That's a tough question because I've seen people make all different kinds of mistakes. Education tax credits and deductions are fairly complicated - with many choices - which are sometimes overlooked. Life insurance "dividends" are a "return of premiums" and are not taxable like "common stock dividends." Interest from US obligations (savings bonds) are not taxable to the states. Interest from municipal obligations (city and state bonds) are not taxable on the Federal return. The wages that are taxable on your tax return are in box 1 of your W-2 - not the social security or medicare wage amounts - which are often higher. Deductions and tax credits are often over-looked. Stock sales reported to the IRS on form 1099B are often over-looked and not properly reported. Real estate taxes for the year (2008) are often deducted instead of the real estate taxes "paid" in 2008 - which for many is 1/2 of the 2007 taxes (paid in May) and 1/2 of the 2008 taxes (paid in December). Common misconceptions by non-tax preparers are that "inheritances" and "gifts received" are taxable income. This is generally not true. Inheritance as a rule is not taxable to the recipient. The exception is inherited IRA's, pensions, and tax-deferred annuities. Gifts given to family members and other non-charities are not deductible to the giver and non-taxable to the recipient. Income taxes are not an issue with gifts. The giver may have to consider the gift tax laws.
moderator: What are some of new tax laws or opportunities that people need to be aware of this year?
Tim Wright: There were four or five significant tax acts passed between late 2007 and the end of 2008 - with tons of tax changes. Some hi-lights: New home buyer tax credit - actually an interest free loan to be repaid over time - don't have to be a "new" home owner - just haven't owned a home for three years. Real estate taxes up to $500 for a single and $1,000 for a married couple can be deducted in addition to the standard deduction. The section 179 limit to write-off the cost of business equipment was raised to $250,000 for 2008. 50% bonus depreciation applies to many business depreciable assets acquired in 2008 - the assets must be "new" to qualify. Alternative minimum tax relief was extended for another year - 2008. The age was increased for children subject to the "kiddie tax." Taxpayers over 70 1/2 can donate money directly to a charity from their IRA - no tax deduction is allowed but the IRA withdrawal isn't taxable. This is beneficial to many taxpayers. Many tax credits and deductions were extended for another year. 50% bonus depreciation was retroactively allowed for many business depreciable assets acquired after 5/5/07 and before 12/31/07 - for many (about 17) disaster ravaged counties in Kansas - including Lyon County. Amended returns can be filed to claim the extra 50% bonus depreciation on assets acquired which do not have to be directly related to disaster damage. There were many, many more changes.
moderator: Can home computer tax programs or national franchise tax preparers be trusted and what are some the differences of established accounting companies like yours offer?
Tim Wright: I definitely wouldn't make any suggestion about the "trust" you can place in home computer tax programs or national franchise tax preparers. For me the issue relates to the training, abilities, and experience that are necessary to properly prepare income tax returns. The "CPA" designation is an indication that a person has a college education in accounting related courses, takes 40 hours per year of continuing education, and has the ability and skills to pass the CPA exam - which is very difficult. I believe that about 10% of those who take the CPA exam - pass it on the first attempt. I have been at Pool & Wright since I was 18 years old - for over 24 years - and have a life-time of experience. My partners and I personally see to it - that our clients' returns and other financial matters are handled accurately and appropriately - to the best of our ability. The tax laws are complex and ever-changing. We have seven very qualified CPA's on our staff - as well as many other experienced accountants. It is a constant challenge for us to keep up with all of the tax law changes - and see that everything is considered for our clients' tax returns. I would think it would be very difficult for someone in a small office or with limited training - to properly complete tax returns. Home computer tax programs probably do a fine job - if you know how to properly answer all of the questions. I have seen hundreds of examples over the years of tax returns that were prepared - with missed deductions, missed credits, improperly calculated items, or mistakenly understated income. We don't have to find very much that should be handled differently - to more than pay for our fees. A recent new client had concerns that they had wrongly claimed a college-age child as a dependent - and feared they would owe a lot more in taxes. I discovered that they had not chosen the best college tuition tax advantage and prepared an amended returns with refunds over $1,300. It is not uncommon for someone to suggest to me that it's surely okay for them to prepare their own tax returns - afterall - how hard can it be. I like to respond that I "agree." Last week my gallbladder was bothering me - so I just "took it out." :) You wouldn't go to someone in a dark alley to operate on your teeth or eyes, but people will have their tax return prepared by someone who took a weekend training session. Did I make my opinion clear?
quarterback: Is the tax code too complicated and can it be simplified?
