Tax Observer

2003-02-22T01:18:00.000-06:00

Oh my. Danny Sullivan makes an example of me. Speaking frankly, I would naturally like it very much if Google were to privilege my "content" here in its searches, although I think that would also be against almost everything that Google stands for -- and so I will diminish, and go into the West, and remain ~~Galadriel~~ Tax Observer.

I've also been spotlighted by someone on the ATXers community site, which is just full of us rollicking, fun-loving tax preparers (at least those who use the ATX software for professional preparers and CPAs). Again speaking frankly, the average poster there may well know more than I -- I claim no particular expertise, and this isn't really my career. But if you find my blog deeply fascinating, you'll doubtless get a kick out of their forums.

2003-02-20T15:56:00.000-06:00

Reader Question #5: Ed writes: Are there any IRS guidelines that can help me in my current situation? I cashed out a big part of my 401k plan in order to come up with the down payment on a home purchase. My understanding is that the IRS (and hence the form I was sent by the 401k administrator company) treats this is income. Any helpful suggestions to reduce or defer the tax bite here?

Unfortunately, there's a phrase investors know all to well, the like for like exchange. This means that if you use the proceeds from one kind of investment to buy another investment like the first -- for example, selling a house to buy a new home, or selling stock and buying more -- then the IRS lets you defer the capital gain (the increase in value, on which you will be taxed) for that investment. The trouble is that too much of this and the IRS never gets to tax you -- so they catch theirs when you sell an investment to spend the money on other things, or even to buy another unlike investment.

In your case, you're exchanging a tax-deferred investment instrument, the 401(k) money, for a real estate investment. What this means is that you've socked away money before taxes for several years, and this is the first opportunity the IRS has to treat it as income and assess a tax. The whole structure of a 401(k) assumes that you'll hold onto the money until retirement, or at least a time when you're in a lower tax bracket, and thus avoid the high taxes of your peak wage-earning years.

There really are few breaks the average person can get here. The better way to handle this, when possible, might be with a loan against the 401(k), rather than cashing out. That can offer its own problems -- for instance, the need to make a loan good when you leave your current company -- so isn't a universal panacea. But it's worth considering when you look at the potential tax savings. In particular, people often view their 401(k)s as a money stash for emergencies, but it really isn't intended for that -- and the early withdrawal penalties make it probably the most expensive emergency stash you can tap. I guarantee you that with this recession a lot of people are finding that out this tax season: if you fall into the highest tax bracket, the marginal tax rate on your early withdrawal (including regular income taxes, early withdrawal penalties, and state tax) can approach a whopping fifty percent. Bet they didn't tell you that up front, huh?

There's one bolthole here for you, though, and you didn't make it clear. Was the down payment on a house for your first home (or was it more than 36 months since you were part owner of a home)? The government does explicitly permit 401(k) money to be applied for that purpose.

2003-02-20T10:37:00.000-06:00

A big hearty thanks! to the guys at About Politics, who've named Tax Observer the Political Site of the Day for 2/20/03. (They even have a blog -- welcome to the blogosphere!) As I've said before, this blog won't focus on the political end of taxes, advocating one plan or another, much beyond the general observation that anybody would prefer to pay less taxes. But taxes are certainly political through and through, so I'm pleased to get this honor (I actually received it over two years ago for another more overtly political site, so this is doubly pleasing).

2003-02-19T20:06:00.000-06:00

Reader Question #4: I still have reader questions to get to! This is the part I really like, helping people.

Phil writes: My company gave us a bonus for the first time last year. My last paystub reflects the bonus in my income and the federal tax that was paid in (like 40%) yet my W-2 does not have any of this on there. Is there supposed to be another W-2 or do I not get the taxes back because it was a bonus check?

That's interesting, Phil. Bonus income is supposed to be properly included with the W-2 for employees and in a 1099 for non-employees, and that paperwork is supposed to be complete and delivered to the taxpayer by the 31st of January, otherwise some pretty substantial fines start to kick in.

