Multi-State Tax Returns

March 30, 2011 by Jan Roberg · 689 Comments
Filed under: State Taxes, Uncategorized 

I get many calls from people who prepared their own returns with two or more states and they all say something pretty similar, “I did the return, the federal is okay but the state just doesn’t seem right.”  Then I ask, “Do you owe way more than you think you should?”  “Yes, how did you know?”  I do this for a living.  The quick answer is to check to see if you took a “credit for taxes paid to another state”, that’s usually where the problem is.

Normally, I would have put that at the end of the blog post, but it’s such a common problem that I figured it needed to go first.  Quick answer and you’re done.  If you need more information, I’ll start from the beginning.

Two states can usually be handled by most of the major tax software companies with no problem.  Remember the credit for taxes paid to another state and you should be good.  On the other hand, three or more states can send your software into a tizzy.  Even with my professional grade software, I still have to compute numbers by hand and manually input them into the program.  If you’re dealing with three or more states, spend the money on a professional.  It’s a good idea to ask, “Have you ever done a California return before?”  (Or Ohio, or North Carolina, or whatever.)  Experience helps.

Back to the two states:  There are two situations where you could have two state returns.  One would be you moved from one state to another, for example moving from Indianapolis to Chicago for a job.   The other would be where you live in one state but work in a different state, for example living in St. Louis, Missouri but working across the river in Alton, Illinois.  These two types of situations use different forms.

Moving:  When you move from one state to another, you’ll be filing your two state returns as a “part-year resident”.  You’ll be completing paperwork that says how long you lived in the state, what your earnings were for the state, etc.  You should only be taxed on the income that you earned while you lived and work in the state.  If you withheld properly, your taxes should come out normal, no big refunds, nor big balance dues.  Most of the time in a case like this, you won’t be filing a “credit for taxes paid to another state” because the “part year resident” return will handle you income allocations.  (Most of the time—there’s 50 states and they all have different rules, so in some cases you’ll still be doing the credit for taxes paid to another state.)

Living in one state and working in another:  this situation is a little different.  You will be a “resident” of the state you live in and a “non-resident” of the state you work in.  The state you work in is the state your company is going to withhold taxes from.  But the state you live in is going to tax your income too.  This is where it’s really important to remember the credit for taxes paid to another state, because if you miss taking that credit your tax bill could be enormous.  Sometimes, the tax bill is still pretty large even when you’ve done everything right.  For example, here in Missouri our state income tax rate is 6%.  Next door in Illinois it’s 3% (although it’s moving up to 5% this year.)  If you live in Missouri and work in Illinois, you’re going to get hit with a pretty harsh state tax bill unless you had Missouri taxes withheld or paid estimated taxes.

Here’s some other tips that will help you with your multi-state return:

  1. Always do the federal return first.  Don’t start the state returns until the federal is done and you feel that it’s correct.  If you have to go back and make changes to the federal, your state numbers will be off.
  2. Non-resident income:  that’s wages that you were paid in a state you didn’t live in.  It also includes self-employment performed in the state.
  3. Resident income:  the state you live in will tax everything, in addition to your wages, it will tax your pension, interest, investment income, everything.
  4. Moving expense deduction-always goes to the state that you moved to, not the state that you moved from.

This is a pretty quick and dirty summary of multistate tax returns.  If these tips don’t solve your problem, do call and get some help.  They’re not always easy to handle.

 

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Note:  We try to answer all the questions that come to us but please be patient.  It’s our busy season right now.  We may not get to your post until the weekend.  When you make a post and use the capcha code, it won’t immediately show up.  You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of.  (We try to keep this a G rated website.)   We have to edit those out.  If you need an answer right away, here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

If you want to hire us, please call (314) 275-9160 or email us.  We do prepare returns for people all over the country (and a few foreign countries as well.)  We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.

