This just in: IRS releases 2008 data

The IRS has released their report on 2008 tax data.

It's 190 pages of engrossing reading.

Ok, maybe not, but it does serve as a useful guide for answering that annual question: How much can I deduct?

The correct answer, of course, is: you can deduct what you actually paid (assuming you can deduct anything, of course), and not a penny more. But for those clients who are skittish about taking the deduction in the first place (I've had clients refuse to take perfectly legit deductions because they were certain if they did, they'd be audited), or who are worried that their deductions are abnormally high (clue: if you make $40,000.00 a year, and claim $15,000 in charitable contributions, you don't need this guide to tell you the answer is 'yes') this is a good starting point for discussion.

In general, the data is broken down by income range, and some tables show the amount of the deduction/credit, others show the actual amounts, and still others show both, so it should go without saying that you should take the time to read the footnotes and headings to make sure you don't misinterpret.

What will you find?

Well, for example, the report will tell you that 1.2 million taxpayers making between $30,000 and $40,000 per year took education credits on their 2008 returns. Ironically there were fewer taxpayers in the next bracket - $40-50,000 - who took education credits (972,000), though the number bumped up to 1.3 million for those making between $50 and $60,000.00.

(Why the drop? Reasons abound, but one reason could be that these people were not aware of the credit, which would provide a planning opportunity for their preparers that is being missed.)

While falling into the bands suggested by this report won't protect you from audit, falling outside (if you're, say, one of the 539 people with no AGI who took the credit) the normal range is a good way to get the IRS' attention.

It's a big file, so it will take a bit to download, but it's an interesting read if you've got time to kill (you know, like when you're on hold with the IRS).

Decisions, decisions

A Massachusetts District Court - in a decision not likely to go unchallenged - has said that the Defense Of Marriage Act (DOMA for short) violates the 10th Amendment. While that has good implications for same sex couples who wish to file joint returns, it really just means that the battle over the rights of same sex couples continues.

And while I'd love to not have to prepare 3 tax returns for RDPs here in California, the truth is, for the time being nothing changes.

Can you relieve tax debt?

Of all the questions I get asked, that's one of the most popular (the other starts "Can I deduct...?")

In today's economy, debt settlement is a big issue, and tax debt is no different. If you've failed to file a return, that debt can be quite large. There's failure to file penalties, failure to pay penalties, late payment penalties, negligence penalties...the list goes on and on, and it's not uncommon to owe more in penalties than you do in tax. And let's not forget interest, another form of piling on. While the IRS rates are currently low (generally 4-6% in recent years), that's no guarantee that they will stay low.

So what can one do if you have tax debt, a federal tax lien or a state tax lien?

There are firms out there which offer to settle your IRS debt for 'pennies on the dollar,' but can they?

The answer: Maybe, but don't bet on it. And like debt settlement companies, you may find that you've paid them, but gotten no benefit.

What are your options, then?

First, know that if you do owe the IRS or the state, the debt won't go away. The IRS has 10 years from the date the tax is assessed (read: from when you file your return) to collect the tax. States, on the other hand, may not have a limit at all, as one California taxpayer found out to their chagrin - a $600 debt from 1982 had grown to several thousand by the time the taxpayer went to try and settle up, and California wasn't willing to negotiate (no surprise, considering their financial condition).

Second, most states and the Federal government have tax relief programs. Some, like Wisconsin, reward non-filers for coming forward voluntarily by waiving penalties and filing requirements, but you often have to do some work to find those options. Others may have payment plans or compromise plans, but with restrictions (for example, California requires direct debit).

Third, coming forward voluntarily is almost always better than waiting for the government to find you. For example, California has a stiff 100% penalty for participating in an abusive tax shelter (Summit Research & Blackbriar Investments, for example) if they contact you about it; if you contact them, you pay considerably less.

Fourth, while an offer in compromise (the 'pennies on the dollar' option) may be available, it's not a given. Anyone who promises you that they can settle your debt for pennies on the dollar is misleading you. The decision rests in the IRS or the state's hands, not yours, and certainly not a third parties'.

In short, if you have tax debt, you need competent advice.

I can help. In California and states other than Illinois, call (909)276-4829 to set up a consultation to discuss your options; in Illinois, call (708)415-6172. Don't delay - each day you wait increases the amount you owe.

More 1099 fun for California businesses

If you’re a business owner in California, you might feel a bit overwhelmed with all the tax returns and documents you file. There’s income tax returns, sales tax returns (or use tax returns, if you’re a service provider with over $100,000.00 in gross receipts), business property tax returns, e-waste returns….

And, of course, the ubiquitous 1099. Not that there’s anything wrong with that, except when you have a bunch of small-dollar forms to complete at year end, and poor records to draw from.

