[Diop]

Today’s Tax Tip of the Day - Home office expenses can be claimed by sole proprietors/self‐employed and in some cases by employees. In order to be allowed to claim home office expenses, both sole proprietors/self‐employed and employees who have an office in their homes must be able to meet the exclusive and regular use of a home test.

To qualify, a taxpayer must have a specific part of a house, mobile home, large boat; or a garage, barn or other structure attached to such – though not necessarily a complete room – set aside and used regularly and exclusively as the principal place of business, or the individual “meets or deals” with customers in the home in the normal course of business. The area is not limited to a single room, multiple rooms may qualify.

Please see this clip from the best movie of all time for a demonstration –

[NewDayNewFace]

How much money can I depreciate for leasing a vehicle?

I have a LLC and primary use for this car is for business use.

[Diop]

(03-01-2017 07:58 PM)NewDayNewFace Wrote:  

How much money can I depreciate for leasing a vehicle?

I have a LLC and primary use for this car is for business use.

Leased vehicles are not depreciated, but you can deduct the business portion of the lease payment, even if you use the car exclusively (100%) for your business.

I despise TurboTax, but they actually have a pretty good data sheet about business use of vehicles. Check it out if you're wondering how to handle these deductions.

[NewDayNewFace]

Good drop Diop,

I was actually thinking of leasing a Maserati and it could help me with taxes. I like new Vehicles so a lease would be ideal because if it works out well I can get another one in a couple years. I'd be able to deduct the insurance I pay for the vehicle as well as the following:

Gas and oil
Maintenance and repairs
Tires
Registration fees and taxes*
Licenses
Vehicle loan interest*
Insurance
Rental or lease payments
Depreciation
Garage rent
Tolls and parking fees*

I'm an indépendant consultant with an S corp. Probably 80% of my driving is business related.

[Diop]

Today’s Tax Tip of the Day - If you own a business outside of the U.S. and you are a citizen or a permanent resident (green card holder) or if you have had substantial presence here over the last few years and thus qualify as a tax resident, you are subject to taxation on your worldwide income and accordingly must file a U.S. tax return related to your overseas business. The U.S. is unique in being the only developed country in the world that requires this.

Despite this, you may qualify to exclude from income up to $101,300 (for 2016) of your foreign earnings, as well as exclude or deduct certain foreign housing amounts. To claim this foreign earned income exclusion, you must meet all three of these requirements (hopefully Roosh V and several others on here already qualify and take advantage of this) –

1)Your tax home must be in a foreign country.
2)You must have foreign earned income.
3)You must be either a U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year, or you are physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

Also, U.S. citizens must annually report their financial interests in or signatory authority over any type of financial account in a foreign country with a value of $10,000 or more during the calendar year to the Treasury Department by filing an FBAR on or before April 18 (tax day). E‐filing of FBARs is now mandatory, and it is not filed with your tax return.

Failure to file the FBAR may result in a penalty of up to $10,000 if the failure is non‐willful. If the failure is willful, the penalty is up to the greater of $100,000 or 50% of the account balance, in addition to whatever criminal penalties may apply.

[Diop]

Today’s Tax Tip of the Day - Legal fees related to individuals are usually not deductible. To be deductible, legal fees must be related to: (1) producing or collecting income (business related); (2) managing, conserving, or maintaining property held for producing income (rental property, etc.); and (3) determining, contesting, paying, or claiming a refund of any tax.

If you use a contingent fee lawyer, you’ll usually be treated (for tax purposes) as receiving 100% of the recovery even if the defendant pays your lawyer his contingent fee directly. That’s why many clients say they are paying tax on lawyer’s fees they never received, and actually lose money after taxes by winning a lawsuit.

[Diop]

Today’s Tax Tip of the Day – Individuals should keep records that support items on their tax return for at least three years after the return has been filed. If you live in a state that levies an income tax, you should keep supporting records for four years because the IRS shares audit results with states, and by the time states receive and process the IRS audit results, another year has passed.

Examples of records and documents you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment, and any other records to support deductions or credits claimed.

[DJ-Matt]

(03-27-2017 11:39 AM)Diop Wrote:  

Today’s Tax Tip of the Day – Individuals should keep records that support items on their tax return for at least three years after the return has been filed. If you live in a state that levies an income tax, you should keep supporting records for four years because the IRS shares audit results with states, and by the time states receive and process the IRS audit results, another year has passed.