2003-02-19T19:59:00.000-06:00

Sorry about the lack of actual blogged tax news or information. I'm physically out at a corporate site where internet access is heavily filtered, and I'm actually unable to visit most "Financial/Investing" sites -- and as of today, "Government" is blocked as well, which means I can't even look up tax questions for my clients. Sheesh! Put it this way: they have a sales staff they need to keep motivated.

Anyway, I hope to have this solved in a day or two -- among other things, I have to get the taxes done for a bigwig here and then maybe I'll have sway to get what I need. Technically, I have justification based on my company's needs, but maybe not my host's needs. For now I count myself lucky I can still get my Yahoo and AOL mail, and use Blogger.

2003-02-18T14:37:00.000-06:00

Reader Question! Sorry for the delay in posting I've actually written this up twice now for the blog and lost the post (once due to the tremendous traffic on Blogger due to the Google buy-out -- which has given Tax Observer great exposure since I'm still a Blog of Note on the front page.)

Procrastinator writes: I have not filed income taxes since 1995. I have, however, had taxes withheld from my checks for all of those years except one, in which I worked as an independent contractor. I would like to file my taxes because I hope to buy a home soon, but am unsure about the best way to proceed. I have been told to file all years; to file only the past year; or to file only the past three years, for which I am told I can still get a tax [refund]. I have all of my W-2 forms, and decent records of expenses from my stint as an independent contractor, but I am unsure of the best course of action.

Take heart! This situation is far more common than you might think. The first thing you need to realize is that there are different goals here -- satisfying the bank, satisfying the IRS, and satisfying yourself. The bank, certainly, cares little whether you have kept up to date, as long as it doesn't mean a potential lien hanging over the property they're going to loan you money for. Getting their approval may well require no more than N {say, 3} years of paper returns to show.

Second, you should be aware that you may only claim a refund within three years from the time the return was officially due. (Extensions, when properly applied for, do count.) This means that you have until April 15, 2003 to claim any refund to which you're entitled for Tax Year 1999. Any earlier refunds are gone for good, sorry to say. On the other hand, and you knew this was coming, tax liabilities never expire; and they do accrue interest and penalties, which can make your 18.9% credit card interest look like easy terms. (Penalties have a ceiling of 50% of the liability; but interest continues to grow indefinitely.)

Third, you may have paperwork telling you that the IRS has figured your tax liability for you. Essentially, you didn't file, but they did the paperwork as if you did file. What you need to know about this is that the IRS will do this in the form that is most advantageous to them. The worst example of this is married couples, who will be filed separately -- which for 99% of taxpayers is less favorable than filing jointly. In other words, the IRS figures your maximum possible tax liability and bills you for that. If you do your taxes yourself,.though, you may well find that you don't really owe nearly that much.

Here's the tricky part for you: that year you were independent, you were not only supposed to figure and pay your own tax, but you were supposed to do it quarterly (unless your income was in a certain range of the year before). The IRS will actually figure penalties not from April 15 of the next year, which is normal for everyone else, but from the first quarterly filing date of that tax year, which was April 15 one year earlier. In other words, the taxes due on 1/4 of your contractor income potentially had an extra year to accrue penalties and interest. The sooner you deal with that problem, the better. It's good that you have decent expense records from that year, because you'll need those to reduce your Schedule C liability.

2003-02-17T21:50:00.000-06:00

Tax software surging, indicate the stats from the IRS through the first part of February. Only three weeks into the filing season, electronic filing is up -- and most of that is taxpayers running software themselves, rather than using a paid preparer. The touch-tone Telefile system -- which lets you punch in a 1040EZ, and other forms if your finger flesh is up for the punishment -- is starting to decline in use, though. End of season stats may not show such a surge, but it does seem as if the proliferation of cheap tax software options, both in a box and on the web, is having an impact.

