Jay Allen Finn

Certified Public Accountant

DoggedByIRS.com

Over the years, we have received many questions from the public regarding tax issues. Below, are some of the questions we have answered. The questions are in bold and the answers follow. Most of the following were acclaimed by the questioner once they received their response.

The following has been reedited on November 15, 2009 for publication.

I was a self-employed truck driver for most of 2008. I worked in the household moving business, contracted with a major van lines. I paid cash to casual labor for loading and deliveries. Ideally, I would have gotten documentation from these helpers for tax purposes, but many did not want to comply. Now I'm being audited. Obviously, I have labor costs that are not supported by 1099 forms completed by helpers. Is there any other valid documentation the IRS would accept? Could labor costs be estimated by my shipment manifests, which include size of the load, dates, furniture pieces, etc?

You are basically unable to take much. You can always ask IRS to have mercy but the only thing I think will be allowed is a list of people you paid under $600.00 in a specific year?

I'm a 1st year college student living in a dorm. School financial aid covers all my tuition and other expenses including room & board, and I do not have any other source of income. If I do need to file, do I file as an individual? Up until now, my parents have been claiming me as a dependent; am I not a dependent anymore?

You did not mention your age (but 23 is the usual cut-off if you work) but if you don't work, are not married, and make about $3,600+; your parents can continue to claim you.

My W2 employer assigned me to a 6 months project out of town in 2007, which was extended a month at a time, until 14 months work completed. The client was 200 miles away from home. Agreement with the client was that a lower billing rate was billed when I worked from home, which I did for a minority of the time, using my home office. Otherwise, I had to travel up every Monday, stay hotel all week, and return every Friday, charging the higher rate. Are the travel expenses (mileage, per diem, etc) deductible? I was traveling or working from home at the convenience/request of the client.

Your travel expenses are deductible as employee business expenses as long as you were not reimbursed for the expenses and required by your employer (you should have this in writing). Your expenses are limited to the amount that exceeds 2% of adjusted gross income (AGI) and the expenses should be reported on Form 2106. Check mileage, travel per diems (conus etc.) and employer policy letter at www.irs.gov.

When I work with just a 1099, which means the employer does not have to match the taxes paid, how will it affect my SS benefits. If I don't work with a 1099 would I get more SS when I retire because the employer matches the taxes? I would appreciate it very much if you could let me know, what would be the best way to go.

If you receive a 1099 your employer does not withhold taxes from your pay. In this case you will have to file a Schedule C and pay self employment taxes. Instead of your employer paying the 2nd half you will pay the entire 15.3% (12.4% for SS and 2.9% for Medicare). 1/2 of the self employment tax is deductible on the 1040 before AGI. If you take expenses on the Schedule C, then your Social Security would be less than employment but if you do not, there is no difference in the social security posted to your account for that year…

A relative of mine is going to receive a gift from an in-law of $13,000, which I know is the maximum that need not be declared on income tax forms. She asked if I would agree to take another $13,000 from that in-law and then turn it over to her. That seems like it would not be in compliance with the intent of the gift tax regulations. Can you comment on that?

It is legal for you to physically take possession of a gift and then gift it to another up to $13,000 in 2009!

In 2008, my wife saw some great furniture that someone was throwing away that she pulled from the garbage and put in the basement. It was great stuff. I guess that gave her a 'bug' because thereafter, she kept pulling other useful items out of people's garbage - more furniture, appliances, house wares, etc. Even if we didn't need it, she felt it was such a waste for someone to throw such useful items away that she would drag it home. It got to be too much and so we ended up donating it to Goodwill. It was SO much that it ended up making a positive difference in our 2008 taxes. Well, that has given ME a 'bug' now, and I'm thinking "...why not pull out all the useful stuff I can from the garbage and donate it to charity and claim it as a deduction on my tax returns?" It seems too easy - so I'm writing to ask you about this. Is there anything wrong with me doing this? Is there a limitation on the amount of stuff I can pull out of the garbage and then donate to a 501(c)3 charity to claim a tax credit? My wife (and son) don't work (outside of the home) and, conceivably, could get thousands of dollars worth of items for us to donate. Any issues here? Thanks a lot.

