Archive for Tax Tips

Last-Minute Year-End Tax Tips.

Here are a bunch of tax tips form the Bradford Tax Instuite.

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14 Nice-Try Tax Breaks Rejected by the IRS

Over the years, taxpayers have concocted a lot of zany arguments to justify their tax breaks. We’ve come up with 14 of the most creative ones that the courts decided did not quite work.

A Little Peace and Quiet

A busy tax preparer ran her business from her home. During tax season, she felt so harassed from clients calling her at all hours of the day and night that she occasionally booked a room at a local hotel for some peace and quiet. On her own return, she deducted the cost of this rest and relaxation as a business expense. Unfortunately for her, the Tax Court ruled that the cost of her good night’s sleep was a nondeductible personal expense.

Investigating Daddy’s Mysterious Death

A CPA paid millions of dollars to private investigators and other experts to help him find out whether his father, who died when the taxpayer was a child, was murdered or committed suicide. He deducted the payments on Schedule C as business expenses. He believed that if he gathered enough evidence, the story could become a book or even a movie. The Tax Court categorized his activity as a hobby and nixed the write-off.

My Little Princess

A couple’s daughter began competing in beauty pageants at age 9. She won between $1,000 and $2,000 in prize money each year that was deposited into her college savings account. The parents reported the income on their returns and also took large write-offs for the cost of travel, costumes and other expenses.

Because the prize winnings were compensation for the child’s services in the pageant, they are included in her income. And only she can deduct the costs, even though the expenditures were made by the parents. So the Tax Court denied the parents’ deductions.

Pizza for the Kids

A couple’s daughter began competing in beauty pageants at age 9. She won between $1,000 and $2,000 in prize money each year that was deposited into her college savings account. The parents reported the income on their returns and also took large write-offs for the cost of travel, costumes and other expenses.

Because the prize winnings were compensation for the child’s services in the pageant, they are included in her income. And only she can deduct the costs, even though the expenditures were made by the parents. So the Tax Court denied the parents’ deductions.

Love & Marriage & Self-Employment Tax

A married couple operated separate proprietorships. The wife’s operation turned a small profit, but her husband’s business generated a sea of red ink. When figuring their self-employment tax bill, the couple claimed the bonds of matrimony allowed them to offset his loss against her income to wipe out any self-employment tax liability.

The IRS disagreed, saying that even though they were married, his losses could not be used to reduce the self-employment tax bill on her income. Playing the referee in this tax dispute, the Tax Court sided with the IRS because the husband had no hand in running her firm. “The fact that they discussed their respective businesses over meals does not establish that [the husband] played a role in operating the realty business,” the ruling noted.

Payment for an Affair

After a police officer discovered his wife was having an affair with her doctor, he confronted the doctor and threatened a lawsuit. Eventually, the doctor agreed to pay $25,000 to settle the matter. The police officer claimed the $25,000 was a tax-free gift, but the Tax Court said that the payment is taxed as income because it was offered to settle the doctor’s misconduct.

Prostitutes and Porn

A tax lawyer spent more than $65,000 in a year on prostitutes and pornographic materials. He deducted the total as a medical expense, making a novel argument that cited the positive health effects of sex therapy.

However, the Tax Court red-lighted his write-off, saying that his conduct not only was illegal, but also wasn’t for the treatment of a medical condition.

Overdone Overdrafts

A couple who owned two struggling dry-cleaning businesses couldn’t get a loan from their bank because they were judged to be a bad credit risk. But they worked out a deal to regularly overdraw their account and then satisfy the overdraft after the bank called them. This odd financing method caused them to incur more than $30,000 a year in overdraft charges, which they deducted as a business expense.

This didn’t wash with the Tax Court, which nixed the write-off, saying the charges were unreasonably high. Not surprisingly, the pair wound up filing for bankruptcy.

Billing Mommy

A wife was sent to jail for killing her husband. Although she was named as the primary beneficiary of his 401(k) plan, state law barred her from receiving any of the funds because of her crime. So the account was paid to their son instead as the secondary beneficiary. He claimed that his mother should be taxed on the payout as the intended beneficiary. An Appeals Court gave him an A for effort but an F in taxation, ruling that he owes tax on the distribution.

Lunch with Cohorts

A partner in a law firm met every day with his colleagues at lunch to discuss the firm’s business, such as case assignments and settlements. But the IRS balked when he asked Uncle Sam to pick up part of the tab. The Tax Court came down on IRS’ side, saying that the cost of the meals was a non-deductible personal expense, even though business was discussed. The moral of the story is that while the partner can have his cake and eat it for dessert, he can’t get a subsidy from other taxpayers for his meals.

A Fish Tank

A couple’s tax returns were filed late and were riddled with questionable deductions, such as the cost of dining room furniture and a fish tank. That piqued the IRS’s attention. After an audit, the couple was slapped with a late-filing penalty and a big tax bill. They claimed that their late filing should be excused because their accountant had been sent to jail for killing her husband and the person who took over her office was incompetent. The Tax Court refused to cut them any slack.

Red Blood Cell Depletion Allowance

A woman with a rare blood type made more than $7,000 in a year as a blood plasma donor. She sought to offset the income by claiming a depletion deduction for the loss of both her blood’s mineral content and her blood’s ability to regenerate.

