Highlights of Newsletters Since 1982
November 1982
Beginning in 1983, medical expense deductions will decrease. Then, 5 percent of Adjusted Gross Income (AGI) will be subtracted from medical deductions instead of the current 3 percent. Also, the $150 insurance premium will no longer be deductible.
December 1985
As usual, I will automatically determine if you are eligible for income averaging and the special 10-year averaging method (lump-sum payment from a pension or profit-sharing plan).
For those who didn’t itemize on their tax return, IRS now allows 50% of your contributions to be deducted without itemizing. Last year, a maximum of $75 was allowed.
The social security tax base for next year will be $42,000—that’s up $2,400 from 1985. Rates are a little higher, too: 7.15% for both employers and employees. The maximum tax will be $3,003—up $211. Self-employed persons will pay 12.3% (up ½%) with a cap of $5,166.
January 1985
Probably the biggest change in the law is the decrease in the terms for long-term capital gain treatment. The holding period required for stocks and other investments to qualify for long-term capital gains is now six months, a decrease from the previous one-year period. Remember, only 40% of long-term capital gains are taxable, as opposed to short-term gains which are 100% taxable. Wall Street has long sought this change.
Income averaging is a method for easing the tax burden for those of you with rapidly rising incomes or with particularly high incomes for the tax year. (I check all clients’ returns to determine if they are eligible for income averaging.) The new law allows averaging with only three previous years instead of the four years allowed in the past. What’s more, the difference between the taxable income for the tax year and that of the previous three years must be greater than what was required previously.
January 1986
January 1991
Some of the Most Frequently Asked Questions (Try this quiz yourself. Answers follow.)
1) I spent a considerable amount for my business attire. Are any of these expenses deductible?
2) I made a contribution to a charitable intuition and received a gift in return. Is the whole contribution deductible?
3) I had $500 worth of items stolen for my home. My insurance cover only amounts over $500. Is my $500 loss deductible?
4) I sold my home and made a profit of $10,000. Is this taxable to me?
5) Are funeral and burial expenses deductible?
6) I head a Girl Scout troop. Can I deduct the mileage when I use my car to buy supplies and go to meetings?
1) No. The IRS allows only specific “uniform” attire. Examples are police, nurse, and bus driver uniforms.
2) No. You should subtract the value of the gift you received. For instance, if you attend a $50 a plate charitable dinner and the value of the dinner is $20, your contribution is $30.
3) Possibly, but not unlikely. For theft and casualty losses, the amount exceeding 10% of your adjusted gross income (AGI) is deductible. For instance, a taxpayer with an (AGI) of $40,000, must have a loss of more than $4,000 in order to deduct it.
4) The profit is not taxed if you purchase a new home within 24 months and the new home costs more than the selling price of the old home or if you are over 55 and have a gain of less than $125,000.
5) No. These are personal expenses. Personal expenses are not deductible unless specified in the Internal Revenue Code. Mortgage interest and real estate taxes are examples of personal items specified in the code.
6) Yes. Out-of-pocket expenses, such as the cost of gasoline and supplies for tax-exempt charitable organizations are deductible. You are allowed 12 cents per mile when using you own vehicle. Note that you are not allowed to deduct what your services “would have cost.” For instance, you cannot assess the services you donated at $20 per hour and then deduct that amount on the tax return.
When IRS began requiring social security numbers for dependents two years ago, an amazing 7.5 million dependents disappeared from tax return files!
Here’s a quick reminder of some miscellaneous deductions you should remember.
· Job-hunting expenses including resume printing, agency fees and postage.
· Custodian fees for IRA accounts.
· Business expenses unreimbursed by your employer.
· Fees for investment advice and publications.
· Professional fees relating to tax and financial services.
· Professional membership and union dues.
· Safe-deposit box rental fees for investment.
· Cost of course work or training to maintain your professional skills.
January 1992
Some Frequently Asked
Questions
(Take the quiz)
1) If someone gives me $1,000, is it taxable to me?
2) My son is a full-time student, how much can he earn and not file a return?
3) Are capital gains taxed at the same rate as ordinary income?
4) Can I withdraw my 401 (k) money if I buy a new house or have a medical emergency?
5) My 21-year-old daughter who lives with me earned $8,000. Can I claim her as a dependent?
6) How long should I keep my returns?
1) No. Gifts up to $10,000 may be given and received without taxation.
