Weekend Investor’s recent feature, “Write Off Your Job Hunt!” offers a tax guide for the unemployed. It has drawn much reader interest and a few questions.
For answers we turned to Douglas Stives, a professor at Monmouth University in West Long Branch, N.J. Stives was a full-time CPA for 36 years and still practices part-time in addition to teaching at Monmouth’s business school. He prides himself on making optimum use of tax deductions allowed by Uncle Sam, and last spring he was featured in a WSJ article dubbing him “The Most Tax-Efficient Man.”
Stives agrees with experts cited in the story that often a job hunter’s best hope for maximizing deductions is to set up a Schedule C sole proprietorship and look for part-time as well as full-time work, so that the same deductions work for both.
Like them, he also stresses that taxpayers must have some income to offset the deductions. “The good news is, you don’t have to have income in the first year, just in three out of five years,” says Stives. “It also helps if you can show that some of the future income was generated by your earlier expenses.”
The August 6 Tax Report on the controversial “carried interest” issue attracted many comments. Some readers defended the provision’s current generous tax treatment and said changing it could damage the U.S.’s ability to create jobs and compete internationally.
“Does America really want to drive away the private equity industry when international competitiveness and international demand for U.S. products is more threatened than ever?” said Bernard Peperstraete of NGN Capital in New York.
Mark Heesen, president of the National Venture Capital Association, agreed. In a statement to the Wall Street Journal, he said, “Continuing to apply a capital gains tax rate to carried interest earned by venture capitalists who invest long-term to build new companies and create jobs is not only appropriate by definition, but from a public policy perspective it is paramount to U.S. economic recovery as we desperately need to encourage - not discourage – this high growth activity.”
Others disagreed. An investment manager from Hilton Head, S.C. said, “The carried-interest rules benefit me personally as a manager of investment partnerships. But even I can’t argue that they are sound tax policy.”
A few readers had technical questions. “Do you think REITs and Master Limited Partnerships would be included in changes on carried interest?” asked one adviser.
Independent tax analyst Robert Willens said no, because the dividends from most REITs and MLPs are already taxed at ordinary income rates. “They aren’t part of the discussion on carried interest,” he said. Neither has there been talk of changing the capital gains tax rates for timber REITs.
While some believe all carried interest should be taxed as ordinary income, others suggested a less radical approach. It is to tax the original award of carried interest at ordinary income rates but then allow further appreciation to be taxed as a capital gain.
Here’s an example: Say that Ted, Joe and Jane form a partnership. Ted and Joe each put in cash in return for an 80% of the profits, while Jane contributes her expertise in return for a 20% share. Jane would be taxed at ordinary income rates on her 20% profit share when she receives it. After that, her future appreciation would be taxed as capital gain.
Recently, the Internal Revenue Service announced an increase in standard mileage rates taxpayers can claim for the final six months of 2011. Beginning July 1, the rate for business miles increases to 55.5 cents from 51 cents and to 23.5 cents from 19 cents per mile for medical and moving expenses. The per-mile deduction for charitable expenses remains unchanged, at 14 cents.
“This year’s increased gas prices are having a major impact on individual Americans,” said IRS Commissioner Douglas Shulman, so “the IRS is adjusting the standard mileage rates to better reflect [them].”
The business standard mileage rate is used by many taxpayers to compute deductible costs of a using a car in a business in lieu of tracking actual costs. The rate is also used as a benchmark by the federal government and many businesses to reimburse employees for mileage.
Wouldn’t it be nice to write off that flight to Hawaii? Or what about the champagne-and-caviar-adorned soirée at Carnegie Hall? Maybe you can, says Doug Stives, a CPA from Red Bank, N.J., who re-engineered his life in 2006 to become the Most Tax-Efficient Man in America, as Tax Report columnist Laura Saunders writes. Stives shared a couple of practical, tax-saving suggestions with SmartMoney.com.
Get on someone’s payroll. Stives had been a partner at an accounting group for nearly four decades when he decided to take on a role as a tax and accounting professor at Monmouth University in central New Jersey. He also started his own consulting business on the side. While his paycheck is now 25% lower than it had been, his take home is nearly 90% as much, says Saunders. Stives estimates that the fringe benefits from working at the university – health insurance, disability insurance, life insurance, pension-plan coverage, unemployment coverage and workmen’s compensation coverage, among others – add up to about $40,000 a year.
Mix business and pleasure. Usually it’s a No. 1 professional no-no. But combining your work life with your personal life can slim the price tag of otherwise expensive vacations. As a part-time consultant and full-time teacher, Stives travels a considerable amount for seminars and teaching gigs, often to alluring vacation spots like Hawaii and Lake Tahoe. To deduct airfare, you need to spend more than half your working days on business, says Stives. Weekends don’t count, nor do travel days. If Stives leaves for Hawaii on a Friday, works three days mid-week and returns home the following Monday, he’s squeezed a mostly tax deductible 11-day trip out of three working days. (Hotels, meals, and rental cars are only partly deductible.) But make sure you don’t get carried away, he says. It’s a good idea to pay in full for at least some trips you take to show the IRS you don’t deduct everything.
