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Wednesday, January 27, 2010

Who gets a 1099?

Q. My wife and I built a house last year. Do we need to give 1099s to the contractors?

A. No, you only need to issue 1099s to people who work for you in the course of a trade or business, but who are not employees. Personal payments are not reportable.

Can I Deduct Gambling Losses on my Tax Return?

Gambling winnings are fully taxable and must be reported on your tax return. You must include all of your winnings, including winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips.

Gambling losses are deductible, but only when they offset gambling profits. And you MUST keep detailed records of those losses or the IRS will disallow them if you are audited. You'll need to list exactly how much you lost on a particular day at a specific machine or game (identified by machine number, game type, and casino).

The catch: you may deduct gambling losses only if you itemize deductions. You claim gambling losses as a miscellaneous deduction not subject to the 2% limit. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return.

This means that if you win, you must report all winnings; but, if you lose, you can only deduct gambling losses if you itemize deductions (and your winnings are more than your losses.)

It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

Keep in mind that Federal taxes apply to ALL your gambling income even if a win doesn’t reach the threshold for mandatory reporting by the casino to the IRS. Jackpots between $1,200 and $5,000 are reported, but are not subject to Federal withholding when the player provides a social security number. Amounts above $5,000 require withholdings.

Monday, January 25, 2010

Don't Forget Non-Cash Charitable Contributions

Don’t forget non-cash charitable contributions as you prepare your tax return this year. Non-cash contributions include clothing, household goods, books, furniture, or other tangible items given to the Salvation Army, Goodwill, or other charitable organizations.

Generally, you can deduct contributions of property that you make to, or for the use of, a qualified organization. Not everyone, however, will be able to deduct their charitable contributions: you will need to itemize your tax deductions in order to claim this benefit.

In general, contributions of donated clothing and household items must be is in good used condition or better. Questionable items worth only a few dollars because they are in fair condition are no longer acceptable. Items not in good used condition must be accompanied by an appraisal.

Also, be sure to get a receipt or written acknowledgment from the charity for the donated goods for your personal records. The nonprofit may not put a dollar value on this receipt, but it will help you prove that you did indeed donate the property if the IRS asks. You are responsible for determining the fair-market value of any goods or services.

And if the total of all your contributed property comes to more than $500, you have to file IRS Form 8283 with your tax return. Above $5,000 and you must include an appraisal.

You can deduct your contributions only if you make them to a qualified organization. Donations to an individual, even if you feel the person is in need, are not tax deductible.

You can ask any organization whether it is a qualified organization, and most will be able to tell you. Or you can check IRS Publication 78, which lists most qualified organizations. You may find Publication 78 on the Internet at www.irs.gov/app/pub-78. You can also call the IRS to find out if an organization is qualified at 877-829-5500.

Saturday, January 23, 2010

Making It Easier for Americans to Support Haiti

New legislation signed by President Obama on January 22, 2010 providing immediate tax deductions for Haiti Charitable Contributions.

This legislation will allow taxpayers to receive the tax benefit from donations made to the Haiti effort in this tax season, rather than having to wait until they file their 2010 tax returns next year. Specifically, cash donations to charities for the Haitian relief effort given after January 11 and before March 1 of this year may be treated as if the contribution was made on December 31 of last year so that the contribution can be deducted from 2009 income. This measure applies to monetary donations, not goods or services.

However, as usual, you must itemize deductions to deduct any charitable contributions.

One way to contribute is the Clinton Bush Haiti Fund. To donate, visit ClintonBushHaitiFund.org or text “QUAKE” to 20222 to charge a $10 donation that will be added to your cell phone bill. To learn more about the situation in Haiti and what you can do to help, visit WhiteHouse.gov/HaitiEarthquake.

Friday, January 22, 2010

Claiming a Parent as a Dependant

Q I pay to take care of my elderly mother. Can I claim her as a dependant on my tax return?

A You may be able to claim your parent as a dependant. However, you must meet certain IRS criteria.

The highest dependency hurdle is the amount of income your parent earns. A dependent parent cannot have more taxable income than the exemption amount ($3,650 for 2009). Social Security normally is excludable, but it includes interest and dividends. Gifts and loans are not included as income.

Next, to be deemed a dependant for tax purposes, your parent must get more than half of his or her support from you. To reach the 50-percent-plus threshold you can take into account the fair-market room rental, food, medicine and
other support items. This is where Social Security does come into play. If a parent is using benefits to pay for some of these support items, it goes into the calculation of whether you cover more than half of your parent's support costs.

A parent may not have less than $3,650 in taxable income, but gets Social Security and uses it to pay for some medicine and buy clothes. In that case, the adult child's contribution may not meet the support threshold.

Your parent doesn't have to live with you. When a parent is able to remain in his or her own house, in an assisted living facility or a nursing home, costs you
pay for parental support at those locations count toward meeting the support requirement.