2) Dependents must file a tax return if they earn more than $550 from employment in1991. Remember, interest and dividends are not earnings.
3) No. Long-term capital gains are taxed at no more than 28%. Short-term capital gains are taxed as other income…31% top rate.
4) Yes, if your company plan allows it. But when you withdraw these funds from the plan, they are fully taxable, and you will incur a 10% penalty. So if you are in the 28% federal tax bracket and 6% bracket for state taxes, you will pay 44% of what you withdraw for taxes and penalties. As you can see, it’s a high price to pay, so I recommend borrowing from these funds instead. You’ll pay yourself interest as you pay back the loan! If you do withdraw the money (not borrow it), be sure to call me so we can discuss the taxes that must be paid when withdrawn in order to avoid additional penalties.
5) Yes, if she’s a full-time student. At age 24 you can no longer claim her as a dependent, however, unless her income is less than $2,200. If she’s not a full-time student, you cease claiming her as an exemption when she reaches 19.
6) You should keep your returns for a minimum of 3 years. There are exceptions, of course. Keep specific returns indefinitely for the following circumstances: (1) The year you sell your residence. (2) The year you get a nondeductible IRA. (3) All the years you are self-employed. (4) The years you have reinvested dividends. (5) Any year you take depreciation for your vehicle, rental property, business equipment, etc. (6) And any year you have a passive loss from a limited partnership. If you substantially under-report your income, the IRS can go back six years to check your returns. If the IRS detects tax fraud, they can check back as far as they want. That’s how Al Capone was finally sent to prison!
Fewer people now claim the child-care credit than in the past. One explanation is that, beginning with the’89 returns, the IRS requires the name, address, and tax ID number of the child-care provider. Since then, the credit was claimed on 31% fewer returns!
When leaving a company and taking a distribution from the savings or 401 (k) plan, it’s important that the proper amount of the distribution is rolled over into an IRA. I’ve seen many cases where the whole distribution is rolled over into an IRS, when in reality only a portion should have been. In effect, you’re being stung because that portion is taxed twice and shouldn’t be. It’s important that you deal with the knowledgeable investment person when you make these transactions. Call me if you need a reference.
January 1993
How much will I get back on my tax return?
I don’t know!
January 1994
It’s the year 1913! Folks are really looking forward to filing the first United States tax return. It’s the birth of the little form 1040. Kept the name, but since made a few changes.
Taxable income was then as it is now – you total income less all your deductions. Tax rates started at 1%, but only on taxable income over $20,000. Today they begin at 15% on taxable income over $1. Hmmmm! The 1913 maximum tax rate reached the stratosphere at 6% on incomes over $500,000. Today’s top rate’s 39.6% on incomes over $250,000. 1913’s personal exemption was $3,000; today’s is $2,540.
Here’s the best part. In 1913, your tax booklet would’ve been four pages long – three pages for the 1040 Form (one of the three pages almost exclusively for you and you tax preparer’s motorized signatures) and one page for instructions. You don’t want to know how many pages of forms and instructions there are today. It changes by the nano-second.
“So Ralph, you seen to have a full grasp of the goings on in that famous year, did you write a newsletter that year too?”
Not so fast, I got this info right off the original 1913 Form 1040 framed and hanging in my waiting room. Well…maybe it’s not an original…and maybe I only paid $12.95 for it. But it’s a real copy, and that’s a real historical IRS newsflash.
Ever wish you were the winner in the TV game show that won the washer and dryer, or the fine automobile, or the snowmobile that travels 400 miles and hour? Well, here’s some sour grapes for you! Those inflated prices that flash on the screen (and which nobody in their right mind would ever pay) are the very numbers that appear on the amount they’re taxed on.
January 1996
Questions
1) Ralph, your tax warmth is contagious! For years around the dinner table, we’ve had tax fun galore with your newsletters and especially those worksheets. Have you ever considered quitting the tax preparation business and doing something you’re good at - - like maybe writing Bedtime Tax Stories for Kids, or special issues to brighten up the holidays (“Holiday Tax”)?
Answers
1) No. Taxing is a serious business.
When you receive your refund, it’s a good habit to show the refund separately as a deposit in you checkbook. Don’t bury it with other deposits. This way you can always tell if and when you received it. This is especially true if you are self-employed or own rental property. Otherwise the IRS could say you’re laundering income through your personal checking account. It’s good to identify all deposits.