Examples of records and documents you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment, and any other records to support deductions or credits claimed.

I have heard stories of people who got audited and saved more than the required 3 years, and the IRS went through the older ones as well. Can they do that? I shred mine after 3 years so I don't have to worry about it.

[Diop]

(03-27-2017 01:03 PM)DJ-Matt Wrote:  

(03-27-2017 11:39 AM)Diop Wrote:  

Today’s Tax Tip of the Day – Individuals should keep records that support items on their tax return for at least three years after the return has been filed. If you live in a state that levies an income tax, you should keep supporting records for four years because the IRS shares audit results with states, and by the time states receive and process the IRS audit results, another year has passed.

Examples of records and documents you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks or other proof of payment, and any other records to support deductions or credits claimed.

I have heard stories of people who got audited and saved more than the required 3 years, and the IRS went through the older ones as well. Can they do that? I shred mine after 3 years so I don't have to worry about it.

In cases of fraud and criminal activity I believe they can, yeah. It's how they got Al Capone...

[Diop]

Today’s Tax Tip of the Day – Tax planning is beneficial in identifying opportunities to lower tax liability and/or avoid underpayment penalties based on the known components. Common variables include anticipating future changes in income, filing status, capital gains realizations, and fund distributions. Taking certain actions now will affect an individual’s tax situation this year and in future years as compared to taking those actions in future years, or when possible, spreading income over multiple years.

You should start tax planning early – timing the receipt of income so that it is claimed in years when it will be taxed at the lowest tax rate, and claiming deductions in years when you are in the highest tax bracket. Many individuals find that they have more flexibility in accelerating or deferring expenses that generate tax deductions rather than trying to time income recognition.

[Diop]

Today’s Tax Tip of the Day – If you fail to report some income, you’ll want to file an amended return as soon as possible to minimize interest and penalties. Also, if you fail to claim a deduction or credit, you should file an amended return. If you are owed a refund, you should wait to receive that refund before filing an amended return. An amended return (Form 1040X) has to be filed within 3 years from the date you filed your original return or within 2 years from the date you paid the tax, whichever is later.

Also, If you can’t pay your taxes due when you file your return, you can request an installment agreement. When the IRS approves an installment agreement, you are still required to pay interest at a certain rate and the fees for setting up the agreement. If you owe $10,000 or less the IRS can’t turn down your request for an installment agreement if you meet the requirements, i.e. during the past 5 years you have timely filed all income tax returns and paid all income taxes without entering into an installment agreement, and you agree to pay the full amount owed within the applicable timeframe and comply with all filing requirements and payment of taxes while the agreement is in effect.

[NewDayNewFace]

What is your go to tax software Diop?

[Diop]

(04-03-2017 06:26 PM)NewDayNewFace Wrote:  

What is your go to tax software Diop?

I use a program called ATX, which is owned by CCH/Wolters Kluwer. It's a top-of-the-line tax preparation software designed to prepare and file hundreds of returns, so it's very expensive. Unless you're in the tax preparation business, it's not the type of program you'd want to use for do-it-yourself return preparation.

It was touched on before, but I suppose Tax Act and TurboTax are probably the two best DIY programs, though I've always despised TurboTax. I'd say give Tax Act a try first and if all else fails, look into TT and H&R Online (puke).

[Diop]

Today’s Tax Tip of the Day – Although the overall individual audit rate is about 1.11%, the odds increase dramatically for higher‐income filers. Data shows that Americans with more than $100,000 of income are nearly twice as likely to be audited as those with $50,000 ‐ $100,000 of annual income. Once you hit $200,000 of income, your audit chances double again. If you somehow have $1,000,000 or more of income, your audit risk doubles yet again.

Today’s Tax Tip of the Day – There is no sure way to avoid an IRS audit. However, there are certain deductions and other things that tend to catch the eye of the IRS and bring about audit notices. Some of these include improper gambling losses, taking higher than average deductions, taking large non-cash charitable deductions, reporting business losses, excessive deducting of business meals, travel, and entertainment expenses, claiming 100% business use of a vehicle, failing to report a bank account, claiming rental losses, and lastly and most importantly – using the wrong tax preparer.

[Diop]

Today’s Tax Tip of the Day – To survive an IRS audit, be aware that the IRS is looking for two major things if you have a business: that the expenses you reported really were business related, and that you have actually reported all your income. The IRS examiner routinely adds up all the deposits to all the taxpayer's bank accounts. This total will usually prove that small business taxpayers have far more deposits in their bank accounts than their tax return shows as income.

