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Deducting the Home Office: For Itemizers and Non-Itemizers

Oct 27

Posted by admin in Taxes

Introduction
The IRS provides numerous examples on a variety of topics, usually focused on what the taxpayer cannot do. This article covers some of the planning opportunities, focusing on what you can do to legitimately deduct your home office expenses and to maximize your home office expense deductions. The home office deduction is one of the least understood deductions. Many taxpayers avoid the deduction, frequently on the advice of their tax accountant or attorney, for fear of an IRS audit. This is nonsense!

The IRS provides detailed instructions on Business Use of Your Home in its Publication 587. This publication is updated every year and is provided to the public, for free, by calling the IRS tax forms 1-800 telephone number or by downloading the publication from the Internet at www.irsgov.com . Home office deductions are reported on Form 8829, Expenses for Business Use of Your Home.

Folklore – The “red flag” to the IRS
Folklore suggests that use of the home office deduction will send up a “red flag” and result in an IRS audit. However, it does not make sense to fail to take a deduction that you are legitimately entitled to! Consider the following:

For the 1997 tax year fewer than 1.5% of all individual income tax returns included claims for the home-office deduction.
In recent years, about 15% to 16% of all tax returns have included self-employment income/losses and a Schedule C or F.
Therefore, if the IRS devoted 100 percent of its audit resources to the tax returns for self-employed taxpayers, they would only be able to audit 1/10th of the individual federal income tax returns with self-employment income or losses.

Of course, the IRS does not audit the tax returns for all self-employed taxpayers. Self-employed taxpayers establish a home office for several reasons. First, they already own or rent a home, so operating out of their personal residence reduces the duplication of overhead and/or the maintenance of a separate office or place of business. The reduction of overhead, and related monthly cash outlays for the additional expense associated with rent, utilities, etc., reduces business risk and business failure rates. Establishment of the home office as the principal place of the self-employed taxpayer’s trade or business also minimizes non-deductible commuting expenses and increases the business use percentage of the business use automobile and, of course, reducing fuel consumption. In summary, one could legitimately argue that the home office is good for the U.S. economy!

IRS Audit Statistics
The IRS publishes audit statistics. For the 1996 tax year, 1,519,243 individual federal income tax returns were audited (1.28%), down from 1.67% of the returns filed for the 1995 tax year. The “no change” rate averaged 14% for office audits, 10% for field audits and 13% for correspondence audits. Additional percentage audited measures for 1996 individual federal income tax returns follows:

TABLE 1

Individuals – Non-business and based on Total Positive Income (TPI)
< $25,000 1.39%
$50,000 to $50,000 0.70%
>$100,000 2.27%
Individuals – Schedule C with Gross Receipts as indicated
< $25,000 3.19%
$50,000 to $50,000 2.57%
>$100,000 4.13%

Generally, the percentage of returns examined will depend on IRS staffing available for a particular geographical region. The returns least likely to be selected for audit are those on which the majority of the income was subject to withholding (e.g., salaries and wages) and where the taxpayer does not itemize deductions on their Schedule A.

The IRS selects returns for examination based on discrepancies identified against informational returns (e.g., W-3 and 1098 transmittals), history of deficiencies, statistically selected random sampling from an updated variation of the Taxpayer Compliance Measurement Program (TCMP), questionable refunds and their computerized discriminant income function (i.e., DIF scores).

Why pursue the home office deduction? There are several reasons why the taxpayer should deduct a home office:

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Tax Problems : Procrastinate At Your Peril

Oct 26

Posted by admin in Taxes

If you are an American, you have to pay taxes. Sometimes it seems like you get it in the pants?err, bank account coming or going. If you get behind on your taxes, things can get a bit more stressed.

Tax Problems : Procrastinate At Your Peril

We can talk all day about whether we should have to pay taxes to the government. As recently as the late 1800s, there was no income tax. Ah, for the good old days! Unfortunately, the reality of modern life is the government has grown into a large child both on the state and federal level. As citizens of this great country, we are the parents of these beasts and responsible for feeding. Breakfast, lunch, dinner and snacks all come in the form of tax payments. If you fail to feed the children, they can get downright mean.

The number one thing individuals and couples worry and argue about is money. Simply put, few of us are millionaires and we have to stretch every dollar. The more you make, the more you spend. Inevitably, a certain percentage of us are going to get behind on our taxes. When this happens, a very strange thing happens ? nothing. If you fail to pay your taxes on April 15th, the IRS does not call you the next day. Months and years can go by, and still you will hear nothing. Are you in the clear? No.

Much like the overall government, federal and state tax agencies are bureaucracies. They don’t react particularly quickly. Once they get moving in a particular direction, however, they are hell on wheels. This is particularly true of the beloved Internal Revenue Service.