2003-02-13T15:04:00.000-06:00

The IRS is again raising a warning flag over the slavery reparations scam also known as the "Black tax credit". No such credit exists, even if the Congressional Black Caucus hopes it one day might. If it does, it's unlikely to take the form it does now, where unscrupulous preparers tout it as a "secret credit" (hoping taxpayers won't contact the IRS) using Form 2439 -- which exists for an entirely different purpose. The preparers disappear into the woodwork expensive fees in hand, leaving the taxpayers liable for any fines, including ones for filing a frivolous return and possible criminal charges if the money was actually received. With the volume of claims topping 80,000 last year, the IRS is hard-pressed to prevent every single one from going through.

This is just one of several schemes the IRS is keeping a close eye on, including another fraud involving supposed credits for social security (FICA) taxes paid over a lifetime. There isn't a credit; you get your money back when you retire, sometimes many times over, at least while the system (and the US government) remains solvent.

2003-02-11T00:51:00.000-06:00

Haircut. Apparently some kind soul has gone and bought up my blogspot ad. That was an expense I'd slated for later, so thank you, whoever you are. Next time I tweak the template everything will move up a bit.

2003-02-10T18:38:00.000-06:00

Reader Question #3: Reporting babysitting costs.

Colleen asks: I paid a babysitter $750 last year. Is she going to get in trouble for not reporting it if I put it in for my tax credit? She is a college student who needed some cash. If you can help I would really appreciate it!

The simple answer is yes. But first, you cannot claim the tax credit on Form 2441 -- Dependent Care Expenses -- without the babysitter's Social Security number or Employer Identification Number (SSN/EIN), or otherwise reasonably identifying her. If you have not entered this information, and cannot show due diligence in trying to get it, you may be denied the credit.

This theoretically helps ensure that tax credits only go to parents who use a professional babysitter. Of course, it also tends to drive other child-care arrangements underground, in the unintended-consequences way that many government regulations do.

You can also look at it this way. The tax credit isn't worth very much to you -- at most, 30% of the expenses can be written off, or up to $225 in actual tax reduction. It does come off the taxes due, and could theoretically mean a credit paid TO you. For your babysitter, reporting the same amount as income might mean $105 or so in increased taxes. She would have to report this on Schedule C-EZ, and the self-employment tax is recaptured (essentially the equivalent of FICA -- Social Security -- for wage earners). Even if she were due credits for being a student, the tax would come off the top of that dollar for dollar. So the real question is this: Is $105 to her worth more than $225 to you?

It's probably easier to settle this sort of thing in advance, rather than after the fact. Let the babysitter know that your spending the money on her is dependent on your getting the credit; after all, it's the same as getting a 30% discount at the store. Conversely, she may realize that the tax discount means she can negotiate for a higher salary, to cover her own increased tax liability. If you're desperate for good child-care, though (and who isn't?), you may have to accept the babysitter's terms -- and reporting income they didn't want reported is a sure-fire way to end your relationship with that sitter. Caveat emptor!

2003-02-08T16:06:00.000-06:00

Reader Question #2: Deductions for interest on real estate loans.

Arthur writes: The scenario: I buy an investment property, specifically an apartment building, for mostly cash with some partners. I refinance the property later. Is there a different in interest deductibility among the different loan options available to me - refinanced, home equity, line of credit, etc.?

Arthur, Schedule E makes no distinction between the types of loans you can get on your property. A refinancing is the same as an original mortgage, and so is a home equity (second mortgage), lump sum or line of credit. Your financial institution sends you a 1098 form showing you the interest paid, and you should add these together on Line 12 of Schedule E. If you have private financing (e.g. a land contract, or another financing arrangement that involves the property as collateral), report that separately on Line 13. Indeed, you aren't limited to secured debt. Interest on credit purchases, including credit card interest, is deductible on both Schedule E and C, even though this was eliminated for personal deduction years and years ago. (Probably wisely, because the last thing the government should be doing is encouraging personal debt. Business debt, though, is considered investment and should be encouraged.) If you can't pay off a contractor, but you keep up with payments including interest, that is all deductible.