While depletion is a proper write-off for firms that remove natural deposits of minerals such as coal and iron ore from the ground, the Tax Court decided that individuals cannot claim depletion on their bodies.

A Trophy Collection

Large charitable deductions are one way to attact IRS attention (especially when they’re so big that they have to be claimed over multiple years.) If they’re in the form of non-cash contributions, where the question of “what’s it worth?” is at stake, the likelihood of an audit goes up.

Claiming a $1.43 million write-off for animal hides, skulls, horns and other hunting specimens he donated to charity is how a big-game hunter found himself in the crosshairs of the IRS. The hunter claimed there was no way to determine a market price for his “museum quality” collection and based his deduction on what it would cost to replace them—that is, to return to Africa and the other locales where he’d hunted these trophies, shoot more animals, and ship them home.

The IRS objected, allowing a deduction of $163,045. In court, a variety of experts on taxidermy presented testimony. Ultimately, the Tax Court was convinced by the IRS’s expert, who testified that there had “always been a market” for such items, and that, in any case, the donated items were just “remnants and scraps” worth a fraction of what the hunter claimed; in fact, far less than the IRS was willing to let him take.

Letting Others Burn Down the House

Homeowners who want to tear down their homes and rebuild sometimes ask firefighters to burn them down. This training exercise serves the public good. But to get a deduction, an Appeals Court says that the homeowner must show that the value of the donation exceeded the value of the demolition services provided. Since the house in the case before the court had to be destroyed anyway to make room for its successor, its value was negligible and didn’t exceed the value of the demolition services that the owners received, so the homeowner’s charitable deduction was denied.

Consider remodeling your home

You can exclude up to $250,000 of the gain on the sale of your main home (of $500,000 for married filing jointly) if all you owned and lived in the home for at least 2 of the last 5 years, and if you didn’t sell another home within 2 year.
What this means is that if you spend some money to remodel, the increase in your sales price on the house may be tax free.
For example, say that your house is worth $100,000. But you spend $20,000 to remodel the kitchen and bathroom. If that remodel allows you to sell the house for $130,000, the extra $10,000 you get ($30,000 price increase minus the $20,000 cost of remodel) is tax free.

DISCLAIMER:

THE TAX TIPS ON THIS WEBSITE ARE FOR GENERAL INFORMATIONAL PURPOSES ONLY, AND MAY NOT APPLY TO YOUR PARTICULAR TAX SITUATION.  PLEASE CONSULT A COMPETENT TAX PROFESSIONAL ABOUT ANY QUESTIONS YOU MAY HAVE.

Don’t shy away from a home office deduction

  • Claiming a home office deduction is easier now, partly because Congress recognized that the work force has changed. Many more people are working out of their homes, so it’s not the audit red flag that it used to be. If you legitimately qualify for the deduction, there should be no problem. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there. But you must use the space exclusively for business.

 

  • You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is based on the ratio of the square footage of the office to the total area of the house. A middle-class taxpayer who uses a home office and pays $1,000 a month for a two-bedroom apartment and uses one bedroom exclusively as a home office can easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more.

 

  • One home office trap that used to scare away some taxpayers has been eliminated. In the past, when you sold your house, whatever portion of your home was an office did not qualify for the tax-free treatment given to the rest of your house. But the Congress has had a change of heart. A home office still qualifies for tax-free profit. You do, however, have to pay tax on any profit that results from depreciation claimed for the office after May 6, 1997. It’s taxed at a maximum rate of 25 percent. Depreciation produces taxable profit because it reduces your tax basis in the home; the lower your basis, the higher your profit.

Provide dependent taxpayer IDs on your return

Provide dependent taxpayer IDs on your return

  • Children and other dependents provide substantial tax breaks, starting with the exemption of $3,700, and a $1,000 child tax credit for each child under age 17. But you have to provide a Social Security Numbers for your children and other dependents on your return. Otherwise, the IRS will deny the tax breaks.
  • Be especially careful if you are divorced. Only one of you can claim your children as dependents. With today’s computers, it’s fairly easy for the IRS to check that spouses aren’t both using their children as a deduction. If you forget to include a Social Security number for a child, or if you and your ex-spouse both claim the same child, the IRS will contact you to straighten things out.
  • The $1,000 child tax credit begins to phase out at $110,000 for married couples filing jointly and at $75,000 for heads of households.
  • After you have a baby, file for your child’s Social Security card quickly so you have the number ready at tax time. Some hospitals will do this for you. If you don’t have the number you need by the tax filing deadline, the IRS says you should file for an extension rather than sending in a return without a required Social Security number.

 

Roth IRA

Consider a Roth IRA. Although Roth contributions are not deductible, they could be the better than a traditional IRA because all withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement.

Contribute to retirement accounts

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  • If you haven’t already funded your retirement account for 2013, you have until April 15, 2014. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.  But don’t forget that the sooner you make the contribution the sooner you get tax-free growth.
  • To qualify for the full annual IRA deduction in 2012, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, you must have adjusted gross income of $58,000 or less for singles, or $92,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $173,000.
  • For 2012, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year).