Once your parent does meet the IRS dependency tests, you can use any medical expenses you pay for mom or dad toward your itemized medical deduction. Since medical costs must exceed 7.5 percent of adjusted gross income before you can claim them, a parent's added expenses could help you meet the requirements.

Note that, if your parent isn't considered a dependant for exemption purposes simply because he or she earned too much but met the other tests, the IRS says the parent still could be counted as a dependant for medical deduction purposes.

Sometimes you don't shoulder the load alone. Many adult children get help from siblings in caring for mom or dad. Where none of you solely pays for half of a parent's support, but each contributes at least 10 percent toward parental care, you can use the IRS's multiple-support declaration. This form helps you account for the tax implications of a shared-care arrangement.

For example, your mother is in a nursing home. Her Social Security covers 40 percent of the facility's costs, and you and your two siblings split the remainder, each paying 20 percent. Because more than half of her support comes from her three kids, she can be claimed as a dependant -- but by only one of you. The choice is left to you and your siblings, but only one of you can claim her as a dependant in any one year. You can, however, switch off, and take turns claiming her as a dependant.

Thursday, January 21, 2010

Are Computers Eligible Education Expenses?

Q My daughter was required to buy a laptop computer when she started college last fall? Can I include that as an eligible expense for the Education Tax Credits?

A The American Recovery and Reinvestment Act was passed last year and created the American Opportunity Credit, which expanded the existing Hope credit. And, when the credit was expanded, the definition of qualified expenses was also expanded.

The credit can be claimed for tuition and certain other qualified expenses paid for yourself, your spouse, or your dependant for higher education in 2009. The term "qualified tuition and related expenses" now includes expenditures for required course materials, including books, supplies and equipment required for a course of study. Those additional costs need not be paid directly to the institution and do not have to be a condition of enrollment.

So, if the computer is required by the higher education institution, the cost would be a “qualified education expense” for the American Opportunity Credit.

The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education at an “eligible educational institution.” (Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. The educational institution should be able to tell you if it is an eligible educational institution.)

Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

The credit begins to decrease for individuals with incomes above $80,000 or $160,000 for joint filers and is not available for individuals who make more than $90,000 or $180,000 for joint filers.

Computers can also be eligible education expenses for 529 plans. If, however, you take the above-the-line deduction instead of the credit, the old definition of qualified expenses apparently applies, and you can only deduct payments made directly to the education institution.

New Real Estate Tax Deduction for Non-itemizers

Much like the ‘New Car Tax Deduction’ (see below), there is a new standard tax deduction for those who don’t qualify to itemize their tax deductions, but pay real estate taxes. The deduction amount is equal to the amount of real estate taxes paid up to $500 for single filers or up to $1,000 for joint filers. This property tax deduction is in addition to the standard deduction used by filers.

This option especially benefits older homeowners and others who have paid off or paid down their mortgage and no longer have the big interest deductions that usually are the major reason for itemizing.

New Car Sales Tax Deduction

For 2009, individuals can deduct sales tax paid on the purchase of a new vehicle. The deduction is available for cars, trucks, motorcycles, motor homes and recreational vehicles purchased after February 16, 2009, and before January 1, 2010. And, the vehicle must be new (not used).

The deduction is limited to the taxes and fees paid on up to $49,500 of the purchase price of an eligible vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.

People won't need to itemize to take this deduction. Instead, the deduction will be added to a person's standard deduction. Itemizers will take this deduction in addition to the deduction for state and local income taxes. If you elect to deduct sales taxes instead of state and local income taxes, then the taxes paid on the car will be added to the other sales taxes you paid.

Sunday, January 17, 2010

What if You Don't Get a 1099 for Work You've Done?

Q I am negotiating with an overseas company to do consulting services for them. They don’t have a federal tax ID, they don’t bank in the US, and they won’t be sending me a 1099. How do I report this income?

A You are responsible for correctly reporting your income despite not receiving a 1099 from the foreign contractor. You have no responsibility as the service provider in the 1099 process; but you are required to report the income with or without a 1099.

The same thing happens frequently with domestic companies or individuals who fail to issue 1099s to contractors. The IRS will not have a copy of the 1099 to compare your reported income to, but that does not change the fact that you are expected to report all income that you receive.

I recommend that you keep good records of the income received with any pertinent documentation, such as contracts, letters of agreement, and bank deposit receipts.

Do I have to Pay Gift Tax on Gifts that I Give?

Generally, the current gift tax rules allow you to make a gift of $13,000 per year to any individual without gift tax consequences. There is no limit on the number of people to whom you can give; you can give $13,000 per year to as many people as you want without gift tax consequences. And, you can give unlimited gifts to a spouse.