Do you remember that wonderful federal income tax credit of up to $8,000 that was supposed to jump start the nation’s housing market?
Skeptics (like me) thought the homebuyer credit was doomed to failure, and we were right – big-time!
Two and a half years later, sales in most residential markets are still anemic and prices are still falling.
The real estate gurus at Case-Shiller expect more bad news: prices could fall another 15%-25%.
Sadly enough, the pessimists at Case-Shiller have proven to be among the few experts that you should believe anymore. The latest home sales numbers from February give them additional credence. Sales are still falling and so are prices.
So what went wrong with the vaunted homebuyer credit? Why didn’t it create the ongoing momentum for home sales our Washington politicians claimed it would.
The answer is simple. When all was said and done, the credit accelerated purchases by people who were already going to buy homes anyway. Once those folks collected their handouts, and the credit expired, there were no buyers in line behind them to keep things rolling. In other words, the government’s cash-for-condos scheme turned out just like the equally ill-conceived cash-for-clunkers program.
The moral of this story: taking money from the general taxpaying public and dishing it to people who happen to be homebuyers was no way to stimulate the real estate market. In fact, handing out cash to subsidize any particular economic sector won’t work in the long run. Once the subsidies run out, the law of supply and demand kicks back in with a vengeance. So the next time you hear about cash for (fill in the blank), bombard your elected representatives with emails in opposition. If they get a few billion messages, they just might pay attention.
Millions of taxpayers - many of them seniors – could be in for an unpleasant surprise this April. They may end up owing Uncle Sam because of a snag in the Making Work Pay Credit, according to a Treasury Inspector General for Tax Administration report. The credit, designed to put more money in your hand (so you’ll spend it) backfired on a number of other groups, too.
TIGTA expects the credit to trip up about 13.4 million taxpayers over two years including pensioners, single taxpayers with multiple jobs, married couples with two incomes, workers without valid Social Security numbers (typically nonresident aliens), dependents who work, and some Social Security recipients who work.
The credit didn’t simply arrive as a check in your mailbox. Rather, your employer advanced the credit by decreasing your withholding so more money showed up in your paycheck. The government designed the credit to stimulate spending and fuel the economy. And that’s where the trouble started.
IRS’s adjusted withholding tables didn’t take into account the panoply of circumstances that affect withholding and eligibility, says the report. For some, that created a “vulnerability” of being underwithheld. Several taxpayers got the credit when they shouldn’t have. Still others got more of the credit than they were due. Keep in mind, though, that the affected taxpayers may not necessarily see a bill for the exact amount underwithheld. Some could see less of a refund or more of a balance due than expected, says Jackie Perlman, a tax analyst at H&R Block’s Tax Institute.
For 2009 and 2010, the Making Work Pay Credit is a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns. (That said, when the IRS compiled new withholding tables, they considered that a taxpayer selecting the married withholding rate could have a working spouse. To help offset the problems that come with underwithholding, the IRS set a maximum reduction for a married person at $600 rather than $800, says Perlman.) The credit phases out at a modified adjusted gross income of $75,000 to $95,000 ($150,000 to $190,000 for joint returns). To qualify, you need earned income, and you can’t be a dependent or nonresident alien.
Say you’re a working senior who received the Making Work Pay Credit as well as a one-time $250 Economic Recovery Payment—given to disabled recipients of Social Security, among other taxpayers. You’d have to reduce the amount of the Making Work Pay Credit claimed by $250. So if you got a $400 Making Work Pay Credit and the ERP you’d have to whittle down the amount of the credit claimed to $150. Some seniors didn’t know they couldn’t claim the entire credit. And some didn’t know they got the credit in the first place, says Mary Johnson, a Social Security and Medicare policy analyst at the Senior Citizens’ League.
Though a tax bill could be news to you, the headache is what’s left of a stubborn hangover from 2009. “It’s not new and it’s not a mistake,” says H&R Block’s Perlman. “Misinformation or lack of understanding of how it works” is the cause for some of the some of the unwelcome surprises. A TIGTA survey points to the fact that despite IRS outreach efforts, a majority of affected taxpayers weren’t aware of the effects of the credit or the way they could avoid negative effects of the credit.
Peanuts creator Charles Shultz says love is sharing your popcorn. Sharing community-property income doesn’t have quite the same ring. But same-sex couples in California, Nevada and Washington will need to figure out how to share their nest and everything in it on their Form 1040s. All three states recognize domestic partnerships and, for 2010, will apply so-called community property laws to such couples. The system attributes income and property acquired during marriage equally to both partners, no matter who earned it. The IRS last year issued guidance recommending that same-sex couples in these states calculate their total community income and split it in half. Sound simple? It’s not.