If you fail to pay taxes, the IRS will take its time getting around to collecting from you. So, can you just wait for them to catch up to you? You should not. The first time you realize they are after you may be when they suck all the money out of your bank account. Even if they are polite enough to contact you first, they are going to come swinging big hammers. While it may have taken them a few years to catch up with you, they are going to charge you penalties, late charges and interest for the back taxes. It is not a defense that it took them a couple years to contact you.

If you are behind on your taxes, you should voluntarily contact the IRS to resolve the issue. Ironically, the best time to do this is when you are dead broke. If the IRS discovers that you have no assets and nominal income, it will often write-off the past taxes. If you have assets and income, voluntarily contacting them will result in a payment plan instead of something potentially nastier.

While you may get away with back taxes for a bit of time, they will always catch up to you. Tax agencies view voluntary efforts to resolve problems with a much friendlier attitude than if they have to hunt you down. Don’t sit on your tax problems and hope they just go away.

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Dealing With Scam Artist Pretending To Be IRS Debt Collectors

Mar 28

Posted by admin in Taxes

In 2004, the IRS was given the authority to use third party debt collectors to hunt down taxes owed by delinquent taxpayers. Scam artists knew an opportunity when they saw one.

Dealing with Scam Artist Pretending To Be IRS Debt Collectors

In an effort to track down delinquent taxpayers, the federal government gave the IRS the right to hire private debt collectors in 2004. You know, those annoying people that call during dinner. The reason for this change in policy actually made some sense. With as much information as the IRS is forced to deal with, it simply took forever for the IRS to start collection actions. By using the third parties, the IRS would be able to get the process moving without taking up employee time.

As you might imagine, the private tax debt collector program sounded like a good idea, but proved to be problematic. There were two primary problems. First, the legitimate debt collectors were threatening taxpayers. Second, scam artists started posing as debt collectors to collect money from na’ve tax collectors or perform identify theft on them. It is this second problem that we focus on here.

The central problem with the new debt collector program is how does a taxpayer know if they are dealing with a legitimate company or a scam artist trying to rip them off? Well, the IRS has instituted a new program in an effort to clarify matters. Here are the highlights:

1. If the IRS is going to use a private debt collector to come after you, the agency will first send you a letter indicating as much. The name of the company handling the debt collection will be included in the letter. If you do not receive this letter, ignore or report any parties claiming to be debt collectors to the IRS immediately. Play along and get their contact information so the IRS can hammer them.

2. When dealing with the debt collector, you will eventually reach a point where you write a check. The check should be written to the United States Treasury. If the debt collector instructs you to write it to any other name, they are scam artists and you should report them immediately. There is no exception to this rule. All payments are made to the United States Treasury, just like if you had actually paid your taxes on time!

Scam artists are very creative when it comes to thinking up schemes for ripping people off. Understand and stick to the following guidelines and you can foil them.

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Nothing Is For Free With The IRS

Mar 19

Posted by admin in Taxes

Those goody bags Oscar presenters receive aren’t tax free gifts anymore.

“The gift basket industry has exploded, and it’s important that the groups running these events keep in mind the tax consequences,” said IRS Commissioner Mark W. Everson in announcing the tax agency and film industry has reached an agreement on Oscar goody bags.

Oscar presenters walk off with over $35,000 worth of goodies in their gift bags, including a $25,000 four night stay at Honolulu’s Halekulani Resort. But tucked deep in that bag will be a nice letter from the IRS.

In fact, the Academy of Motion Picture Arts and Sciences first contacted the IRS voluntarily due to the high value of the goody bags this year. The Academy was concerned with any potential tax issues for this year and previous years.

The Academy and the IRS have settled the tax obligations for all gifts through 2005, though no details were given as to how. Recipients of this year’s gift basket will be issued informational tax forms by the Academy and will be responsible for their own income tax obligations.

It doesn’t seem as if the “gift” should be taxed. After all, the goddies are given by the hotels, designers and manufacturers as a homage.

But the IRS says that at this level of cost, the gift bags have public relations value. This is business, according to the agency. The only option the stars have, according to an IRS spokesman, is to donate the gifts to a qualified charitable organization. If they do, they may be able to take a tax deduction, subject to the usual applicable limitiations and requirements.

This will affect many more people than just the Oscar stars. Celebrity fundraiser goody bags, celebrity golf, charitable organization and other entertainment events will all be handing out tax bills with their goody bags. The IRS is notifying all entertainment and charitable organizations that they must issue 1099-MISC forms at the end of each year to each celebrity or recipient of expensive gift baskets.

Those who wish to avoid the taxes must return the gift basket and have written proof of return.