Back to your question, though: certain types of interest aren't deductible. Interest on taxes due, for example, or interest paid with funds from the original borrower, and interest that is required to be capitalized (e.g. for products you produce, which doesn't apply to real estate you own rather than build).In general, then, there is no tax advantage or penalty for choosing a particular loan option, in terms of this deduction. There may well be tax effects in terms of depreciation or asset allocation, so keep those in mind.

2003-02-07T21:40:00.000-06:00

Kudos, incoming! I've been nominated as blog of the day at ShredNow.

2003-02-07T17:30:00.000-06:00

Reader Question #1: Deducting conference and research expenses.

Seth writes: I've been a freelance writer who's dutifully reported that income on Schedule C. But 2002 was the first year I've had substantial expenses, making taxes a bit more tricky. (Not that I'm complaining!) I've kept solid records and a boxful of sorted receipts, and generally everything is pretty clear. But two types of expenses I'm uncertain where to deduct on Schedule C. 1) Not travel to and from, but the expense of entering a business-related convention or seminar; and 2) The cost of research materials. Are these "Other Expenses" that I declare in Part V of Schedule C, and if so, how would I label them? Or perhaps there's another form I'm overlooking?

Seth: You're on the right track. Conference and seminar expenses, if clearly related to your business activity, are deductible on Schedule C. It's probably best to list the fees under Line 48. The travel, meals, and entertainment expenses are all subject to the 50% limitation, however, and must be listed separately on Line 24. Caution, though: if you're attending a conference for professional development, there is a possibility the IRS would consider that an Employee Business Expense that you should deduct on Schedule A, where it would be subject to the 2% (of your total income) limitation. With a freelance writer, the distinction here would be unclear. If you could demonstrate that the conference led directly to a writing gig, that would be best.

Research materials are subject to the same balancing act. Those related specifically to articles you write, companies you work for, or other business you develop, can justifiably be listed on Schedule C, where they offset income dollar for dollar. Those with a less certain relationship to the business would be Schedule A material -- even if you're likely to be able to get away with it. In the end, though, consider that unless it's a very substantial amount, it won't affect your taxes much either way. Schedule C is deliberately vague about defining many business expenses; the default is to consider them deductible. For more information on filling out the forms properly (but not so much information on your question), see Publication 535, Business Expenses {PDF}.

2003-02-06T20:22:00.000-06:00

Letters, we get letters: I am now getting reader questions by the bucketload! Well, if four questions would fill a bucket. (I'll print them out using 96-point type.) I will answer all reader mail questions in the blog, without revealing the questioner's name. Since some questions may require research, I will normally answer no more than one question daily.

2003-02-05T18:53:00.000-06:00

Are you one of the few who've filed? Get your refund status, directly from the IRS. This is one of the handier best-kept-secrets in the field.

2003-02-04T19:39:00.000-06:00

New recurring series: Nobody's sent me any questions by mail yet. Shoot away! Really! But until that happens, I realized I have a steady supply of interesting questions to answer -- based on my Google search engine referrers.

Our first question is reporting paypal income. Indeed, this fits in neatly with my future series on weblogs & taxes -- perhaps I'll get there next week or so. But for now it's an interesting question by itself. Paypal, of course, is not a source of income -- only a conduit, like a bank. If somebody sent you money by check, technically you are obligated to report it, but technically many people don't bother. For most taxpayers, income of this sort isn't really worth reporting (or worth enforcing, for the IRS). But at a certain point, it will become significant, and that's where banks and Paypal (which is really a bank, behind the web interface) can cause problems, because they have accurate records. If for any reason the IRS suspects you may be "living beyond your apparent means", they could launch an audit, and IRS does have the legal authority to subpoena records from financial institutions. If you haven't been reporting money received this way, for whatever purpose, you could be socked with severe penalties for leaving it off your taxes.