The caveats are as diverse and numerous as the filers themselves. Would splitting one self-employed partner’s income of $200,000 give his unemployed (thus non-earning) partner Social Security credits? Then, suddenly, the two incomes are less than the $106,800 FICA cap. So would the couple have to pay Social Security taxes twice? And how would retirement plans figure into community property? Stock options? Deductions? Credits? The stack of questions grows ever higher.
One of the most pressing questions is what qualifies as community property. “I’ve talked to a lot of tax-return preparers and even they have a huge number of unanswered questions,” says Patricia Cain, a law professor at Santa Clara Law, who specializes in taxation and estate planning for same-sex couples.
Publication 555, which explains how community-property rules apply to income tax reporting, instructs filers to split wage income 50-50 on line 7. But “[n]obody I know will report income that way,” says Cain. “If income is earned by one person and allocated to another, can that [second] person call it earned income?” she asks. Cain suspects the answer should be no. “The IRS will connect the wage income from your W-2 with your Social Security number” and see a discrepancy, she says. Cain suggests each partner write his or her own income on line 7 of Form 1040. Next, write half of the community share figure on line 21, which asks filers to list “other income” by type and amount. She says to include your partner’s Social Security number to indicate that this figure is your share of the community income.
Admit it – ever since that first electronic game of solitaire, we’ve been hooked on computer games. The more competitive of us like to play against each other, and there are lots of online sites where we can compete for free or cash. My favorites include WorldWinner.com, Pogo.com, King.com and Games.com. These are places where you don’t get surprise viruses piggybacked on the software.
Generally, when playing games for money, all you do is spend – paying for the games. Even when you win, you “re-invest” the proceeds into more games. It’s the rare individual who walks away from online games with a net profit for the month.
Win or lose, U.S.-based online game companies are issuing a 1099-MISC based on your gross winnings. Since there is no real income, you wish they could net the wins and losses.
Unfortunately, as the law now stands, they can’t. And it’s not hard to generate wins worth several thousand dollars a month, even when your payments into the system are only $50 a session. Why? Each time you win a game, your gross winnings increase. You use your winnings to pay for the next game. If you’re good, that $50 might last a week or even a month. By the end of the day, the week, the month, you will have no money. But you may have reinvested your winnings to the tune of several thousand dollars for that period of play.
Your income: It doesn’t seem like the figure should be terribly complicated to calculate. Yet as April approaches we realize that, thanks to our tax system, a number of deductions can manipulate the amount of your taxable income. Depending on your write-offs, for instance, your taxable income could be anywhere from half to almost all of your gross income, says Tax Guy Bill Bischoff.
The biggest and most common deductions–home mortgage interest, charitable donations, and so on—leap to mind as soon as you get your hands on that Form 1040. But there are several others, and some will catch you by surprise. Here are a few more that may have slipped below your radar.
1. Protective Clothing Required at Work. Need to buy your own lab coat? Apron? If you’re required to wear it at work, and the item isn’t provided by your employer, then it’s deductible, says Greg Rosica, tax partner at Ernst & Young and contributing author of the “Ernst & Young Tax Guide.” This deduction even applies to cosmetics and related application tools for makeup artists and beauticians. But don’t get too carried away. Just because your employer requires you wear a suit to work, doesn’t mean the IRS will let you deduct the cost of that Hugo Boss hanging in your closet. If you’d otherwise wear the item in your everyday life–say to dinner, to church, to visit your mother-in-law–then it doesn’t pass the test, says Rosica.
2. State and Local Sales Tax. This primarily targets residents of states like Texas, Washington and Florida that don’t have state income taxes. The IRS provides estimated sales-tax tables based on income — but if you bought any big ticket items (say, a car or a boat), you may want to keep track of the items yourself. Lawmakers extended this deduction for 2010 and 2011.
Sole proprietors, partners, limited liability company (LLC) members, and S corporation shareholders can deduct qualified health insurance premiums paid to cover themselves and family members. This is the so-called self-employed health insurance deduction.
For 2010, you claim it on Line 29 on Page 1 of Form 1040. Because it’s an above-the-line deduction (meaning a deduction claimed on Page 1), you don’t have to itemize to benefit.
Medicare Part B Premiums Suddenly Count as Qualified Expenses
For years, the IRS had taken the position that Medicare Part B premiums did not count as qualified health insurance premiums. This was bad news if you are an older small business owner because your Medicare Part B premiums for 2010 could range from about $1,300 to over $4,200, depending on your income. If you are married, your spouse’s premiums could be in the same range. So we can be talking about major bucks.
Now for the good news: with no fanfare, the IRS suddenly reversed course on the Medicare Part B premium issue. We know this because the 2010 instructions for Line 29 of Form 1040 explicitly allow you to include Medicare Part B premiums in your health insurance costs for purposes of the self-employed health insurance deduction.
Make sure you (or your tax preparer) take the new taxpayer-friendly IRS attitude into account when putting together your 2010 return. The additional Line 29 write-off could lower your federal income tax bill by hundreds of dollars or more.
The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at email@example.com.