There is no dollar limit on the amount you may pay on an individual's behalf if you pay the money directly to a school for tuition or to a health care provider for certain medical costs. As long as the payments are made directly to the institution, the $13,000 annual limit will not apply.

The exclusion does not apply to books, supplies, and fees or other expenses that are not direct tuition costs, or for medical costs that do not qualify as deductions for income tax purposes.

Spouses can split their gifts so that a gift made by one is treated as being made one half by each. As a result, a married couple can give $26,000 a year to any one individual without incurring any gift tax consequences. The funds can come from one spouse's assets, as long as the couple agrees to split the gift.

So what are the ‘gift tax consequences”? If you make a gift to any one individual of more than $13,000 ($26,000 for a married couple), you will have to file a gift tax return. However, under the unified gift and estate tax rules, you may still not owe any gift tax. Under those rules, every person is entitled to a combined lifetime exemption for gift and estate tax purposes. This exemption allows an individual to gift $1,000,000 of assets without paying any gift tax.

However, even if no tax is due, a gift tax return must be filed for any gifts above the annual exclusion limit.

There is no limit to the amount that you can give to charity; however, your tax deduction may be limited. Income tax deductions for charitable contributions not allowed in one tax year may be carried over to the next tax year.

Note, however, that the gift and estate tax rules are in the process of change: what is true for 2009 and 2010 may not be true for 2011.

And, as I wrote in the previous post, there are no income tax consequences to the recipient of the gift.

Friday, January 15, 2010

Eight Ways to Find Tax Help 'en Español'

Tax information can be tough to understand in any language, but it can be even more difficult if it is not in your first language. To assist Spanish speaking taxpayers, the IRS provides a wide range of free products and services.


Here are ways you can seek help from the IRS if you need assistance with your federal taxes in Spanish:


1. Get answers 24 hours a day seven days a week IRS.gov/espanol has a wealth of information accessible all day, every day for individuals and businesses. You will find links to tax-related information, disaster relief, identity theft and warnings about common tax scams that victimize taxpayers. You can also check the status of your tax refund through the online tool ¿Dónde está mi reembolso? Or even find out if you qualify for the Earned Income Tax Credit, a refundable tax credit for people who earned less than $48,000, using the Asistente EITC on our secure Web site.


2. Get up-to-date at the Multimedia Center Watch YouTube video tax tips and listen to audio podcasts on various IRS topics in Spanish and English by entering the keywords “Centro Multimediático” into the search box of IRS.gov.


3. TeleTax is a toll-free, automated telephone service. TeleTax provides helpful pre-recorded tax topic messages and refund information. TeleTax can also help if at least four weeks have passed since you filed your return and want to check on the status of your federal refund. Having a copy of the tax return handy will help you respond to the prompts on the automated system. TeleTax is available 24 hours a day, seven days a week at 800-829-4477.


4. Toll-Free Telephone Assistance is available from Spanish-speaking IRS representatives by calling the IRS customer service line at 800-829-1040 and then pressing 8.


5. Get tax forms and publications You can view and download several tax forms and publications in Spanish directly from IRS.gov/espanol at any hour of the day or night. You can also get them by calling 800-TAX-FORM (800-829-3676).


6. Visit the IRS Spanish Newsroom Find the agency’s most recent announcements, tips and information on recently implemented tax law that could affect you. Avoid missing any benefits and keep up to date by typing the keywords “Noticias en Espanol” into the search box of IRS.gov.


7. Multilingual Assistance at IRS Taxpayer Assistance Centers Don’t let a language barrier prevent you from getting the face-to-face tax assistance you may need when you believe your tax issue cannot be handled online or by phone. Multilingual services are offered to taxpayers in more than 150 languages, including Spanish, through bilingual employees and an Over-the-Phone Interpreter. TAC locations, hours and services are available at IRS.gov/individuals by clicking on the link for Contact My Local Office in the left tool bar section.



In addition to this help from the IRS, you can contact me at lancewgurel@gurelcpa.com en Espanol at any time. I have Spanish-speaking assistants on staff to assist us in meeting your tax and accounting needs.

Sunday, January 10, 2010

Are Gifts That You Receive Taxable?

Q I received a large cash gift from my father last year? Do I have to report it on my income tax return?

A No. Gifts are NOT taxable to the recipient. Some gifts require the filing of Form 709 – US Gift Tax Return, and some can incur gift tax. However, filing the return and paying any gift tax due is the responsibility of the gift giver, not the recipient.

What is considered a gift? Gifts include both money and property given out of affection, respect, or other generous motivation with no consideration of payback in the form of past or future work, promotional activity, or other benefit.

Gifts include the use of property without expecting to receive something of equal value in return. Also, if someone sells you something for far less than the fair market value, they have given you a ‘gift’ in addition to the price they received. If you receive an interest-free or reduced-interest loan, the IRS considers the interest given up as a gift.