In California, as opposed to other states, any nonresident who receives income is subject to backup withholding on income over $1,500.00. What is backup withholding? Well, if you refuse to provide a Taxpayer Identification Number (TIN – essentially your Social Security or Employer ID number) when asked, or try to be clever and give a false/incorrect one, the IRS requires the payor to withhold tax on any payment to you. Normally, that’s it. But for a while now, nonresidents of California have also faced the possibility of losing an additional 7% in withholding to California (the IRS rate is 28%).

Effective January 1 of this year, the rules in California have changed to include residents in the mix. So now it doesn’t matter where you live, if you get California-sourced income, you WILL pay tax, one way or another, on it. There really just isn’t any way to avoid it – however, 7% is still lower than the state’s actual rate of 9%, so….you be the judge.

This just in....

From the IRS newsroom....
Those of you who enjoy the 'fake bake' may soon be paying more for the privilege:
IR-2010-73, June 11, 2010
WASHINGTON — The Internal Revenue Service today issued regulations outlining the administration of a 10-percent excise tax on indoor tanning services that goes into effect on July 1.
The regulations were published today in the Federal Register.
In general, providers of indoor tanning services will collect the tax at the time the purchaser pays for the tanning services. The provider then pays over these amounts to the government, quarterly, along with IRS Form 720, Quarterly Federal Excise Tax Return.
The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises. The regulations also provide an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee.
The IRS and Treasury Department invite comments - provided, of course, that you can wade through the 121 pages of regs...

We're married! Uh, no we're not....

Riddle: When does a divorce not follow a marriage ceremony?

Answer: When the marriage is a common law marriage.


Seem weird? Or maybe you didn't know that 10 states still allow you to form a common law marriage?

It's true: in Alabama, Colorado, DC, Iowa, Kansas, Montana, Rhode Island, SouthCarolina, Texas and Utah, it's still possible to form a common law marriage. Oklahoma's tried to ban them after 1998, but there's a question of whether that ban is valid. And Ohio (1991), Idaho (1996), Georgia (1997) and Pennsylvania (2005) allowed them up until recently (the year indicates the latest year that the requirements could have been satisfied for a valid marriage). New Hampshire will recognize a common law marriage for probate purposes only.

There's a catch: even though you never had a marriage ceremony of any type, if you have a common law marriage, you MUST get divorced for any subsequent marriage to be valid. And even though you cannot form a valid common law marriage in other states, the principle of comity would cause the marriage to be valid if it was formed in a state that did. This makes sense, since couples united in common law marriage have the same rights as those married by a JOP or in a religious ceremony.

Interestingly, the standards for such a marriage are not set in stone. For example, every state requires cohabitation for a common law marriage to be valid, but none specifies how long. When I was in law school, the rumor was 20 years, but in fact the standard seems only to be a 'substantial' period of time, without definition.

The other problem is that many people believe that common law marriage is recognized everywhere (it is, subject to the constraint that it was formed legally) and that it can be legally formed everywhere (it can't). And therein lies the rub - your client tells you he's married, but IS he? You have no affirmative duty to verify (imagine asking your client for a marriage certificate!), so you take him at his word. Then it turns out he wasn't actually married - he thought he was, because he bought into the common law myth - and now your client is forced to revise his return, with negative consequences.

Then there's the flip side - people who WERE common law spouses, who never got a legal divorce, then subsequently 'married' another. Imagine their surprise when you tell them that they aren't married to their new spouse!

Truth is, you'll never really be able to catch these before its too late. Some idle banter ("how'd you guys meet?" and the like) might give you clues to inquire further about the validity of one's marriage, but often this stuff rears its ugly head long after you've prepared the return and generally for an out-of-the blue reason. The best you can do is document, document, document, and keep in mind that all may not be as it seems.

Oh, and lest you think this is just an oddity - I've had two such situations in the last 4 months. Seriously. Fortunately, I've been the guy called in to fix things, but it makes me think every time I prepare a married couple's tax return...

Allowed vs. Allowable

For some odd reason, this tax season I've run across a number of tax returns which fail to calculate depreciation (and it's only February!).

My suspicion is that the prior preparer (not in my office) thought that they'd be clever and not claim depreciation, knowing that it's recaptured when the property is sold. You can't recapture what you haven't taken, right?

Wrong.

The IRS has a principle called 'allowed or allowable'. Here's their take on it:

"You must reduce the basis of property by the depreciation allowed or allowable, whichever is greater. Depreciation allowed is depreciation which you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.

If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable.

If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed)."

In short, you're paying tax on the depreciation recapture, whether or not you actually claimed it (and if you claim too much, on the excess, too). So those people who think they're being clever are in for a rude awakening when they sell the property. Sadly, because of depreciation, it is possible to sell a property for less than what you paid for it and still have a gain! Not good news for landlords.