Injured Spouse Relief

March 28, 2011 by Jan Roberg · 518 Comments
Filed under: Family, Uncategorized 
Sunday morning in Piazza del Popolo, Nov 2009 - 43

Photo by Ed Yourdon

So you filed your tax return expecting a nice refund and then nothing comes back. You go to the IRS “Where’s my Refund?” website and find a note that says your refund was held because of a prior tax debt—but you don’t have one. Turns out your beloved spouse owed back taxes from before you were married. Is there anything you can do?
Yes, there is. You may be able to file for Injured Spouse Relief.
How do you know if you qualify as an injured spouse? First, you must have made and reported tax payments. That means you either had income tax withheld from wages or you made estimated tax payments, or you claimed a refundable tax credit like the Earned Income Tax credit. Second, you must not be legally obligated to pay the past-due amount. For example, you weren’t married to your spouse when he or she incurred the debt.
Are there any kinds of debt besides federal income tax that can cause my refund to be taken? Your refund can be taken for state income tax, child or spousal support, or federal student loans.
Note: if you live in a community property state, there are special rules. If you’re in one of those states, you’ll need to see IRS Pub 55.
If you filed a joint return and you are not responsible for your spouse’s debt, you may request your portion of the refund by filing the Injured Spouse Allocation form, Form 8379.
If you haven’t filed yet, you can submit form 8379 along with your tax return. If you’ve already filed and received a federal offset notification, you can submit a form 8379 by itself. You can e-file the 8379 when it’s submitted with a return. If you’re sending in a paper tax return (okay, you know you should be e-filing whenever possible) then you need to write “INJURED SPOUSE” at the top left corner of your 1040.
If you’re filing the 8379 by itself; make sure that you list both spouses’ social security numbers in the same order as they appeared on your income tax return. I know this sounds kind of silly but it’s really important to put the social security numbers in the right order. You might be thinking that the spouse that’s injured should have his/her name on the top, but put your names in the same order as on the tax return.

How Come the Injured Spouse Allocation Form doesn’t tell you  how much you’ll get back? Good question, but it doesn’t. The IRS will determine how much of your refund you will receive. Part of the issue is that allocation for couples from the community property states will be different from couples who aren’t in community property states.
How long will it take me to get my refund after I file an injured spouse claim? It’s going to be slower than a regular refund. If you e-file a form 8379 along with your federal return, it will take about 11 weeks to process. If you mail your return in your refund will take around 14 weeks. If your tax return was already file and you’re sending in an Injured Spouse Allocation by itself, expect the IRS to take about 8 weeks to process it.
Am I better off just filing separately? Sometimes, yes. But if you qualify for any of the tax credits that aren’t allowed to couples who file separately then the Injured Spouse Allocation is your best choice despite the delay to your refund.

_______________________________________________________________________

Note:  We try to answer all the questions that come to us but please be patient.  It’s our busy season right now.  We may not get to your post until the weekend.  When you make a post and use the capcha code, it won’t immediately show up.  You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of.  (We try to keep this a G rated website.)   We have to edit those out.  If you need an answer right away, here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

If you want to hire us, please call (314) 275-9160 or email us.  We do prepare returns for people all over the country (and a few foreign countries as well.)  We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.

Why You Don’t Want to File Your Taxes on April 15th (Or the 14th for that matter)

March 25, 2011 by Jan Roberg · Leave a Comment
Filed under: Last Minute Tax Tips 
taxation with representation

Photograph by Dayna Bateman

Does this sound like you?  You’re pretty sure that you owe taxes this year so you’ve had no motivation to get them done.  You know you have until April 15th so all through February and March you’re not even thinking about it.  April 1st rolls around and now it’s like, “Oh yeah, I’ve got to get that done.”  But life gets in the way and the next thing you know, it’s April 14th and you’re starting to panic.  You go online to do your return and realize that you’ve got some funky tax issue that you can’t handle by yourself so you need professional help.  You head down to the big box tax store and wait in line with 20 other folks who are in the same boat as you.

Don’t do that!

