A Tax Consultant for All Seasons

If the only real estate you own is your principle residence and you filed your return on time,  you probably do not have to worry about getting a CP2000 for the 1099-S on the sale of your home. However, if you filed your return late, the IRS takes a closer look at your return than if you had filed it on time. This means they are likely to request information on everything that is reported to the IRS from outside sources.

A prime example of this is a 1099-S. If you get a CP2000 on your 1099-S and the only real estate you sold is your principle residence, then just respond to the CP2000 stating you disagree with the assessment and include a letter that states that the property you owned was your principle residence. If you are single, you can exclude up to 250,000 of gain on the sale of your residence if you have lived in it over 2 years or 2 of the last 5 years. If you are married, the exemption is 500,000. The IRS could ask for additional proof that this is your residence such as utility bills on your home.

If  you sold some other type of property such as rental or investment,  you will need to provide your cost basis on that property and may need to complete additional forms. A tax professional such as an Enrolled Agent can advise you on what you need to do to respond to the CP2000 on investment and rental property. You can also visit the IRS website if you need more information.

The CP2000 that shows a 1099-misc was left off your return can be a little more complex than the ones noted in the last 2 blogs. The 1099-misc means that you did work as an independent contractor or you received rental income. If the 1099-misc shows non-employee compensation, it means you did work as an independent contractor. This company did not take any taxes out of your pay and you are responsible for paying the full tax.

If you incurred expenses in earning this income, then you can deduct them(provided they are allowable expenses). You will pay taxes on the net income. You will also have to pay self-employment tax. Check out the IRS website Forms Schedule C and Schedule SE for more information.

If your 1099-misc was for rental income, then look up the information for a Schedule E. There are other types of 1099-misc but they are less common and you can find information on the IRS site or contact an Enrolled Agent to help you.

As with the others, you will have to pay a penalty for the error on your return and penalties and interest on any additional tax you owe. Be sure to respond promptly to your notice. Correcting you error is much simpler if handled within the time frame given on the notice.

My last blog talked about the CP2000 showing a 1099-B on your stock sales. If your CP2000 has in addition or instead of the 1099-B, a 1099-R, you made a withdrawal from a retirement account. As I indicated on the previous blog, the CP2000 form tell you what you need to do to respond to this notice and how much time you have to respond before the IRS assesses the tax.

Your response to the 1099-R withdrawal involves 2 issues:

• The first really does not require additional information from you. You do owe tax on the withdrawal from your IRA or 401K since you did not pay takes on it when you put it in the retirement account.
• The second part depends on your age and several other criteria. If you are under 59 1/2 you normally have to pay a 10% penalty for withdrawal in addition to the tax you have to pay. There are however exceptions such as buying a first home, medical expenses and others. Visit the IRS website or contact an Enrolled Agent to help you determine if your situation requires payment of the 10% penalty.

As with the 1099-B, you will be charged a penalty for the error on your return and penalties and interest for the amount of underpaid tax.

If you received a notice from the IRS and it was labeled a CP2000, it means your tax return was missing income that was reported to the IRS. In this blog and other blogs this week, I will address the different forms that the IRS may have indicated you left off your return. The CP2000 shows you what forms were left off your tax return and what you need to do to correct it. It also tells you how long you have to respond. If you miss this deadline, they will assess the tax and it will be a long involved process to prove you do not owe that tax.

Your best course of action is to follow the directions on the form or consult an Enrolled Agent to help you understand your options. If you chose to respond yourself and the form that you did not report is a 1099-B you will need to provide the IRS with the following:

• The date you purchased the stock(this determines whether you gain or loss is long-term or short-term) long term gains have a lower tax rate than short-term gains. Stocks held over a year qualify for the long term gain rate.

• Your stock basis–this is what you paid for the stock plus the commission you paid to purchase and sell the stock–in other words, what it actually cost you .

The difference in your cost basis and what you sold the stock for is your capital gain or loss. This should be reported on a Schedule D on your tax return. Do not file and amended return to correct this error unless specifically instructed to by the IRS. Usually, you can just provide them with the additional information.

You may however, be charged a penalty for the error on your return. You will be charged penalties and interest as well, if you owe additional tax. You can visit the IRS website for more information.

If you have a flexible spending account for dependent care expenses, here is a great tip.  Even though you cannot count the money you put in that flexible spending account again to get the Child Care Credit, you can still use the amount above that.

Say you put $2000 in you Dependent Care Flexible Spending Account, but you spend $3500 on child care.  The $1500  you did not have in the flexible spending account is eligible for Child Care Credit. You file for this credit on IRS Form 2441. If you need additional information on using Form 2441, visit the IRS website.

There area special rules for separated and divorced parents and for those filing Married Filing Separately. Review the rules at the IRS link above, if you have questions, or contact an Enrolled Agent.

Yes, I know it is only July, but now is the time to prepare for filing your 2008 W2 forms. If you are tired of filing in those forms by hand, there is help.  The Social Security Administration has an online option for filing your W2s. Follow the link above for instructions on how to sign up. You can file up to 20 W2s online. The program will even fill in your W3.  You can log in and out and when you are ready you can finalize your W3.