Beware, this is a trap. After all, when you use several bank accounts, you routinely transfer funds between them, have to redeposit bounced checks, or deposit cash advances and other loans. To avoid being ambushed, you should consider assembling a spreadsheet to show the IRS which deposits were not income.

A few more IRS audit survival strategies: Always find original receipts for depreciable assets, because the IRS has a right to demand the purchase documents for any assets still on your depreciation schedule. You also need to have logs for your vehicle usage. You must prove the total miles you drove the car during the year, as well as your business mileage. Anytime you use mapping software to locate your destination, save the file as a PDF file and attach it to your calendar. At least write down the total miles.

If you are missing important documents to support your facts or deductions, find them, reconstruct them, or get written affidavits from people who can objectively verify the information.

Final IRS audit advice - Be sure to try to work with the IRS agent to address the issues in your case. Be honest and polite to the agent and try to give them the information they are asking for. Withholding information is never a good practice and the IRS has rights to subpoena information from taxpayers. Answer the questions put to you as best you can. Don’t lie. Answer only that which is asked of you. Do not volunteer any information.

Don’t be difficult – it may be tempting to try to make the field agent’s life a little more difficult by providing a shoe box full of receipts, for example. Remember that your goal is to establish a good rapport with the audit agent so that an issue resolution can be reached with minimal consequences to you.

[Diop]

Today’s Final Tax Tip of the Season – If you aren’t ready to file your tax return by tonight (April 18th), you can apply for an automatic six-month extension of time to file as long as it’s submitted before midnight. You must estimate your taxes due as well as submit your payment with this extension, and take special care to be as accurate as possible with your estimated payment due.

If the IRS thinks your estimate of the amount of tax you owe is unreasonable, it may disallow your extension and assess a late-filing penalty. If you underestimate the amount of tax you owe by more than 10%, you’ll have to pay interest on whatever amount you fail to pay by tonight.

Feel free to send me a PM if you have any questions about filing an extension. Cheers!

[Hypno]

I've always used Turbo Tax but their prices have nearly tripled. Have already filed for an extension. Will check out Tax Act, thanks.

[Diop]

I've got a slight lull today from my busy season so I thought I'd share some insights into how my clients here in the U.S. have been affected by the Tax Cuts and Jobs Act (a.k.a. tax reform) this tax season so far. For those who aren't familiar, 2018 was the first year of major tax law changes here in the U.S. and it's been interesting to say the least. I've prepared about 150 individual tax returns and around 50 business (S-Corporation, Partnership) tax returns so far, and here are some of the winners and losers from my observations:

WINNERS

1) Small Business Owners. Whether you have a Small Business Corporation (S-Corp), an LLC, or are just a sole-proprietor (Schedule C), the new tax regulations are a boon. There is a new 20% deduction for QBI (Qualified Business Income) under section 199A, which is a bit complicated but is essentially the net profit you make on your business, among a few other factors. So if your net profit is $100,000, you can generally take a $20,000 (20%) deduction ON TOP of all of your other business deductions, resulting in only $80,000 in taxable income. Many of my business clients are seeing some great results from this new feature and it should really help increase small business growth, which is never a bad thing. The media likes to hype up how large corporations (C-Corps) benefited from their permanent tax rate decrease (from 35% to 21%) as a result of the new laws and while I have some mixed feelings about that, one thing that can't be denied is the net positive it will have for small business corporations going forward as well.

2) Real Estate Investors. People who earn real estate (rental) income generally have it categorized as passive income, meaning it's subject to various limitations concerning deductions and losses. The new tax regulations allow real estate investors a "safe harbor" designation that basically requires 250 hours of work a year on each set of rental real estate activities for it to qualify for the 20% section 199A QBI deduction (see above). So many of my clients who are landlords have been taking advantage of this new clause, resulting in an extra 20% reduction in rental income just like the business owners I mentioned above. Also, the work hours required for this safe harbor designation may be performed by the owner or agent, and logging of work hours must be maintained but only starting in 2019 so a number of my clients are seeing some great write-offs for 2018 as a result of this. There is also no limitation for state and local real estate tax deductions on rental properties, which is very important (keep reading to find out why).