Don’t do your taxes on April 14th.  (Okay, for 2011 the tax deadline is April 18th, but everybody knows the 15th is tax day even if the IRS likes to mess with us about that.)  But that’s just another good reason not to file your taxes on the 14th because you have until the 18th this year.

But it’s more than that.  More mistakes get made on tax returns on April 14th than any other day of the year.  This isn’t a statistical fact, it’s just my observation.  I do audit work helping people who have tax trouble.  I notice that tax returns done on April 14th have more mistakes.  Not necessarily big mistakes, but missed deductions and credits.     

If you’re going into the big box tax store on April 14, those preparers are busting their behinds trying to make sure that everybody gets taken care of.  They’re probably exhausted from the long hours already.  If you go in at night, most of those folks have already put in eight hours at their day job already.  If there’s a line of people in the chairs, the office manager is probably cracking the whip, “Let’s keep it moving people!”  This is not the day that they’re going to ask you all of the questions they need to ask to give you the best service possible.  They have the built in questions in their software that they’re required to ask you, but don’t expect anything above and beyond the minimum if you go in during rush time.

If you go into a big box store on April 14th (or 15th or one of those late days) and there’s a big line and it looks crazy, the best thing for you to do is just file an extension.  If you think you owe, make a best guess as to how much you owe and pay it (keeps you from paying late payment penalties.)  An extension is an extension of time to file, it does not give you an extension of time to pay.  The penalty for filing late is much higher than the penalty for paying late though so even if you don’t pay, you’re still better off filing the extension than filing your return late.

If you’re at the big box store, they’re going to pressure you to file your return now instead of doing the extension.  Here’s why:  they get paid a commission for the tax returns they prepare during the tax season.  Most of them get laid off after the last filing date.  The few preparers who work during the summer get paid an hourly wage for the off season work and it’s not anywhere near the rate they get for their seasonal work.  Filing your extension doesn’t pay them much if anything so that’s why they don’t want to do it.

Now if you go someplace and it’s not a mad house and you find someone there that makes you feel confident, by all means go ahead and file.   Do it and be done with it.  Sometimes, while the 14th may be a madhouse, the 15th will be quite calm and a good time to file.  Use your good judgment.   Don’t file a tax return while feeling panic.  Fixing a bad return costs more than doing it right the first time.

Rental Income Basics

March 23, 2011 by Jan Roberg · 1 Comment
Filed under: Uncategorized 
The Quails Nest

The Quails Nest, photo by Eric M. Martin

Are you a landlord?  Are you renting property out to someone?  Maybe you were trying to sell a house but the market was too tough so you rented it out to someone.  If so, that makes you a landlord and you’ll need to report your rental income on your tax return.  Here’s some basic information you need to know.

First, the form you need to fill out is called a Schedule E.  You file it with your regular 1040 form.  If you look at the form you’ll see columns A, B, and C.  That’s for people who own more than one property.  If you just own one place that you’re renting out, put everything in column A.  If you own a duplex or a multi unit apartment building, you still put everything in column A.  If you own three separate houses that you’re renting out, then you use a separate column for each property.  If you own 20 properties, you’re going to use 7 of these forms.  (If you own 20 properties, you’re hiring a professional anyway.)  The totals will go in the column on the far right. 

Do not do this by hand.  You’re going to be depreciating the property and unless you really know what you’re doing you’ll mess it up.  Tax software will talk you through it and handle the depreciation and everything.    Do not buy the cheap software.  If you’re buying Turbo Tax, get the Premier package.  If you’re buying H&R Block At Home, you need the Premium Edition.  The cheaper packages are not designed to handle rental real estate issues so don’t even try.

Now that you’ve got the proper software and you’ve got all your information ready, what all do you need to be reporting anyway?

Income:  basically, you’re going to report the income you receive from rents the year in which you receive it.  That means, if someone paid you rent six months in advance, you report all of the rent that you received, even though some of the rent is meant for next year.

Security deposits:  security deposits are not rent.  You don’t report that as income unless you’re going to keep it.  It’s not income when you get it, and it’s not an expense when you refund it to your tenant.

