State politicians are creating a de facto national sales tax. – No surprise here. We all knew that sales taxes on internet purchases were inevitable.

When making those last minute donations, make sure you do it properly.

Don’t Take a Bath By Ignoring the ‘Wash Sale’ Rule on Stock Losses – From Gail Buckner

Numerous Changes Show Up on the New Form 1040—and More Are Coming – From the latest Intuit ProConnection Newsletter

IRS Begins Implementing Extenders Legislation; Works to Help Taxpayers During Filing Season

From a reader:

Subject: partially dodging the revised Kiddie tax

 

California has not adopted the increase to age 18 for the Kiddie Tax.  This gives Californians an opportunity to realize gains this year and pay only 15% federal tax.  That’s more than the 5% it would have been without the retroactive tax increase, but it’s less than the 24.3% it would have been had California conformed to the new federal rule.

 

If California conforms for 2007, people with teens aged 14 to 16 this year will wish they had realized those gains in 2006.  Taking the gains now avoids another 9.3% tax hike.

 

You might want to check out which states have conformed and which have not, and advise your readers.  Please don’t quote me on this one if possible.  I’d rather you take the credit, since you’ll be the one doing the research and writing.

My reply:

That’s a very interesting loophole for people to consider.  I don’t have time to research each state’s conformity with the federal law, but I hope tax pros around the country are checking on whether their states will allow for a similar maneuver.

Thanks for writing.

Kerry Kerstetter

 

There have been plenty of people writing about the recently passed tax law that we have been referring to as the “Extenders Act” instead of its technical name (Tax Relief and Health Care Act of 2006).

What I always find useful with new legislation are short and sweet summaries that can be passed along to clients more easily than the verbose analyses that we practitioners have to study.

While I know many of such summaries are currently in the works by the normal sources, the first one I’ve come across is this one from Spidell, which includes the excellent warning that California law currently doesn’t conform with this new Federal legislation.

This non-conformity will be a mess for all states, as some pass their own last minute or retroactive conformity laws, while others leave their tax systems as is and force us to make the appropriate adjustments between Federal and State tax returns.

I will post links to other similar summaries of the new law as I learn of them.

Updates:

QuickFinder has posted two items related to this new law:

Four-page PDF summary of provisions in new law, with helpful references to page numbers in the QF books.

One-page PDF on IRS guidance on how to adjust tax return prep to the fact that the 2006 tax forms were already printed before this law was passed.

The folks at TheTaxBook have posted their summary of the new tax law, also including page references to where each subject appears in their books.

Deloitte Tax:

HTML

PDF (8 Pages)

Q-1:

Subject: Substantiation of Expenditures

 

Tax Guru,

 

I appreciate your musings and advice on the U.S. Tax regime and have a question for you that I’ve been unable to see a post for on your blog.

 

Is there a de minimis amount for which a receipt is not required to substantiate a deduction for income tax purposes.  My former employer required us to provide a receipt only for expenses of $25 or more.  Has the IRS adopted an similar policy?

A-1:

For several years, IRS had a $25 threshold for when an actual receipt was required to document a particular travel or entertainment expense.  A number of years ago, this was raised to the current $75 threshold.

While IRS can’t demand an actual  receipt for individual travel & entertainment expenditures of less than $75, you do still need to keep records showing the time, place, business purposes and amount of each separate expense.  Documentary evidence is still required to substantiate expenses for lodging.  See IRS Publication 463  for more details.

An even easier way to account for out of town expenses is to use the IRS’s per diem rates, as published in IRS Publication 1542.

Your own personal professional tax advisor should be able to provide more specific assistance for your particular situation.

Good luck.

Kerry Kerstetter

Q-2:

Thanks for the input Kerry. Turbo Tax, my tax advisor, has been silent on the matter.  I’ve been keeping receipts for everything $25 and over.  But have been throwing away all receipts under $25 not just travel and entertainment.   Should I be keeping receipts for items under $25 that are not travel and entertianment?

A-2:

Now I can’t tell if you’re legit or pulling my leg here.  No computer program can seriously be considered as a professional tax advisor.  That goes for all software, from the $5,000 plus Lacerte programs I use to the $30 TurboTax you are using. The role of an advisor can only be handled by an experienced human.

The rules for record keeping need to be tempered with real life.  While technically, you are supposed to have receipts or other suitable documentation for every penny you deduct (other than the special $75 rule I mentioned previously), the real life need for such detailed records may never materialize.  If you are audited by IRS for those deductions, the auditors have the discretion to either demand to see detailed documentation for every single penny or just those expenditures over a certain dollar figure.  It usually depends on the number of individual transactions and the total dollar amount being deducted.  For example, I am currently handling an IRS audit where the auditor agreed to only look at documentation for individual expenditures over $100 after I gave him a several page QuickBooks listing of all of the items included in the expense accounts he was interested in examining. 

So, your self defined $25 threshold for keeping receipts may work out to be fine, as long as you don’t encounter one of the IRS auditors who doesn’t believe in the concept of materiality and demands documentation for every penny. 

Again, if there are large amounts of money involved, I would advise working with an experienced human tax professional for setting up your record keeping systems, preparing your tax returns and representing you with IRS if you are one of the lucky ones to be selected for their examination.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Very helpful.  Thanks for the real life advice. 

 

I’m pulling your leg.  I’ve done a bit of research on my own and don’t rely on TT as an authoritative source for tax law.  My consulting work isn’t sufficiently complex enough or large enough, at least yet, to require a tax advisor, at least I think don’t think so.   Maybe one more

year of Turbo Tax and then I might need to seek more professional help with my taxes.

 

Thanks again for taking the time to personally respond.

 

Happy holidays.