3) Those With Children in Private Schools. Parents who have children in private schools can now use 529 plans to pay for them (up to $10,000 per year). This includes K-12 education tuition and related educational materials and tutoring, and it's a huge benefit because it's tax free. These used to be reserved for college tuition payments, but tax reform allowed many of my clients to pay for their children's 2018 private school tuition expenses using 529 distributions, totally tax free. It makes a difference when you live in a high-cost area with lousy public schools such as where I am, and I've definitely seen a number of my clients take advantage of this benefit since the regulations took effect last year.

LOSERS

1) Salaried (W2) Employees Who Have Unreimbursed Employee Expenses. Prior to 2018, if you worked for a company and had a lot of out-of-pocket expenses required for your job you could claim these as deductions on your tax return. They would first be reported on Form 2106, which would then flow into Schedule A miscellaneous itemized deductions (subject to 2% of your adjusted gross income). Tax reform completely eliminated this and I've had a few clients get absolutely screwed as a result. It's usually those in sales who have to travel a ton and pay for gas mileage without any employer reimbursement who got crushed with this. They used to be able to claim thousands worth of mileage deductions on Schedule A to help get them sizable refunds, but now....nothing. Raising the standard deduction to $12,000 (single)/$24,000 (joint) would seem to offset this, but....see the next few paragraphs.

2) Married Property Owners in High-Tax States. Tax Reform now limits state and local tax deductions to $10,000 on Schedule A (itemized deductions), which means you get royally fucked if you live in a state like California, New York, or Illinois. I live in one of these states and so do my clients, and many of them are feeling the burn from this new regulation.

Let's say in 2017, you had $7,000 in state income taxes withheld/paid from your W2 and your spouse had another $6,000 in state tax withholding, and you own a house with total annual real estate taxes of $15,000 (very common where I live). You add this up and it results in $28,000, a healthy chunk of state and local tax deductions to write off on Schedule A. Under the new 2018 regulations, this deduction gets capped at $10,000 and you are now out $18,000 in Schedule A deductions.

The common retort to this is that the standard deduction was doubled to $24,000 under the new regulations for married couples (as I mentioned above), but when you combine high mortgage interest payments (tax deductible) with all of the above these couples are now getting a raw deal compared to prior years. In my example here, the married couple paid mortgage interest of roughly $13,000 so they would have exceeded the $24,000 standard deduction limit regardless, but now they have to claim $18,000 less in itemized deductions compared to 2017. Funny how the Republicans knew this would screw over people in high tax states. I wonder what those states have in common with each other.....

3) Those Who Are About To Be Divorce Raped. Some of you on this forum will undoubtedly already know what I'm talking about here. Taxpayers who get divorced after 12/31/18 will no longer be able to deduct alimony payments. That's why there was an uptick of finalized divorces towards the end of last year - not only are alimony payments not deductible starting in 2019, but those who receive alimony still have to claim it as ordinary taxable income so that side of the equation didn't change at all.

I've already had a slew of (male) clients come in telling me that they divorced their spouses since I last saw them, and this regulation was one of their major reasons why they knocked it out as quickly as they could once they determined a separation was inevitable. If you are currently married and foresee a divorce that will involve alimony payments in your future, Sorry....I don't know what to tell you. You missed the boat.

One other note - many of my clients are getting smaller refunds this year, and they think it's because the new tax regulations increased their taxes. This is not usually the case, because in most instances their employers withheld less in taxes throughout the year (in response to the new regulations) so their paychecks were subsequently increased throughout 2018. Keep in mind that your refunds are only one part of the equation, so don't freak out if you're getting less back than you did in prior years.

Lastly, don't believe the CNN/MSNBC/NY Times, etc. hype about taxpayers getting screwed due to smaller refunds. That's just typical NPC media hysteria trying to cause an uproar so don't pay any attention to it. As I outlined above, some people were worse off, but many, many regular American citizens benefited from the new tax laws and it remains to be seen what will happen in the future as a result of these changes.

[doc holliday]

With regards to the married folks losing some deductions, the flip side to that is that their rates got lowered pretty significantly so that will help them offset what ever tax increase they'd get due to losing some of those deductions, right Diop?

[SamuelBRoberts]

Great post, Diop! Thanks so much for taking the time to write it up.

+1 rep from me. Forum needs more posts like this.

[doc holliday]

(02-23-2019 07:14 PM)SamuelBRoberts Wrote:  

Great post, Diop! Thanks so much for taking the time to write it up.

+1 rep from me. Forum needs more posts like this.

