Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for August 3rd, 2009

Double Depreciating Vehicles?

Posted by taxguru on August 3, 2009

Q:

Subject: Question about Section 179 Deduction

I was reading your website and had a question about section 179.

In 2007 I purchased an Expedition EL >6000 lbs. I took the $25,000 deduction, I am being audited and am being told that I can not take the milage deduction and the 179 deduction. I thought the 179 was a depreciation event and had nothing to do with deducting milage. Can you elaborate??

Thanks in advance

A:

I constantly warn people about the dangers of trying to prepare their own tax returns because it is all too easy to make simple mistakes such as the one you did.

With business vehicles, you generally have the option of claiming the IRS’s standard per mile deduction or the prorated actual expenses based on business miles to total miles for the year.

The standard mileage rate includes a factor for straight line depreciation. This was 19 cents per mile for 2007.

The Section 179 expensing election is basically a kind of very accelerated depreciation. If you claim it, you are required to use the actual expense method for that vehicle and you are not allowed to use the standard mileage rate ever for that particular vehicle because that would result in double deducting the same depreciation.

There is no nice way to say this; but you screwed things up big time by trying to deduct both Section 179 and the standard mileage rate on the same vehicle. Any professional tax preparer with even limited experience would know better than to do that.

With that kind of basic error in your tax return, there’s no telling what others you have as well, including many that probably cost you money. Before you go any further with the IRS auditor, you should hire a professional tax advisor to review your 2007 1040 and see if s/he can find some tax saving deductions that will offset the extra taxes that you are going to have to pay as a result of double deducting vehicle depreciation.

If you already prepared your own 2008 1040, you will also need to have a professional tax advisor fix the mistakes that it has.

I’m sorry to be the bearer of such bad news and I hope this helps you salvage some tax savings.

Kerry Kerstetter

Follow-Up:

Thanks for the quick response. The situation is not quite so bad, we found almost $20k in deductions missed.

Thanks again for your help

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

Posted in 179, Vehicles | Comments Off on Double Depreciating Vehicles?

A 360 degree policy change…

Posted by taxguru on August 3, 2009

Posted in comix, TaxHikes | Comments Off on A 360 degree policy change…

First-Time Homebuyer Credit

Posted by taxguru on August 3, 2009

Q:

I just closed escrow on the purchase of my first ever house in July 2009. Is my Realtor correct that I can file an amended 2008 tax return to claim the special credit for first time homebuyers? Is he also correct that this credit is mine to keep forever and doesn’t need to be repaid? I had read somewhere that the credit was just an interest free loan that had to be repaid on future tax returns. It sounds too good to be true.

A:

Your Realtor is correct that you won’t have to wait until April 15, 2010 to receive this credit, which can be as much as $8,000. You have the option to claim the credit on your original or amended 2008 1040, as long as the purchase has been completed.

As always, this kind of thing should be handled by a professional tax preparer, whose software should have the ability to properly calculate the credit on Form 5405. This can get tricky if your modified Adjusted Gross Income is over $75,000 ($150,000 for married couples) because that places you into the dreaded “Evil Rich” category as defined by our imperial rulers in DC.

In regard to repaying the credit, there was a change in the original program from what we had in 2008. For homes purchased in 2008, the credit must be repaid in 15 annual installments, starting with the 2010 1040. If the home ceases to be the main residence before the 15 year repayment tine is up, the remaining amount of the credit will be due in one lump sum on that year’s 1040.

For homes purchased between January 1, 2009 and December 1, 2009 (the current end of the credit qualification period), the credit does not have to ever be repaid if you use the home as your primary residence for at least three years. If you move out of the home, sell it or convert it to business or rental usage before the three year anniversary of your purchase, you will be required to repay the full amount of the credit in one lump sum on the tax return for the year in which the home ceased to be your principal residence.

If you don’t already have your own professional tax preparer, be careful of who you use to prepare the amended 1040. As IRS has announced in this press release, they have discovered some unscrupulous preparers who are soliciting clients who don’t actually qualify for the credit. If you happen to use one of those preparers, your credit will be disallowed and your full tax return will most likely be audited by IRS.

As with any tax law, there are even more twists to this one; so be sure to work with a professional tax advisor.

Good luck. I hope this helps.

Kerry Kerstetter

Posted in Credits, realty | Comments Off on First-Time Homebuyer Credit