You are okay with this but you probably will have enough to fill out the special form each year (over $500.00). It is an 8283 (go online and look at it). You need to be honest about it and will need receipts (from 501-C) and/or appraisals.

I am about to inherit money due to my mother's death. Do I have to pay State (PA) or Federal Income tax on the amount I receive (under $50,000).

Both Pennsylvania inheritance taxes and Federal estate taxes are paid out of the assets of the estate by the administrator/executor of the estate before the assets are distributed to the beneficiary. Since the money you receive will have had taxes already paid on it you will not owe taxes on the amount you receive. Also, it may likely be possible that the estate wasn't big enough to pay taxes or file a return.

This month (April of 2009) I received a notice for Tax Year 2007. The letter states that the entries in my 2007 tax return (1040) do not match their information and that I must pay $19,697 or reply by May 20, 2009. I have never received anything like this in my life. The obvious corrections that I do notice are stocks. I purchased and sold many different stocks throughout the year (first time I got really into trading). But I lost most of my money and did not report any of it. All of the money invested in 2007 was lost, I did not make a profit. But based on this documentation it looks like I made money because I purchase and sold and repurchased again.

Believe it or not I get this question often in my practice. You must report stock trading of any kind on your tax return. You simply say you lose money but the IRS assumes your income is the Gross proceeds traded until you provide the cost basis. This is done on a Schedule D which is probably all they need (not an amended return). Download it from www.irs.gov or hire a CPA like myself or a taxperson just to handle this. I would charge about $350.00 or so depending on the quantity of trades but everyone is different.

We are stationed overseas for 2 years. We own a home in Colorado and are renting it out in the duration. Since we are not in the States, we no longer receive BAH (non-taxable housing allowance). Obviously, we still have a mortgage. We are actually bringing in LESS money per month by renting the home out than we were netting before (when we received BAH). We're not sure how to go about claiming the rental income since it's our private home that is being rented as we had to go overseas. Do we list everything on a Schedule E? Is it all considered taxable?

Everything goes on a Schedule E but you come out better tax wise (not cash flow wise) by depreciating under MACRS (27.5 years) your cost plus improvements. See IRS.gov Search (Depreciation or Rental homes).

Both my wife and I work from home full-time, it is not a small business. We were looking over the IRS's website for what we are able to claim when working from home. With the two of us working from home, how are the tax deductions figured? For example there is a certain amounts we can claim from rent, utilities etc.. Are we to double these amounts, calculating the two of us? Or do they still stay singular for just one person.

You are allowed the deduction (one time, not double). Take from the person's business most beneficial or split it, it does not matter. You can only use the room that is separate divided by the total square footage. Storage is also allowed. Rent, utilities (a separate business telephone hookup only) and insurance are allowed. Auto should all be allowed when you leave for business because your office begins at home. Business income and expenses are taken on Schedule C and the sub schedule is 8829 for the office.

If I cash out my 401k on an emergency status and I still owe from a previous loan how does the loan get paid back?

It doesn't. The loan becomes taxable along with the 401-K. However, I am not sure whether you are getting an exception to the 10% penalty but the loan may not be coded that way? You will have to check with your 401-K Benefits department.

My Husband is a contractor and works in another state. His contract is deemed temporary and states up to one year, duration not guaranteed. He is on a W-2, does not get per diem and is not reimbursed for his living expenses. It is my understanding that he can file Form 2106, but must enter the results on Form 1040 Schedule A. Since we have no other deductions on Sch. A, why can't he enter the results on Form 1040, line 24? He has only been on this job for three months this year, so the living expenses don't even come close to our standard deduction. Why is that line restricted to only certain individuals, such as ministers, govt. employees, performing artists, etc.?

You have heard the expression: "You can't fight City Hall or IRS Rulings." That applies to your husband's case. Hopefully in 2009, you will have enough for 2106 which must be placed on a Schedule A.

Is it true that you don't have to pay capital gains taxes if you make less than $65,000 a year? I'm married, and heard that if you make less than a certain amount, you don't have to pay capital gains on stock sales during the year.

That is not correct. If you are in a lower tax bracket (not enough information), you can pay 5% rather than 15%. Also, you might sell the stock this year because capital gains changes can be a hot item in 2009 and beyond. Also, if you hold the stock for less than one year, that is automatic "ordinary income" rather than "long-term capital gains." Go to IRS.gov and search: "Capital gains" to see if you can pay the 5%?