In light of all the talk about Social Security changes, now is a good time to prepare for your own future. Even though IRA contributions are often not deductible, IRAs are still wise because savings grow without taxation. This is especially true as you approach 59-1/2, the year you can withdraw IRA’s penalty-free. Why have that interest or dividend taxed when it can be sheltered? You can only win with this strategy! If you’re self-employer you should open a tax deductible IRA-SEP which is tax deductible for you.
January 1998
For those of you contemplating some future time in a penal institution (not for taxes of course), the IRS has just made it somewhat less attractive for you! Wages paid to you while working as an inmate, will be exempt from federal unemployment taxes. Consequently, you will not be able to collect unemployment benefits when laid off from your little jail job!
Remember, if you hire someone to care for your children and care is provided in your home, the IRS generally considers you an employer. If you pay the domestic worker more than $1,000 during the year, you will be liable for the employer’s share of FICA tax. This is handled on schedule H of your personal income tax return.
Here's a little quiz for you! If you loan someone money and are now unable to collect the amount owed to you, are you able to claim a deduction for a bad debt? Yes! Whether for business or non-business bad debts, if your efforts to collect are fruitless and you have evidence that it is worthless, you may deduct the loses on a tax return.
The new law has a treat for those who sell their home after May 6, 1997. This is probably the biggest change in home ownership rules for as long as I can remember! You may exclude up to $500,000 of gain ($250,000 if single) when you sell your residence. To qualify you must have used your home as a principal residence for at least two out of the last five years. You may exclude the gain from your sale once every two years. If you don’t meet the two-year requirement, you still may be able to exclude part of the gain. I will determine this on your tax return.
No longer will taxpayers need to defer gain on the sale of their residence by purchasing another home of equal or greater value. Nor will they be required to wait until age 55 to pull gain out of their house tax-free. Please still keep receipts on improvements made to your residence, because, in the event of an audit, you will still need to provide proof of the amount of gain on that sale.
Leaving your employment eventually? A really undesirable way of increasing your taxable income when you terminate employment is to leave an outstanding balance on a loan from your 401(k). This will be treated as a taxable distribution. The simplest solution is to pay off the loan before you leave employment.
When leaving your present employer, remember to exercise any your stock options available to you. The window of time in which to exercise these options is very short after termination.
January 1999
IRS News Flashes!
Want some interesting tax dirt from IRS data on 1995 personal returns? The top 1% had incomes starting around $209,000, which generated about 30% of the total income taxes for the year. Incomes of $100,000 represented the top 4-½ % of taxpayers and about 47% of the total income tax burden.
Did You Know?
¨ If kindergarten is not required in your state, it is considered a dependent-care expense.
¨ You can always deduct valid employee business expenses as long as the company policy says it won’t reimburse you for such expenses. Taxpayers lose all the time in court cases where they “thought” the company wouldn’t reimburse them.
¨ The IRS will accept credit card payment of taxes on your 1998 tax return—but only through electronic filing. Also, your credit card company will charge a service fee. Let's think about this: Ralph will charge an electronic filing fee; throw in a fine credit card service charge; IRS enjoys fast cash! Hold me back! Hope I can eke out some credit card interest payments too!
¨ You can withdraw from your 401(k) plan, based on hardship; however, it is still taxed and subject to a 10% penalty, unless you’re 59 ½ or roll it into an IRA.
¨ You can fully deduct buyer AND seller points (loan origination fees) if they are PAID and not incorporated into the loan.
¨ You need a receipt for donations by check or cash that are more than $250.
¨ Non-compliance on taxes costs the government about $200 billion per year (about $1,600 per household), but other countries marvel at our tax compliance! (Go figure!) Compliance here is about 85%--far above most other nations.
¨ Casualty and theft losses must exceed 10% of your income before you start deducting them.
¨ And finally, you can call 1-800-TAX-FORM to get any IRS form you ever wanted!
So, there you go! These are all the tax fragments I can spare right now. Feel free to share them with all your tax cronies! Now off with you to those worksheets!
January 2000
First, it's important to brush up on some common tax terms. Let's all try a little quiz: Just match the terms and descriptions. Go ahead, test your knowledge, and then share your results with your little tax friends. If you have a bit of trouble, I've included the official answers just below the grid.
