Overlooked Beneficiary Designations Can Lead to Undesired Results

When you have a change in marital status or a birth or death in the family it is often generally assumed that if you have make the appropriate changes to your will that you will have accounted for these changes and your final bequest desires will be honored.  Unfortunately, many people forget to consider beneficiary designations that have been made on IRAs, Pensions, Annuities and Life Insurance Policies.  The beneficiary designations made on these financial instruments and plans take precedence over bequests made in wills and can often lead to disappointing surprises for family members you leave behind.  Any time you have a change in the status of your family or final bequest desires, request information as to the beneficiary designations you have listed for these financial instruments and complete a change of beneficiary designation form for the appropriate entity to affect your desired changes.  You can make your estate the beneficiary of these instruments, but doing so can often lead to unintended income tax consequences.  It's best if you consult with your CPA or estate attorney to insure that you are making the best choices.

Deduction for Taxpayer's Own Work

In 2007, taxpayer worked 1,000 hours developing a web-based business. His proprietorship did not pay him for his services, but did accrue a $50,000 liability for his work to set up the website, based on the $45 to $55 per hour he would have paid an unrelated third party for performing similar website development work. In upholding the IRS's disallowance of the deduction, a Tax Court summary opinion noted that a taxpayer is not entitled to a deduction under the accrual method "if there is no legal obligation during the taxable year to make such payment." In this case, there would have been no legal consequences if taxpayer had refused to pay himself—he would not have taken collection action nor would he have sued himself. This has always been the IRS position and I am surprised that the Tax Court was even willing to hear the case. 

Social Media Resources for IRS

The IRS lists five "social" ways to access tax information from the IRS:
(1) IRS2Go—a smartphone application allowing users to check refund status and tax updates;
(2) YouTube—the IRS posts short information videos on various topics;
(3) Twitter—the IRS tweets, @IRSnews, tax-related announcements, news for professionals and updates for job seekers;
(4) Audio Files for Podcasts—short recordings with information on one tax-related topic and made available on iTunes or www.irs.gov ; and
(5) Widgets—tools that can be placed on websites, blogs, or social media networks directing others to www.irs.gov for information.
So, if you have a burning desire to keep tabs on what the IRS is thinking, here is a way to do so.

Business Expense Substantiation

In a recent court case the Tax Court granted a self-employed handyman a partial deduction for amounts paid to individuals who assisted him in performing certain jobs, but denied deductions for meals and entertainment, vehicles, telephone and legal fees due to lack of documentation.  This case reinforces the need for self-employed persons to maintain receipts for all business expenditures and to keep mileage logs for business vehicle use.  If meal and entertainment expense is going to be claimed, it is necessary to document who was entertained and what business was discussed either before, during or immediately after the meal or entertainment.  Also, when claiming meal expenses it is important to remember that generally only out-of-town meal expense is allowed.  Published per-diem meal and incidental expense deductions may actually allow for more deduction than the actual expenses incurred.  You should check with your CPA to make sure that you are getting the maximum deduction for your out-of-town meal expenses.

IRS Steps Up Audit Enforcement

Over the past few years the IRS has added roughly ten percent additional enforcement staff positions bringing the total number to just under 23,000 positions.  The audit rate was 1.11 per cent of all taxpayers last year, but for certain groups such as those who operate their own business the audit rate is just over four per cent.  The IRS estimates that Schedule C filers understate their income by about $69 billion a year.  Although the numbers are still small, IRS audit representation can be costly and it is important that you have your returns prepared by someone familiar with all pertinent sections of the tax code and IRS regulations regarding self-employed taxpayers.

New IRS Publication to Assist Displaced Workers

The IRS has released a new brochure, IRS Publication 4128 (Tax Impact of Job Loss), which addresses many of the issues faced by workers who have recently lost their jobs.  The publication addresses such items as severance pay, unemployment compensation, gifts from friends or relatives, food stamps, and withdrawing money from retirement accounts or IRAs.  It also contains information regarding starting a new business and allowable deductions regarding job search expenses.  If you or someone you know could use this brochure it can be downloaded from the IRS website at http://www.irs.gov/.

Q&A

As you visit this site you may think of particular tax questions or issues that you would like addressed.  Since other bloggers may share your interests or concerns, if you will either email or comment to me I'll address them in Q&As on this blog.

The Cost of Raising a Child

The average cost of raising a child born in 2011 (including attendance at a public university) is estimated to be $310,262 (Source: USDA 2009 Annual Report and Babycenter.com), so it is never too soon to start saving for your child's education.  There are provisions in the Tax Code to help you get there:

One of which is to setup custodial accounts for children under the Uniform Gift to Minor's Act which allows you to make gifts up to $13,000 per donor per child per year.  The first $950 of investment income earned on these accounts is exempt from taxation with the next $950 subject to taxation at the child's rate, which is currently 10%.  Investment income over the $1,900 is taxed at the parent's incremental rate which can be as high as 35%.  However, by carefully selecting investments that do not throw-off much income, such as stock index funds a good deal of money can be shifted to a child's account with the potential for significant tax savings.  These funds are not restricted and can be used to pay any of the child's expenses.  However, once the child reaches the age of majority, technically (note I said in a technical sense) they have control over the funds.

Another provision is the adoption of an Education Savings Account.  Annual non-deductible contributions can be made up to $2,000 per child.  The advantage to these accounts is that to the extent the funds are used to pay for the beneficiary child's education, the income earned in the account is never taxed.  There are some contributor income limitations to making the contributions, but these accounts remain a good option for education savings.

Another option is to open a 529 College Savings Plan.  These plans must be adopted by states or educational institutions and the investment returns of these state sponsored plans vary greatly.  Internet searches can easily be performed on these plans to determine which state plan best suits your needs.  Again, there is no current deduction for amounts contributed and the contribution is limited to the present value of the cost of the college education.  Contributions can be made on a systematic ongoing basis or in a lump sum.  Lump sum contributions are subject to annual gift limitations although one large gift may be used ratably over a five-year period to avoid gift tax consequences.

Determining what option is best for you can be a bit confusing and I suggest you consult with your CPA as to which plan may best suit your contribution limitations and tax needs.

7 Tax Tips For Bloggers

If you are blogging with the intent to earn money then there are some provisions in the tax code you should be aware of and also certain tax benefits that you may be able to tax advantage of:

1.  If you barter your services in exchange for goods or services in return, you are required to
  report the fair market value of those goods and services in income on your income
  tax return.
2.  If certain conditions are met and your blogging income exceeds your expenses you may  
  be entitled to a home office deduction.
3.  You may be able to take the Child and Dependent Care Credit on your tax return for
  enrolling your child in summer camps if your blogging activity is showing a profit.
4.  You may claim business use of auto deductions if you drive to either acquire or test 
  products or services that you blog about.  Mileage records should be maintained to
  account for business usage of your auto.
5.  You may take a portion of the cost of computers, accessories and supplies and internet
 access fees as they relate to your blogging.  Any other out-of-pocket expenses incurred in
 your blogging business are also deductible on your tax return.
6.  The costs of developing websites and blog content are also deductible expenses in
  determining your net taxable income from blogging.
7.  Even if you are not yet generating revenue from blogging and are in the development
  stage of building your blog site, you may still be able to deduct certain blogging related
  expenses.

In determining which expenses are and are not deductible on your income tax returns you should consult a CPA knowledgeable in tax matters.