My rule of thumb would be this: if it's more $1000 for the year, be honest and put it down.

Now the question is how to report it. The easiest way to handle this income is as a business, using Schedule C -- or for many purposes, Schedule C-EZ. The beauty of this is that as a business, you can deduct ordinary and necessary expenses -- in other words, the stuff you spent to make the money you got. You're only taxed, that is, on profit. (This isn't the same thing as an accounting profit, though. It's possible to make an accounting profit while reporting no taxable income.) Were you an eBay seller? Deduct the shipping costs. Deduct the long-distance phone call to the buyer. Deduct the auction fees. As long as you can justify these with receipts or printed records, you'll be fine. Deducting things like your internet access, though, might seem like a brilliant move at first blush -- but are probably things that will get you flagged for review. Your eBay usage was probably only a tiny percentage of your online costs for the year. If you think you can justify 1% of $240, well ...

Will the IRS accept your deductions? The key question, for them, is whether you conduct your business as a business, that is, with a view toward making more money than it costs. Did you keep records? Did you have a DBA (doing business as) designation, or a business license? If you just screwed around and happened to make money, you might be engaging in a hobby -- and the IRS is suspicious of hobbies that are used to offset income, especially if you get a Schedule C with a loss. In the end, if you make serious money this way, you probably should consider getting serious about handling it.

Next: Well, probably not. But I did get "asked" how to deduct suv costs via MSN search. That's going to be the legacy of this stink made about the "SUV deduction" -- many more people trying to get it, now that they know it can be done. Call me a cynic ...

2003-02-04T19:09:00.000-06:00

Woohoo! A banner day for my textads. My Pyrad on the front page of Blogger is sending about one person here every 90 seconds. What's funny is that due to deficiencies in the Pyrads interface (paging Evan), I thought it had already dumped my 12,500 impressions off a week ago Sunday. I thought it was strange I received not a single click, but wrote it off to an audience mismatch. I guess that was wrong, though, because the ads are clearly running now and working.

Update: scratch that. Still no evidence of my Pyrads; but I am a Blog of Note, which is why I'm getting referrers from the front page. Hmm.

Compared with my Metafilter Textad, which still has several days to run and is sending an even stream of daily surfers in the single digits, I guess this works. Ideally there's synergy between the two. I still haven't gotten many direct blog referrals.

And I have to be happy that I made the Daypop Top 40, even if it only seems to be through automated citations. Every bit of exposure helps! Now if someone could tell me when the affiliate income starts to kick in, I'll be a really happy man. I'm actually having a bit of a Suze Orman month, where just trying to pull together some scrape-by money, I'm having more money tossed my way. That's good, but it isn't a living yet. Click my ads, O readers! Blogroll me!

2003-02-04T18:55:00.000-06:00

CNBC's columnist Schnepper sings the virtues of the earned income credit -- and its drawbacks. It's a hidden treasure for low-income taxpayers, but many don't know how to file the forms to get it. If your income is low, and you're working -- that is, earning income, rather than drawing some kind of investment or benefit income -- and especially if you have dependents, it's very likely you could not only completely zero out your taxes, but get free money back from the IRS. Such a deal! Schnepper suggests Congress was addle-brained in creating it with such complexity, but I suspect they're just as happy having put it out there -- and hoping as few taxpayers as possible actually take advantage of it. (It's the sort of tax cut that means never having to say you're sorry about the deficit.)

The big problem, of course, is errors in the filing: you have to get the dependent status just right, and kids eligible for the credit aren't necessarily the same as the dependents you can claim. Having a pro do your taxes can make this work, but of course that costs you part of your credit. On the gripping hand, that's free money you're paying him out of, so it's your call. (I actually do several of these a day.)

Then there's the advance earned income credit -- money that comes right into your pocket via your paycheck. As I've noted before, not all taxpayers who qualify will want their employer to know.