Tim Wright: Question #1 - absolutely! Way, way too complicated. It is a constant battle for our seven CPA's and other qualified staff to keep up with and understand all of the rules. It's not uncommon for an tax issue to come up in our office that one or more of us has never heard of - or never encountered. The only people that these complicated tax laws are good for - are the accountants - and we're not so sure ourselves. When I started at the firm in 1984 - there used to be a major change in the tax laws about every ten years. The tax reform act of 1986 was a very large change. In recent years I have two to five reasonably thick books which explain the tax law changes during the current year. To make matters worse, many of the changes in recent years are "phased in" with different amounts or calculations every year. Also deductions and credits are passed for one year at a time - and expire - and are extended. The alternative minimum tax relief was passed in late December in 2007 - for the year of 2007. I recently explained to somone how you calculate the portion of your social security benefits which are taxable. The complexity of these calculations is staggering. Question #2 - can it be fixed? I really don't know. I'm afraid the tax laws are an ever-changing result of the political process. There aren't many capable tax and accounting professionals with the skills, abilities, or tolerance to enter and navigate the political system. I often answer this question as follows. Everyone agrees the tax laws should be simplified - just a flat tax paid on your income. The first person agrees but says that surely you can't pay tax on money you give to charity. The next person says that you have to be able to deduct medical bills. Do you see where this is going?
quarterback: With a new administration in the White House what do you think will happen with the tax code?
Tim Wright: My crystal ball isn't any clearer than yours. The general expectation is that tax rates will be increased at some point. Most experts expect the tax laws to be left alone for awhile - due to the bad state of the economy. When the President is talking about the tax rates etc - he refers to the middle-class as anyone who makes less than $250,000 per year. This may mean that tax rates will only go up for taxpayers above that level. The estate tax limit is now $3.5 Million and will be unlimited in 2010. Then the limit returns to $1 Million in 2011. Most experts feel that the estate tax limit will be "settled down" before 2010 - at a fairly high level - perhaps the current $3.5 Million.
mythoughts: What are the benefits of starting a one-man side business that I'm pretty sure will never make a profit? I want to provide a certain service to friends that need it, and don't mind breaking even. Is there any benefit to me, tax-wise, if I actually end up operating at a loss of a $100 - $300 dollars?
Tim Wright: If a business has losses because the owner is really spending more than the business is making, it’s a bad deal all around. The only exception is a business that has deductible expenses which create a loss - but are expenses the owner would have paid anyway. For example, a home-based business that meets the home office rules - can deduct a portion of the expenses related to maintaining the taxpayer’s home - real estate tax, insurance, utilities, etc. These expenses would have occurred anyway - so the business has expenses without any additional cash being spent. If you create a business that will never make much money - just because you want to or to help friends, there really won’t be much of a tax benefit. Small losses of $100 to $300 will create a minor tax savings but won’t make much difference. There are rules that don't allow the deduction of losses related to a hobby. Theoretically, a business has to be entered into for a profit - in order for losses to be deductible. There are a number of facts and circumstances that evaluate if an activity is a business or a hobby. A minor business with small losses is probably not a problem here.
Moderator: We've reached the end of the questions submitted early and are now dealing with questions that came in later. This meanins responses will take a bit more time. Here's a question about tax software.
stevo: Is it safe to use TurboTax.com ? It asks for you Social Security Number and Account Number...just want to make sure that it is secure..my son is only 19 and worked two part-time jobs while going to Vo-Tec.. With all the identity thefts I don't want him to get taken.
Tim Wright: Unfortunately, I don't really have a professional opinion on the information security issues related to Turbo Tax or other internet type software. That question would be better answered by an identity theft or internet type expert. I would expect that Turbo Tax has help or other online information that provides information regarding the security of using the program. There are also other "identity theft" support lines that might be able to answer your questions. The confidentiality of your tax and personal information is always safe with Pool & Wright!
steakbuffet: Are there limitations on how much income an 80 year old can earn? If a holding company bought back the common shares and is no longer traded on the stock exchange, is the income taxable like interest income? Thank you.
Tim Wright: There certainly is no limit on the amount of income an 80 year old can earn. The standard deduction and personal exemption total for a taxpayer over 65 is $10,300. This means that you can have taxable income of that amount and still pay no Federal income taxes. The Kansas limit is somewhat lower. Also, social security benefits are taxable - based on your other income. There are thresholds you can reach with your other income that will cause your social security to start being 50% taxable - and later 85% taxable. If none of your social security is taxable, it doesn't even factor in to the $10,300 limit mentioned above. I need more information regarding the holding company stock buy-back question. I'm not sure exactly what you're saying happened - and need more information to answer.
steakbuffet: Would new storm windows, doors and a tornado shelter be deductible? Thank you.