What is taxable now? Everything recieved at a fundraiser — from things in goody bags, items picked up at a free shopping table to rooms given as a courtesy. Even gift certificates and vouchers are taxable.

And if you are a celebrity and receive a free outfit to wear to an event, you are going to have to pay taxes on it. You will be taxed on the fair market value of the gift. Don’t forget to keep track of all the goodies you receive during the year.

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Short Sale San Diego:do you know what a short sale is?

Jan 29

Posted by admin in Finance, Real Estate

With the current boom in foreclosures hitting the state, it’s likely that if you watch the news or read the news paper, you have potentially heard the term short sale. But do you really understand or know what a short sale is? For most they are still confusing. Put simply, a short sale is when a bank or banks, accept less that the total amount due on a loan when the property is sold. The bank will often accept the short sale to circumvent the time and cost of a foreclosure, but do require that the owner of the property show some kind of a difficulty, or reason that they won’t afford the home and need to sell. In a short sale, the bank will pay all of the charges that are concerned with the sale, including the Realtor’s commissions. With home prices down over 29% across the country, many householders are finding themselves in a situation where they don’t have any equity in their property. And even if they’ve a tiny amount, when a borrower is in default on a mortgage they not only owe the back payments but also may owe late penalties, back taxes, lawyer costs, for example.

This may add up quickly to eat all of the equity the borrower had in the property. If the borrower is not able to bring the account current the bank will then foreclose on the property. With a foreclosure, the bank can lose up to 40% of the mortgage amount thanks to the extra costs concerned with foreclosing on a property : lawyer costs, court costs, lost interest, eviction costs, property upkeep costs, and selling costs. Foreclosing on a property can take anywhere from some months, up to two years in some states. It is often in the best interest of the bank to accept the short sale. It can also be in the best interest of the borrower. They won’t have to endure the time and stress of a foreclosure and their credit would possibly not be as negatively influenced as it might with a foreclosure. It is faster and less complicated and does not subject the borrower to the humiliation of a foreclosure. How does it work? The very first thing the borrower should do when they won’t afford a property is to contact the bank instantly. The very last thing a bank wants to do is foreclose on the property. When contacting the bank, they have departments that work with folk who are behind on their payments to decide the situation and may be in a position to direct you to their departments. Sadly though , these departments are usually shorthanded, overworked, and have really poor systems prepared. Getting thru to someone and getting them to basically work on your file could be an extremely maddening battle. This is why it’s important to hire a Realtor, or Realtors that are experienced in short sales and dealing with the bank that hold your home loan. If they are experienced, they’re going to have the numbers and the contacts to get the deal done.

When you have told the bank, step one will be hiring a Realtor and placing your property on the market. With lots banks, they won’t review any forms or think about you for a short sale till your property has been listed on the market and a buyer has submitted an offer. Once which has taken place, there’s a lot of paperwork the bank will need together with the offer to think about the short sale. The data needed may include : Income documentation like 2 years of tax returns and W-2s, together with one month of pay check stubs to confirm the borrowers’ income. Bank records to confirm the borrowers’ assets.

Trouble letter this letter will describe for the bank the explanations the borrowers are in the monetary position they are in and will ask the bank to accept the short sale. Borrowers should make this letter sound as unhappy as feasible and back up the tale with any paperwork you will have like doctor’s bills, for example. Finance Worksheet this worksheet will show the borrowers net montly income vs. All the monthly cost, and should be used to show the borrower is not able to afford the property.

Fair market worth for the property depending on the bank they may need aComparative Market research from the Realtor justifying the cost of the property. Purchase agreement signed by all parties. Initial HUD1 – this may show the profits of the sale of the property after the mortgage is paid off and all of the closing costs and charges are paid. This can show the bank what they are going to be receiving as the short payoff.

Listing agreement. ( And many banks have their own express forms that are needed as well as everything above. ) Once the bank receives all the above info, they can hire an exterior 3rd party to finish either an appraisal on the property or a BPO ( broker’s price opinion ) to figure out the fair market cost of the property.

They’ll use the data provided above to make sure there’s a difficulty and they are going to compare the offer that is presented in contrast worth to establish if the short sale makes sense, or if they can get more by going thru foreclosure. Once the bank has reviewed all the info, they might or might not approve the short sale. If they don’t approve the short sale they can proceed with the foreclosure. If they do accept the short sale, the exchange will advance the same as a normal sale, you can close on the sale of your property and the lender will take the loss. So, is the borrower off the hook? Not really. The bank still has options to try and collect this shortage. As a condition of the short sale the bank may need the borrower to sign a note to reimburse the shortage or bring in money at closing. The bank might also require that the borrower agrees to the bank keeping their rights to chase a deficiency at a later time. This is the reason why it’s important to work with a team that is experienced in Short Sale and to consult a real estate lawyer to entirely understand all your options. There could also be tax implications in a short sale or foreclosure.