Property or services in lieu of rent:  that’s a little trickier.  Let’s say that you have a tenant in an apartment that rents for $1,000 a month.  You have a tenant who’s particularly handy and she painted the house for you in July in exchange for a month of free rent.  On your Schedule E, you would record the $1000 as rent received, but you would also record the $1000 as an expense to the property.  Generally, whatever price you and your tenant come up with will be considered to be the fair market value of the labor (or property.)

Expenses paid by tenant:  If your tenant pays a bill that normally would be considered your  bill, then you have to count that as income as well.  Say for example that a water main broke and you couldn’t be there to meet the plumber and pay him.  Your tenant (bless her heart) not only met the plumber but also paid the bill.  Because the bill was yours (and not the tenant’s) you must also include that amount as income.  And of course, you’ll be writing off the bill as an expense also.

Men Divorcing: Tax Issues

March 21, 2011 by Jan Roberg · Leave a Comment
Filed under: Family, Uncategorized 
Divorce Cakes a_005

Photo by Dr. John Bullas

When you’re going through a divorce you have a million things to think about, and probably the last thing you want to spend time on is taxes.  But it’s important to think about them early, rather than later—here’s why.

As an enrolled agent, I usually don’t get to talk to men going through a divorce unless they’re already a client.  Instead, I see is what happens to divorced men at tax time after it’s too late for me to fix things.  Here’s the basic problem:  a guy is going through a divorce.  He goes to his attorney and hands over his pay stubs so that a fair and reasonable amount can be determined for child support. 

The child support is based upon the breadwinner’s take home pay.  This is where the problem is.  Up until the divorce, the man generally has been filing his tax returns as “married filing jointly”; which has a lower tax rate than “single.”  If he has children there are the exemptions for the kids which reduced his tax.  Of course the exemption for the wife will be eliminated with the divorce too.  If he owned a home then there were itemized deductions and tax advantages that he’ll lose as well.  Bottom line:  getting a divorce will increase a breadwinner’s income taxes.

For example:  Let’s say John is going through a divorce.  He makes $4,000 a month and brings his pay stubs to his attorney to determine the child support payment.  Currently, John’s withholding is based on 4 exemptions; one for him, two for his kids, and an extra one because of his deductions.  In this case, his federal withholding would be $248 per month.  But the reality of the situation is that after the divorce, John will be single and filing as single with probably no exemptions on his tax return.  He should be withholding $561 per month instead, that’s a difference of over $300. 

This creates a double whammy.  First, the child support is set based upon John’s take home pay which right now looks like it’s $300 a month more than it really should be – so John winds up paying more in child support then he can really afford.  Then, when tax time comes around, John wasn’t withholding enough and now he has a tax debt of $3600 that he never expected and can’t afford to pay because all of his extra money is going to his child support. 

Remember, paying child support does not count as a tax deduction.    

So what does John do next?  He goes to his attorney and pays the attorney to renegotiate the child support payment.  This costs him even more money and ticks off the ex-wife (who wasn’t too pleasant to begin with-that’s why she’s the “ex” wife.)  So now he’s got a tax debt, attorney fees, an angry ex-wife, and in the meantime, he’s racking up another IRS bill because he can’t afford to change his withholding if he wants to make those child support payments. 

Now a really good attorney recognizes this problem and would have John change his withholding before he ever went to court.  But from my end, I’ve seen too many cases where this wasn’t done.  So if you’re going through a divorce, you need to be the one to make sure that you’re protected.  Plan out what your tax situation will be as a single man and prepare for it up front.  Hire help if you need it, it will be money wisely spent.

Leaving Your Estate to Your Dog

March 16, 2011 by Jan Roberg · Leave a Comment
Filed under: Estate Tax 
Leaving your estate to your dog

Photo by Blaise Machin

I don’t often get requests for what to post in my blog, but I was actually asked to write this one. 