It will even file your W2/W3 online and allow you to print out copies to keep for your records and copies to give your employees.  Even if you only have a few to complete this is so much easier than doing them by hand. There is no fee for this service, but you should go ahead and sign up now. Avoid the winter rush to sign up.

You will have to sign up and wait for a pin number to come in the mail. Once the pin number comes in the mail you will be able to go online and complete and file your W2s.

If you are a CPA/Accountant or Enrolled Agent,  you can get one sign in for all your clients and do each of your clients online. Visit this link for more information on the options for tax professionals.

So you bought the house at the beach you always wanted.  You plan to use it some and rent it the rest of the time. Here is some important information on the tax implications of rental properties:

• If you rent your house 14 days or more, you are considered a landlord by the IRS.  You will have to report your rental income on a Schedule E–you will also be able to deduct any expenses you incur on this rental property. You will have to allocate expenses based on how much of the time you rent and how much time you use it for personal use.
• If you rent your house for 14 days or less you are not required by the IRS to report that money as income, no matter what you charge for the days you did rent it. You can also deduct up to $25,000 in losses per year. Note: Days you stay in the house to make repairs are not counted towards the days you use the house.
• If you stay in your house for more than 14 days, or more than 10% of the total days rented, it is considered a personal residence.  You will be able to deduct expenses for your rental home, but only up to the amount you take in as income. Since it is considered a personal residence, you will not be able to deduct any losses.

If you find all the rules confusing and are not sure which ones apply to your situation, visit the IRS website  or contact an Enrolled Agent.

While you are thinking about where to spend your retirement, there are several things you might want to consider. While weather and amenities are important considerations, have you thought about the tax implications of where you decide to spend your retirement years. Here are some items to consider:

• Does the state tax your pension?
• Does it tax your social security?
• Does it have sales tax ?
• How high are property the property taxes?

Only 3 states exempt most retirement plans–Illinois, Mississippi, Pennsylvania –from state income tax. The states that are toughest on retirees are California, Connecticut, Nebraska, Rhode Island and Vermont. For more information on how states tax retirement follow the link.

Keep in mind, 9 states have no income tax at all:  Tennessee, Texas, Nevada, Florida, Alaska, South Dakota, Washington, New Hampshire, and Wyoming. 27 states don’t tax Social Security at all. Iowa and Missouri are beginning to phase out their tax on Social Security.

Another tax to consider is sales tax. If you live on a fixed income, a state that has no sales tax could really save you money. 5 states have no sales tax:  Alaska, Delaware, Montana, New Hampshire and Oregon. The states with the highest sales tax are:  Indiana, Mississippi, New Jersey, Rhode Island and Tennessee.

The last tax you might want to consider is property tax. When looking a property tax, don’t just look at what they are now, but look at how they have changed over time. That way you can see trends in how the taxes might be going up and which ones  are somewhat stable.

So, when you are choosing a retirement destination, don’t just look at the weather, look at how that state’s taxes are going to affect your retirement income and how far it will go.

 The Mortgage Forgiveness Debt Relief Act of 2007 has provisions that allow tax payers  to exclude up to $2 million in debt forgiveness during 2007,2008 or 2009. Normally, debt forgiveness is consider taxable income.  Congress enacted this legislation to provide relief for the thousands of homeowners who have or are in danger of losing their homes.  Printed below are details from the IRS about what you need to do to take advantage of this relief.

If your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

If your debt is reduced or eliminated you will receive a year-end statement (Form 1099-C) from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for your home (Box 7).

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Web site at IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. This publication and Form 982 can be downloaded from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (PDF)
• Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (PDF)

Yes, you have seen blogs on this before. But I work every day with clients who have lost hundreds and sometimes thousands of dollars in deductions due to lack of good record keeping. I cannot emphasize enough how important it is to keep good financial records. Listed below is the latest info from the IRS on what you need to know about keeping good records.

In a tax emergency, would you be ready? Well–organized records not only help you prepare your tax return, but they also help you answer questions if your return is selected for examination or prepare a response if you are billed for additional tax.

Fortunately, you don’t have to keep all tax records around forever. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

If you are an employer, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.

If you are in business, there is no particular method of bookkeeping you must use. However, you must clearly and accurately show your gross income and expenses. The records should substantiate both your income and expenses.

Publication 552, Recordkeeping for Individuals, provides more detailed information on individual record keeping requirements.

Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses, provide additional information on required documentation for taxpayers with business expenses.

These publications can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

Actually, there is a wealth of free tax information on the IRS Web site, IRS.gov. It’s not just about recordkeeping. Individuals and businesses can find answers to almost any question about federal taxes on the web site. Helpful links found at the top of the home page will take you directly to topics centered on Individuals, Businesses, Charities and Non-Profits, Government Entities, Tax Professionals, the Retirement Plan Community and Tax Exempt Bonds.

In addition to the latest news coming from the IRS, the homepage can lead you to statistics, news releases and tax tips, local IRS offices, the Taxpayer Advocate Service, and thousands of IRS forms and publications. Frequently asked questions and answers are available or you can use two separate search icons: one by keyword and one by answering “I need to . . .”

Why wait? Summertime is a great time to visit IRS.gov.

Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

Links:

• IRS Publication 552, Recordkeeping for Individuals (PDF)
• IRS Publication 583, Starting a Business and Keeping Records (PDF)
• IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)