If my husband wanted to withdraw his balance in his SARSEP plan and he will be turning 59 1/2 in 2009, does he have to wait until he is actually 59 1/2 (10/29/09) or can he withdraw it in the year he turns 59 1/2 without penalty?

He must be 59 1/2 when he withdraws it unless you can have the 1099-R show the "normal distribution" code in box #7.

Can I claim my children even though they don't live with me? Their mother has not worked all year, and has said she cannot claim them. She told me I should claim them...

If they are your children, they do not have to live with you. You need some documentation that shows you provide over half of their support, however.

Will I be issued a US Passport if I have a Federal Tax Lien? Part B... Will I be restricted from traveling?

I have never considered such a question but in my expert opinion, I strongly doubt a tax lien by itself would affect your part A or part B question.

After I submit social security retirement request at full retirement age and begin receiving social security payments, do I still have to pay FICA and Medicare on wages received an employer after receiving social security payments?

Yes you do (sorry)!

Earlier this year I paid a deposit to a sole proprietor construction contractor to perform work on my house. He did part of the job and then filed for bankruptcy. I won a judgment against him but have been unable to collect. Since he already has a number of liens against him, I doubt I will ever collect. Can I send a 1099 to him so that he will be forced to show my deposit as income on his taxes? If so, how do I do that? I plan to list the loss on my 2008 taxes as a non-business bad debt (short-term capital loss). Thank you in advance for your response!

By 1/1/09, you can issue a 1099 and 1096 (transmittal) by asking IRS for the paperwork. Yes, you can also use it as a non-business bad debt only once you deem the paper to be totally worthless.

Hi, I received an advertisement in the mail for a service called Tax Audit Defense by Tax Resources. They will help interact with the IRS if I'm ever audited which sounds like a good deal. My question is how far back in years is an individual 1040 tax return at risk for an IRS audit? Is it only the past three years or is the period longer? Also, I sold stock back in 2000 for a substantial loss ($40,000) of which I'm still deducting $3,000 each year as a carryover loss. If say I'm audited for the year 2005, will I have to show the carryover losses that originated from the year 2000 stock transactions or is just the 2005 tax return records that just show the carryover loss from the prior year good enough for the 2005 audit?

You did not ask if their charges are a good deal so I won't answer that question. Just remember that unless you have flags on your taxes or earn a lot of money, the percent of randomly being audited is less than 1%. Also, they can only go back three years from the date you filed. If you are carrying over losses, you must keep records showing the loss going back to that year but the rest of your return cannot be audited.

I currently inherited $450,000 from my grandfather in Romania. When I bring the money into the US, do I have to pay taxes on it? I currently live in Chicago, Illinois. I would like to invest this money in the US.

This money should be free and clear once you receive it. Only the income derived from your investments should be taxable.

I am a salesman who receives 1099 wages from my company. I owe an outside rep compensation for a deal. Can I 1099 him at the end of the year. Can an individual 1099 an individual.

Absolutely and you do not need a tax # to do so. Simply go to IRS.gov and download instructions for 1096 (transmittal) and the 1099-MISC and the NEC box. It is due to the person by 1/31 with the report to IRS due 2/28.

I work for a hospital with many campuses. I work at the main campus in the same area. Sometimes I start my day at one of the other campuses; I may just work there a couple hours and then go to my regular campus, or spend my whole day there. Since I am starting at a different location are the miles from home to the different location reimbursable or just considered a normal commute?

Commutes are considered from the first place you go from home and the last place you go to home. The rest are all business miles.

How many years after you start your small business (a sole proprietorship) does the IRS give you to make money before they decide your business is not really for-profit and you cannot deduct for business expense? I appreciate your help.

This is what they call a rule that says you need a profit during the first 5 years, in 3 of them. Unofficially a small profit in two years if the expenses include a high depreciation may also be okay.

I have read several answers to this issue of tax liability for foreclosures on investment property. I got involved with an "investment club" that literally wiped out several of my family members and a few of my friends. I am indeed insolvent and all three of my investment properties are going into foreclosure. Do I have to declare bankruptcy to get rid of the tax liability, or is being insolvent enough?

Being insolvent is definitely enough!