Yeah Diop is a good guy. He does my taxes and my ex wife liked his work so much that he even does her taxes now! Anyone on RVF needing their taxes done should seriously use Diop. He's not even that expensive. Or you could use Turbo Tax and have all of your sensitive financial data hacked into.

[Diop]

(02-23-2019 07:13 PM)doc holliday Wrote:  

With regards to the married folks losing some deductions, the flip side to that is that their rates got lowered pretty significantly so that will help them offset what ever tax increase they'd get due to losing some of those deductions, right Diop?

I've seen it go both ways so far, doc. Generally the very high earning double-income no kids (DINK) married couples who got screwed with the state and local itemizing limitations on Schedule A had their taxes increase slightly, on the whole. Almost everyone else saw their taxes lowered though, so it would be a stretch to say that the middle class saw no benefits to the tax changes. Some might say corporations benefited more, but that includes small businesses and I think anything that helps small business owners out can't be a bad thing.

Thanks for the kind words!

[Lampwick]

+1 Diop. I like your breakdown of the new tax law, and who it applies to in practical terms.

Are you familiar with the Mega Backdoor Roth?

This is a technique that allows you to contribute an extra $37,000 per year to a Roth IRA (above the $6,000 per year limit). The catch is that your employer's 401k plan has to support after-tax contributions to a traditional 401k, and allow in-service rollovers of those after-tax contributions to a Roth IRA.

It sounds like a killer way to grow a bunch of money tax free, but so far I haven't been lucky enough to have an employer with the required 401k features.

Are there other ways to do something similar?

[Diop]

(02-23-2019 09:45 PM)Lampwick Wrote:  

+1 Diop. I like your breakdown of the new tax law, and who it applies to in practical terms.

Are you familiar with the Mega Backdoor Roth?

This is a technique that allows you to contribute an extra $37,000 per year to a Roth IRA (above the $6,000 per year limit). The catch is that your employer's 401k plan has to support after-tax contributions to a traditional 401k, and allow in-service rollovers of those after-tax contributions to a Roth IRA.

It sounds like a killer way to grow a bunch of money tax free, but so far I haven't been lucky enough to have an employer with the required 401k features.

Are there other ways to do something similar?

I've read an article or two about the Mega Backdoor Roth option but have yet to come across any clients of mine who have a realistic opportunity or desire to do it. Most everyone I work with has pre-tax income going into their 401k's, and their employers don't offer an after-tax contribution option. The very few times I've brought this up, the response I get is "I'll just contribute to a Roth IRA outside of work, that's all I can afford to do anyway" so I've never had any of my clients take advantage of it.

Aside from your garden-variety Backdoor Roth IRA contribution, I'm not currently aware of any other similar ways to create something like the above article mentions. I do know that the tax reform regulations eliminated the option to recharacterize a Traditional IRA once it has been converted into a Roth, so doing this definitely needs to be done very cautiously.

[frozen-ace]

The 1040 really threw me off this year. It’s all changed around and is “simplified” but then you have to add brand new schedules to it to make up for what you used to put on the face of the 1040 (like taxes paid, and other income, among others).

And if you owned a REIT you will get a report showing your 199A amount which you can use to get a qualified business income deduction (seems to be like 20% of the 199A amount). Have you guys noticed this at all? It is very strange that you can get this deduction just by holding the mutual fund when you aren’t actually engaged in the business. Maybe this makes it more attractive to hold a REIT in a taxable account.

The tax withholding tables were updated this last year so most people had less tax withheld- meaning a higher paycheck. The common person equates “tax liability” with “tax refund” and since you had less taxes withheld, the refunds are smaller. Lots of my friends are complaining about getting screwed when really their overall tax liability is the same or perhaps even lower...they just got their tax refund baked into every paycheck vs the big refund from the IRS. I always laugh when I hear tax prep companies or software vendors talking about getting you the “max” refund- there is no max refund. There is only one refund, and it’s the maximum amount legally allowed under the law. In theory you should get the same no matter who or what you choose unless you go with someone likes to push questionable tax positions.

There is one major tax scam in Alaska that this one preparer pushed and now it’s so common people take it for gospel. I’ve read the tax code and even talked to an IRS expert who enforced the issue and the way the tax preparers up here run with it makes it a complete bastardization of the law. They take something that is actually needs to be counted as a tax on the individual and turn it into a deduction for the individual. And in all these years I have only seen the IRS challenge and audit one person on the issue (the person lost to the IRS of course). It makes you see the IRS doesn’t really review the returns and people can get away with just about anything.