But the tail end is that getting your EIC application wrong can mean disqualification from the program, in addition to severe penalties. Schnepper may be wrong about the demographics, though; it seems there are plenty of people on the street who understand the benefits of being able to claim dependents, and shoot for getting a fraudulent credit, even if they've been turned down before.

2003-02-02T01:39:00.000-06:00

Hidden Paycheck is an interesting idea. Most employers have benefits available to employees that they don't know about. This company will help them produce a "paycheck" that shows the value of those benefits to the employee. One can see how this would increase employee satisfaction, but it might also increase employee usage of those benefits, which are often of the passive variety, ultimately leading to higher benefits costs to the employer. This might not, then, be a service they would be interested in following up on; why advertise something that will cost you money? Still, it's interesting.

2003-01-31T16:41:00.000-06:00

Another from last year's tax season: E-filing not a deal for all taxpayers. It's certainly a boon for the IRS, which is one reason they're energetically promoting the Free Filing program (in the planning stages when this article was written). But it doesn't do much for the taxpayer, unless you get a refund anticipation loan, and those are expensive. Worse still is that e-filed tax returns are scrutinized much more carefully for fraud, which may mean that your skating through on a shaky deduction will get dinged for the first time. Dealing with the IRS is unpleasant enough as it is, for most taxpayers; the additional concern that your return is much more likely to be checklisted by a Criminal Investigative agent might give some the willies. On the other hand, of course, this means that the fraudulent filers -- the same folks who, back in the 80s when SSNs were first required for all dependents, suddenly let 9 million little deductions vanish like so many deducted goldfish -- will get detected and screened out, which is better news for the average taxpayer pulling his weight.

If you can pass the scrutiny, though, and there's no reason that most simple and honest filers shouldn't, feel free to click over on the Complete Tax logo to the right -- I get an affiliate vig. It's half the cost of most tax software or even the cheapest preparer service!

2003-01-31T16:09:00.000-06:00

From last year, to be true, but basic advice tends to remain sound: How to choose a tax professional for your needs, explaining the differences between CPAs (Certified Public Accountants), CFPs (Certified Financial Planners), Enrolled Agents, and other terms such as Electronic Return Originator (ERO), although the public doesn't generally run into the latter. It does point out that the IRS has both a page where you can find an e-filer near you, and an annual recognition of exemplary e-file originators -- one firm from each state that had the fewest errors and other considerations.

Ms Money has a reference list for financial planner titles, including a few more that are less closely related to taxes -- such as the investment advisors known as CFA (Chartered Financial Analyst) and ChFC (Chartered Financial Consultant).

Tax Observer, it should be noted for my regular readers (are there any of you yet?), is considering looking at achieving some sort of certified professional status, while his technology career remains on hold.

2003-01-31T00:40:00.000-06:00

I do have another comment on the proposal that Traditional IRAs may go away. While again I prefer to take no position on the politics of this matter, and in fact the article points out correctly that the Roth IRA can be, in the long run, much more valuable to the taxpayer, I think in principle that taxpayers ought to be allowed to choose between the two. The Traditional IRA deduction was just raised to $3000 for the 2002 tax year, a long-overdue adjustment for inflation (and one that, much like the bipartisan-popular Earned Income Credit, gives the most benefit to the lower income scales). It would be a shame to lose this, one of the few above-the-line deductions that is available to everyone who can sock away a couple of grand.

2003-01-31T00:31:00.000-06:00

All you really need to know about the "SUV Loophole" that has been making the rounds is this brief quote: To be honest, I never knew about it, said one auto dealer; and another said overall impact has been negligible because he sells few such SUVs. The Tax Observer Editor does maintain he will stay out of politics, but it is clear from this particular issue that few people understand the basics of a Schedule C business filing, let alone a Section 179 equipment deduction. For starters, taking a one-time deduction for a vehicle is very bad tax planning, for a variety of reasons, but mainly coming down to the generosity of depreciation and vehicle mileage deduction.