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1 Taxamegadotia
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A Delightful game providing hours of amusement for accountants with fairly low entertainment thresholds |
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2 Tax Mendoza
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B Joyful health condition usually paired with bursts of exuberance—Typical onset: First viewing of the Tax Data Worksheet |
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3 Tax Bingo
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C Notorious Tax bandit. Stole from the rich; donated to the tax-impaired |
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4 Taxi
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D Reliable vehicle to transport me home 4/15/00. |
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5 Tax Lax
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E Never mind |
1 B 2
C 3 A 4 D 5
E
How'd ya do? I'll bet, just great! Let’s see if we can bring you a little closer to home.
Can You Answer These?
Can you trade stocks (instead
of selling) and avoid paying capital gains tax?
§ No. Tax wise, trading stock is the same as selling it. You realize capital gain and pay taxes on it.
Under which of the following
circumstances can you deduct the mileage?
a) Taking Aunt Rose to visit Uncle Joe. (Uh, no! Have you dropped your chalupa?)
b) Business Mileage (32 ½ cents)
c) Medical Mileage (10 cents)
d) Charitable Mileage (14 cents)
e) Moving Mileage (10 cents)
o Uncle Joe is the only loser above. Exploit the others at the given rates per mile.
Let's say you're selling your home
that you owned for two years, and you will have a sizable gain. You plan on buying a home that costs
considerably less than the selling price of your current home. (Or you plan on not buying another home
at all). Is the gain taxable?
o Nope! Since 1997, you may exclude up to $500,000 ($250,000 for single filers) of gain on the sale. You simply have had to live in the home for two of the last five years. And this can occur every two years—unlike the previous "Once in a lifetime exclusion.” What's more, if you owned the home less than two years, we can prorate the exclusion.
I obtained a second mortgage to pay
my tax preparation fee: Is the interest on the loan deductible?
o Yes! It doesn't matter how you use the proceeds of a second mortgage or home-equity loan. The interest is deductible as long as you itemize your deductions.
Is private mortgage insurance
deductible, and how do I eliminate it?
o It's not deductible, unless it is used for rental property or you use your home as a home-office. (Be sure to include it on my worksheet.) Private mortgage insurance is usually required when you put less than 20% down on a home. Mortgage insurance can be pricey, and the insurer will not beat down your door to indicate it’s no longer necessary. Once you have 20% equity in your property, indicate to your lender that you wish to cancel the insurance. Your equity increases by appreciation, improvements, or simply paying down the loan.
Can I deduct my itemized deductions
regardless of my income level?
o No! If your income is over about $129,000, you'll lose $300 of your itemized deductions for every $10,000 of income over the limit (3%).
Can You Eliminate Filing
a Tax Return for Your Child?
o You bet! If your child has investment income greater than $700, a tax return must be filed for the child. However, you may consider investing in high quality growth stocks, which typically do not pay dividends or capital gains. By doing this, you will realize growth, with no dividend income. End result: No filing until you sell the stock!
Can you deduct your commute from home
to your work place?
o Normally, you cannot! The IRS considers the expense personal. But, there are ways: If you have a temporary work location farther than your normal location (must be both), then you can deduct the mileage.
I have a dependent over 19 (child or parent) at home. May I claim her as an exemption?
o Possibly. You must provide more than half the cost of her support, and the dependent must have less than $2,750 in taxable income in 1999.
Are US Savings Bonds and Treasury
Bonds tax-free income?
o No! The IRS does tax the interest earned on them; however most states do not. Municipal bond interest income is tax-free by the Fed and also by the State, if the issuer is located in the state where you reside
Is the Medicare Premium
deductible?
o Yes. It is deducted as medical expense if you itemize deductions.
Tips for Business
Owners
Do you own a business? Consider hiring your child. As a matter of fact, you may pay him $4,400 for 2000. You can even increase this by $2,000 if you have your child contribute to a traditional IRA.
The IRS says that in order to deduct business travel, meal, and entertainment expenses, you need to substantiate the date and place, amount, the business purpose, and the business relationship. Plus, you need to keep receipts or other documentation for expenses of $75 or more.
Business meals and entertainment are usually only 50% deductible. However, if the meals are on your business premises or are for your employees for special occasions, then they are 100% deductible. You should set up an account called "Meals – Special Occasion/On Premises.” That way you can track it and alert us for the deduction.
Have a spare corporation lying around? If you’ve considered ending a corporation or LLC and forming a new entity, consider keeping the old one alive. Just pay the annual registration fee on the old entity. In this way, it will be available for future use, and you save the cost of forming a new entity. No tax returns will be due either.