When the bank forgives the quantity of the shortage, they’ll report that amount to the IRS and the IRS will send out a 1099 showing the shortage as income.

Each person’s situation is dissimilar and they could be protected from needing to pay taxes on that amount thru the Mortgage Debt Relief Act or thru showing bankruptcy. I won’t offer recommendation on that and highly suggest that any person considering a short sale or foreclosure consult a tax pro to absolutely understand the consequences of a short sale or foreclosure.

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IRS To Cut Estate Tax Compliance Personnel

Aug 5

Posted by admin in Taxes

The IRS is planning to cut the number of estate tax lawyers and audit staff it employs.

With the efforts of the Bush administration to reduce the number of people liable for the estate tax, the IRS will cut the jobs of 157 of the agency\’s 345 estate tax lawyers, and an additional 17 support personnel. The cuts are expected to occur within a two month time period.

Kevin Brown, IRS Deputy Commission explained to the New York Times that the cuts have been made necessary because there are far fewer taxpayers subject to the estate tax.

This year, estates worth over $2 million for singles and $4 million for couples are taxed at a maximum 46% tax rate. Under legislation passed in 2001, the exemption will rise to $3.5 million in 2009. The rates are set to decline to 45% for 2009. The tax will then be repealed for 2010. However, in 2011, the tax will then be reinstated at a pre-2001 rate of 55%.

House Ways and Means Committee Chairman Rep. Bill Thomas (R-CA), says that the compromise legislation he drafted would permanently eliminate the estate tax for 99.7% of Americans. It would increase the exemption amount to $5 million per person. Estates between $5 million and $25 million would be taxed at a rate equal to the capital gains tax rate. Estates worth over $25 million would be taxed at double the capital gains rate.

Some tax lawyers that will be cut have suggested that the cutbacks aren\’t made to save money, they are being made to protect wealthy individuals with political links to the Bush administration. According to the Times, these lawyers are claiming that the agency is reluctant to pursue cases involving complex schemes to understate the value of assets.

Critics say that the Bush administration is bypassing Congress to eliminate the estate tax where it lives — in the IRS.

However, Brown says the IRS has no intention of letting down its guard over wealthy taxpayers. Brown explains that the money saved by reducing the estate and gift tax compliance department will be used to hire extra staff to audit tax returns of over $1 million.

Martin Lukac represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com, a finance web-company specializing in real estate and mortgage rates. We specialize in daily updates, mortgage news, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies!

Writen By : Martin Lukac

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Donating A Car ? What IRS Want You To Know

Aug 5

Posted by admin in Taxes

When donating your car to your favorite charity, the Internal Revenue Service (IRS) wants you to be aware of certain pitfalls. After December 31, 2004, taxpayers planning their charitable giving, donors should understand the way that the American Jobs Creation Act of 2004 will alter the rules for the contribution of used motor vehicles, boats and planes.

When the claimed value of the donated motor vehicle exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale. Under the rules in effect for 2004, taxpayers will be able to deduct the fair market value of the contributed property.

Here is what IRS officials recommend to people donating their cars:

Check the qualification of the Charity. Taxpayers should make sure that they contribute their car to an eligible organization, else their donation will not be tax deductible. They can use the IRS Website to check that an organization is qualified by searching Publication 78. Publication 78 contains a list of most organizations that are qualified to receive deductible contributions. Publication 78 is also available in many public libraries. If in doubt, you can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500.

You should take into the many factors into consideration to establish the fair market value of the car. Many used car buying guides contain step-by-step instructions so that readers can make adjustments to the value of a car for accessories, mileage and other indicators of its general condition. Publications like Publication 526, Charitable Deductions, and Publication 561 provided such details.

Taxpayers cannot take a deduction for car donations if they do not itemize deductions on their personal tax return. The decision to itemize is determined by whether their total itemized deductions are greater than the standard deduction.

Taxpayers must document the automobile donation and its fair market value. IRS Publication 526 details requirements for the types of receipts taxpayers must obtain and the forms they must file.

Some used car donation programs mistaken that donors can deduct the highest value listed in a used-car buyer\’s guide regardless of the donated vehicle condition. The IRS only allows a deduction for the fair market value of the car. Fair market value takes into account many factors, including the vehicle\’s condition.

Contact state charity and IRS officials when in doubt. You can call the IRS at 1-800-829-1040 or for TTY/TDD help, call 1-800-829-4059. IRS forms and publications can be found at IRS website www.irs.gov. A list of state charity official offices can also be found online.

Joshua Poyoh is the creator of http://www.2donatemycar.com where you can find out more information on how to donate your car for cash

Writen By : Joshua Poyoh

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