Tax Observer, therefore, to shed more light on the subject and dissipate the heat, will begin a series of articles explaining Schedule Cs and ending with an explanation of how best to handle an SUV deduction. Whether you, as a well-paid professional, deserve this deduction is a matter of politics, but for the moment it remains legal, and thus Tax Observer believes you are entitled to every penny you can deduct this way. Check back later Friday for the first part of the series.

2003-01-27T05:03:00.000-06:00

The best way to save money on taxes, of course, is to reduce your taxable income. Still, many tax breaks go unused because people don't know about them, or don't realize their value. The biggie for most wage-earners today is the 401(k), of course, but there are many other ways to take in income and stash it away to get a credit or deduction, including the recent medical and education savings accounts. And if you're low income, don't overlook the earned income credit -- it's like taxes paid back to you.

2003-01-26T14:56:00.000-06:00

Chances are, unless you're a financial officer in a large business, you've never heard of the Electronic Federal Tax Payment System. If your annual tax payments exceed $200,000, though, you're required to use it. As an individual, you may have wished for a way to pay the government online, and this is the way to do it. There's no fee, and you can schedule payments -- e.g. for estimated taxes, or an installment plan for tax arrears -- up to an entire year in advance.

The site, alas, has designed by government bureaucracy written all over it. First you have to get forwarded to the correct regional site, and then everything you look at -- including the frequently asked questions and the front page -- is served up by https secure 168-bit encryption, making using the site ghastly slow even if you have broadband. One would think that with the e-file push this site would be a little more usable. Why does the end-user have to select which site to connect to, when it's a simple routing-by-state methodology? Why a cumbersome snail-mail verification process, even for penny-ante users? Perhaps somewhere along the line they'll conform better to the expectations of online users and get more individuals signed up.

2003-01-25T16:17:00.000-06:00

TurboTax generally gets good marks, along with other Intuit programs, but complaints have arisen about antipiracy software that comes bundled with the latest versions. It's called SafeCast, and clearly is intended to "manage digital rights" for more than just TurboTax -- in other words, for any software vendor that signs on, and for owners of music and movie copyrights. Intuit now lets you uninstall SafeCast as part of their own uninstall. Such software is called spyware and is increasingly common; it is very likely that if you have downloaded free software, you have spyware of some sort installed on your computer without your knowledge or consent. SafeCast, alas, is not apparently considered spyware, and may be kept out of spyware-detection and removal tools like Ad-Aware, as has happened at least once before under threat of lawsuit.

2003-01-23T22:11:00.000-06:00

The Motley Fool rounds up the main
Tax Form Changes for 2002. The one that is going to affect the most taxpayers is the increase in the floor for filing a separate Schedule B, up to $1500 (from $400, which is just about the same amount of money in constant dollars). If your interest and dividends together are less, simply put the total directly on your 1040, remembering that the IRS still gets the 1099 forms and can calculate how much you earned. Of course, if you use TurboTax or another product, this will happen automagically.

Another change allows you to deduct college tuition, even if you don't itemize -- valuable for adult students paying their own way. Also, very low-income taxpayers will be encouraged to use retirement savings plans with a contribution credit, but the numbers affected will be few (most people making that little money will not choose to sock some away). And teachers will be happy to have a deduction for school-related materials they purchase on their own dime, without itemizing. But most will probably already itemize, so again the numbers affected will be few.

2003-01-23T11:23:00.000-06:00

Humberto Cruz will get frequent notice in this blog. A former editor of the Orlando Sun-Sentinel, he is now a Tribune company columnist on financial matters, and his obsessive money-saving strategies apply to million-dollar real estate deals as much as they do to those scraping by.

Here Cruz describes how to "bunch" your charitable donations to save taxes, if you aren't able to itemize deductions every year. If it's close, it may be worth planning your deduction-related spending to fall in the tax year where you can get the most benefit. Other deductions to which this might reasonably apply are medical expenses and unreimbursed employee expenses, such as a home office. For example, you are able to deduct certain maintenance and repairs to your house pro-rated to the size of your home office. I will cover this in more detail later.