Tim Wright: Expenses for storm windows, doors, etc for a personal residence are not tax deductible. There is an "energy efficient home improvement" tax credit which provides up to $500 in tax credits based on different energy efficient home improvements that are "qualifed" improvements. The $500 limit is broken down into a certain dollar amount for different kinds of improvements. A recent tax law extended this credit for 2009. A prior tax law allowed the credit for 2007. My understanding is that it is somewhat unclear if the credit applies to improvements made in 2008. The experts disagree at this point. Consult your tax advisor.
Tim Wright: Expenses for storm windows, doors, etc for a personal residence are not tax deductible. There is an "energy efficient home improvement" tax credit which provides up to $500 in tax credits based on different energy efficient home improvements that are "qualifed" improvements. The $500 limit is broken down into a certain dollar amount for different kinds of improvements. A recent tax law extended this credit for 2009. A prior tax law allowed the credit for 2007. My understanding is that it is somewhat unclear if the credit applies to improvements made in 2008. The experts disagree at this point. Consult your tax advisor.
DJrocksthemic: If you make less than 2,000 in freelance income throughout the year you do not have to claim that on your taxes, ... correct?
Tim Wright: That is NOT correct. The tax code states that taxpayers must report and pay tax on "all" of their income. The code is actually very broad in this sense. Then you start working on the "exceptions" which are written into the code regarding certain kinds of income which are not taxable - like life insurance proceeds. Many of my clients are often confused by the 1099 reporting rules. The rules indicate that a 1099 must be given to the recipient if they are paid more than $600 for services. My clients often think this means that if they make less than $600 - they don't have to report it. This is not true. All of your income should be reported. If a 1099 isn't filed, the IRS just doesn't know about it. Even if a taxpayer's only income was $2,000 from a self-employed business, they would still be required to file a return. No income tax would be due, but self-employment tax (social security tax) is due on self-employment income if it's much over $400.
gogreen: How much does it hurt you if you and your husband claim married claiming 1. My husband already has over $500 taken from his paychecks this year.
Tim Wright: This is a common problem that happens to married couples who both work. When you claim "married" on your W-4, the withholding tables assume you get the benefit of the full married standard deduction. The tables also calculate that you get the full married tax brackets. The problem is that the married couple TOGETHER only get the married standard deduction and the married tax brackets. The withholding tables have no way of knowing if your spouse works or not and if so - how much they make. "How much" it will "hurt you" depends on the amount of your income. We would expect you to owe tax on the amount of the married standard deduction of $10,900. If you're in the 15% bracket, the tax would be around $1,600. Also, the tax is about $800 on the second 10% bracket that you really won't get. Tough question to give a specific answer on - but the sooner you figure it out - the more time you'll have to prepare for April 15th.
jladdlewis: I sold my house last january after owning it less then 2 years. The purchase price was 86,500 and we sold it for 92,000. For a gain of 5,500. But the real estate commision was 5,520, making it a net loss of $20. Do i need to file anything on that?
Tim Wright: Congratulations on selling your home! and at a profit! Losses on the sale of a personal residence are not deductible. Some realtors have a form for you to sign which indicates that you meet the requirements for your home sale to be tax free. If you sign this form, they don't report the house sale on a 1099S form to the IRS. If this form isn't filed, you don't even have to report the sale of your home. If the 1099 is filed reporting the sale to the IRS, you need to report the sale of your residence on Schedule D, but claim the same amount as your "cost or other basis" so that no gain or loss is figured. This lets the IRS find the sales proceeds they are looking for on your return. I'm often surprised that many clients aren't aware that the home sale rules changed years ago - I think in about 1997. Now when you sell your home, if you've lived there at least two of the prior five years, the first $500,000 of gain is tax-free for a married couple. The tax-free amount is $250,000 for a single. This is a "middle-income" taxpayer break that Congress passed - that you can make a $500,000 gain on selling your home and not pay tax on it. Doesn't sound too "middle-income" to me. If you've lived in your home for less than two years, part of the tax-free amount may still apply if you meet certain exceptions - like selling your home and moving due to a change in jobs.
Moderator: That is all the time we have for today's chat. Thanks to Tim Wright for sharing his expertise and his time today. And congratulations to all the participants for the interesting questions. This chat will remain posted on The Gazette Web site and a transcript of the chat will be published in Wednesday's newspaper. Keep watching for the chats at www.emporiagazette.com, where they will be announced as soon as they are scheduled.