Tax Guru – Ker$tetter Letter

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.

The Virtual Taxman Cometh – Will IRS come looking for real tax dollars from people earning online virtual money?  Will IRS accept virtual money as payment of taxes?  We’ll have to wait and see.

Allowing people to keep more of their hard earned income is now considered the same as a gift from Santa?

(Click on image for full size)

A Way for Mom and Dad to Give More Generously – From Gail Buckner

Your Mortgage: Pay Now, Or Hold Off to Invest? -From the free WSJ.

Tax Leads Americans Abroad to Renounce U.S. – An extremely drastic way to save on taxes.

Q:

Subject: Business Startup Questions

 

To the TaxGuru~

 

 Hello! Somehow in a random search for relevant tax based website information I stumbled across your site. First let me introduce myself. Im 27 y/o and in the process of forming a corporation that provides auction & import services. I am somewhat business savvy, but when it comes to tax – its over my head! And of course my funds are meager to begin with. So my questions are below….

1 Do you provide tax help for povery stricken student ha.

2. Do you know of any non profit orgs that will answer your tax questions for a small fee.

 

3. What is the process for taking the home based office deduction? I have the form i just dont know how i would lease an apartment upfront. 

I imagine thats what i would have to do? Then from what i understand(let me know if this is wrong). You *rent* the office to the corporation which you keep the money from and the corporation deducts the office costs as a business expense?  I would be utterly grateful if someone could walk me through this process there is so much i dont understand about this. I need to start this business away from the stress of my home situation. But i cant afford an apartment unless i can qualify for the office deduction.

 

Kerry any advice you can give me is respectfully appreciated.

 

Seasons Greetings!

A:

While this may sound harsh and self-serving, tax and accounting advice isn’t the place where you want to cut corners.  Nowhere is the “you get what you pay for” maxim more appropriate than in this area.

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

 

Q:

Subject: So how would you advise them?

Dear Mr. Kerstetter,

A friend and fellow lawyer pointed this article out to me and I thought you’d find it interesting.

Basically, can you be taxed on receipt of a kidney?

What I wonder is, if you and I each have a car of equal market value and we trade them, would we be taxed?  Beyond the obvious bio-ethics issues, I don’t see the difference.

A:

As learned and entertaining as Professor Maule is, this is a perfect example of how ivory tower academics (and some attorneys I have known) love to let their imaginations go wild and conjure up scary tax scenarios out of what are actually innocent events.

If I were advising these people from my real world perspective on tax matters, I would have them sell their kidneys to each other for one dollar each and completely avoid the entire subjective valuation of a bartering transaction.  While the black market price for kidneys may be as much as $50,000 (per a recent episode of Nip/Tuck), each person is actually entitled to establish her own price.  While some cold-hearted bastards might say they should auction the kidneys to the highest bidders, basic private property rights allow us to set out own prices for things we own; so who is to say one dollar isn’t appropriate?   

They can each prepare a bill of sale for one dollar and report the transactions on Schedule D of their 1040s, with a cost basis of zero.  The tax on one dollar of long term capital gain (acquisition date = date of their birth) will be the least of their worries.

Thanks for sharing that.

Kerry Kerstetter

 

Jokers couldn’t resist messing with this sign.

Courtesy of CollegeHumor