2003-01-23T00:42:00.000-06:00

Sole proprietorships have more paperwork than wage-earners, but it really isn't that complicated when you get down to it.

Curiously, though, this BW q-and-a fails to mention the increasingly popular LLC, a hybrid of sole propietorships, S-corporations, and partnerships that to its proponents offers the best of each. It's certainly more flexible, especially if there is profit or loss (e.g. from capital depreciation) to distribute among more than one person. Nevertheless, it can potentially be a minefield, so I would recommend seeking initial advice from an attorney or accountant, even if in the end it all looks surprisingly easy. LLCs can manage with fewer tax forms than anything but sole proprietorship.

2003-01-22T13:37:00.000-06:00

The House Always Wins. Online gambling is in a bit of a tither, since the major credit card vendors -- as well as Paypal -- have all agreed to stop processing transactions for internet gambling operations. An industry summit in Costa Rica is seeking a stay-in-business solution; unfortunately it may well resemble the increasing use of check-by-phone payments, which actually could give a gambling house access to your checking account. I shouldn't need to warn you about that. Still, this will likely give a needed boost to Paypal competitors, who aren't as picky.

Whether online or at the table, however, gambling has tax implications. Certain winnings -- generally big-ticket wins over $5,000 -- will have a withholding allowance sent to Uncle Sam. Others may not -- and the taxpayer is responsible for reporting that income.

On the other hand, it's little known that you can actually claim gambling losses as a deduction (as long as they do not exceed your winnings). If you do win a tell-grandma payout, it's a sure bet that you got there by a string of losses, and those losses may be used to offset the income from your winnings. Use form W2-G for both profit and loss accounting.

2003-01-21T23:29:00.000-06:00

File online for free. It's no scam -- it's for real. The IRS is under Congressional mandate to increase the number of e-filers substantially. E-filing is faster for the consumer, especially if you're seeking a refund -- but it's even more advantageous for the IRS. Every tax return that is submitted on paper has a significant cost associated, from postal transport, to storage, to transcription, to error correction. E-filing reduces errors (at least to those introduced by the taxpayers themselves!), and cuts many other costs. Also, e-filers tend to file earlier in the season, meaning that the IRS manpower can be spread out more evenly, reducing the need for overtime and seasonal employees.

This win-win scenario, though, is mostly on the side of the IRS. To avoid a tragedy of the commons, they want more taxpayers to e-file, even if they don't get refunds. Which brings us to the problem at hand: the costs associated with having professional tax services or online vendors e-file your taxes. Low-wage workers just won't go for that, nor will those on fixed incomes. So the IRS hopes to draw them to the e-file table with a program to promote free tax preparation services. The USA Today story gets into the nuts and bolts, but the basics are that the IRS Free File Alliance program has several tax services signed up to provide a variety of different needs-based programs. (In the wake of lawsuits, some of the large vendors are more than eager to provide image-building pro bono filing, especially because it could provide a good referral business.) Criteria vary -- for instance, a low AGI, or active-duty military status, or under 20. But the IRS wants 60% of taxpayers to be eligible for some type of free service during each tax season.

2003-01-21T17:55:00.000-06:00

Welcome to Tax Observer!

This will be a blog devoted to US Federal income taxes and associated topics, at a very accessible, how-to level. There will be reviews of tax books and software, news items, and knowledge gleaned from my ten years of experience doing complex personal returns including real estate, business, investment, and dependent situations. I do work for a tax service but I am not a certified accountant or career tax professional, just a regular person with hands-on experience that I hope is valuable. Note that in order to avoid professional conflicts I will use the Tax Observer pseudonym. This blog will not focus on tax politics, such as the ongoing debates over economic stimulus plans, and does not take a position favoring any proposal or party. But who doesn't like paying less taxes? If you read this blog, I hope I can show you a way or two to do that.