What about gifts from an employer to an employee? Within limitations, gifts are allowed tax free to reward longevity or safety achievements. But a gesture of gratitude, in cash or goods, for great work the past year or to spur efforts in the future is taxable, says the IRS. That includes Christmas or other bonuses; your employer should include the bonus in taxable income on the W-2.

Certain untaxed gifts between family members can have a hidden bite that may not be apparent for years. Take a grandfather who gives stock to his granddaughter. Though there's no immediate income tax on the gift, there may be a large liability when the securities are sold. That's because profit on the sale will generally be measured from when granddad acquired the shares, and that profit will be taxable to the granddaughter when she sells the stock.

Wednesday, January 6, 2010

Reporting Name Changes to the Social Security Administration

Q I was married in 2009. Is there anything special I need to do before filling my taxes this year?

A If you took your spouse’s last name or if both of you now hyphenate your last names, you may run into complications if you don’t notify the Social Security Administration. When newlyweds file a tax return using their new last names, but the Social Security Administration has the old last names, IRS computers can’t match the new name with their Social Security Number.

Similarly, individuals who were recently divorced and changed back to their previous last name need to notify the Social Security Administration of this name change.

If your husband adopted your children and their names changed, you’ll want to make sure this information was reported to Social Security Administration, as well.

Informing the Social Security Administration of a name change is easy; you’ll just need to file a Form SS-5, Application for a Social Security Card. Form SS-5 is available from the Social Security Administration or on my website at www.gurelcpa.com (Click the DOCUMENT CENTER tab.)

Bartered Goods and Services are Income

Q I have a landscape business, and I trade services with my mechanic. We agree that, over the course of the year, the value of our services is equal. Since it is a “wash”, do I have to include anything about this on my tax return?

A Yes. The IRS considers this barter income, and even though the transaction was a “wash”, you must both include the fair market value of the services as income.

Bartering is an exchange of one taxpayer's property or services for another taxpayer's property or services. The fair market value of property or services received through barter is taxable income.

Usually there is no swap of cash. Barter may take place on a direct, one-on-one basis between businesses and individuals, or it can take place on a third party basis through a modern Internet barter exchange.

If you engage in the direct barter of products or services with an individual or a business you will generally not receive a Form 1099-B, but the transaction must be accounted for in your books and records just the same. For example, if a doctor agrees to give an accountant a personal medical exam in exchange for personal tax return preparation, the fair market value of the medical exam is taxable to the accountant, and the fair market value of the tax return preparation is taxable to the doctor.

Barter can be used as compensation, too. A business can “pay”3 bartered goods or services as a bonus or as part of a compensation package to employees, partners and contractors. For example, a business may “pay” bonus or sales incentive programs with compensation including such items as vehicles, restaurant certificates or resort trips.

Barter used as compensation is deductible to the payer as an expense, but it is subject to employment taxes and information reporting. Barter used as a bonus or compensation for an independent contractor must be included on the contractor’s Form 1099-MISC, Miscellaneous Income, as non-employee compensation, and all barter compensation for employees must be taken into account on their Forms W-2. Barter compensation is subject to FICA, FUTA, and federal income tax withholding.

Saturday, January 2, 2010

Happy New Year! Now, go write down your odometer reading

It's the beginning of a new year, and it's time to document the odometer reading of each vehicle you use in your business.

Why? Establishing total yearly mileage for the vehicle is an essential part of documenting a deduction for the business use of a vehicle. In order to claim a deduction for vehicle expenses, you must know the percentage of business use each vehicle you use in your business, not just the number of miles of use. And the IRS is picky about what you must do to prove your deduction.

Simply knowing the number of miles you use the vehicle for business use is not enough; you must know your TOTAL mileage to calculate the business-use percentage.

Hopefully, you wrote down the beginning of 2009 odometer reading(s) somewhere; if so, with that number and the reading you take today, we will be able to calculate your total vehicle mileage for 2009 and, then, the business-use percentage.

If you did, congratulations!

If not, it's time for New Year resolution: write down the beginning odometer reading of my vehicle(s) so I'll be able to properly document the business use for 2010!

Since I'm writing from Florida, it's easy for me to say, "Go outside right now and check your vehicle mileage." However, I realize for many of you in other parts of the country, that process may involve many layers of clothes and possibly scrapping ice. I shutter at the thought. Nevertheless, you must know your beginning of the year odometer reading to properly document your tax deduction.

If you're not sure where to store that information, you can email it to me @ lancewgurel@gurelcpa.com and I'll store it for you.

(Please also see the post from December 2009 for more about maintaining a log of vehicle mileage. Jump to the post by expanding the 2009 diamond to the right, clicking on the December diamond, and selecting the post.)

Happiest of New Years and best wishes for the coming decade.