You can leave all of your money to your dog when you die.  Now I don’t recommend it, but it’s possible.  Maybe you heard about Leona Helmsley, the wealthy hotel maven who left her money to her dog in her will.  Yes it’s true.  And, it’s actually more common than you might expect. 

But is leaving your money to your dog the right thing for you?  Probably not, and here’s why.  First, a dog doesn’t have a social security number.  (I’m reading this back to myself and it sounds like an episode of Mr Roger’s Neighborhood;  “Dogs don’t have social security numbers!”  But it’s true.)  Without a social security number, dogs can’t file a regular tax return.  And you’re not getting a social security number for your dog– so don’t even try to go there.

If you want to leave your money to your dog, you have to set up a trust.    My dog’s name is Lady so if I wanted to set up a trust for her I’d probably call it the “Lady Browser Inheritance Trust.”  Two points about naming the trust:  first, it should properly identify the trust.  If you just call it “dog trust” there could be dozens of other dog trusts out there and there could be some confusion.  It will have an identification number, of course, but a unique name is helpful to the people who will be working on it after you’re gone.  Second:  don’t give it a terribly stupid name.  Remember that someone is going to have to manage your trust after you’re dead.  You might have no problem calling your dog “Kitchikookoo-picky-poo-poo” but the person managing the estate might. 

You will fund the trust by making it the beneficiary of your estate.  For example:  Let’s say that you name the trust, “Duke Dog Trust.”  Then, you would make “Duke Dog Trust” the beneficiary of your bank and financial accounts.  If you’re really serious about doing this, you need to think which accounts should go to your dog versus which accounts go elsewhere.  You also need to think through who your secondary beneficiary will be should your dog die before you do.   

Setting up the trust and funding it isn’t all that hard.  Really you just have the legal expense of setting up the trust.  What’s more difficult is figuring out the care program for your dog.     Anyone who’s serious about leaving their estate to their dog is really more concerned that their pet is well cared for than anything else.  You’ll have to include specific care instructions outlining feeding, grooming, exercise, veterinary care, etc. and who is going to be responsible for that care and how it’s paid for.

Once again, that brings me back to my original observation—you probably don’t want to leave your money to your dog.  Why?  The taxes!  Dogs can’t really inherit money, everything goes into the trust.  Trusts are usually set up as “pass through” entities.   Usually a trust is set up so that people get money from it.  For example:  Grandparents setting up a trust for a grandchild.  The money in the trust earns interest, the interest is “passed through” to the grandchild and the grandchild pays taxes on the interest at his income tax rate.  (10, 15, 25, 28 or 33 percent)   Income in a trust is taxed at 35%.  You don’t get a deduction for the expense of caring for the dog.  About the only deduction you get is paying your attorney and accountant fees, the rest is all taxable.  Leaving your money to humans is much more tax effective.  First, if you have less than $5 million dollars, your heirs can inherit the money tax free.  And your estate can be settled within about year.  Income from your estate can be passed through to your heirs at their personal income tax rate instead of the estate tax rate.  People you love will get more of your money instead of it going to lawyers, accountants, and taxes.   Leaving money to a trust for a dog is the worst possible tax strategy for your estate.  Now if it’s the only option available to you, then so be it.  But if you can arrange to have your pet cared for after your death and leave your money to a human, that’s that best situation from a tax standpoint.

Enter our NCAA Basketball Picks Contest

March 14, 2011 by Jan Roberg · Leave a Comment
Filed under: Uncategorized 

Enter the Roberg Tax Solutions NCAA Basketball  Tournament Bracket contest for a chance to win a $10 Starbucks giftcard!  No purchase necessary.  All you have to do is “like” us on Facebook and submit your NCAA Basketball picks before midnight March 14th.

Winner will be based on who picks the champion, tiebreaker based upon points earned in the lower brackets.  Five points each final 4 and semi-final game, 1 point each all other games.

Like us on Facebook at:  http://www.facebook.com/home.php#!/pages/St-Louis-Tax-Preparation-Roberg-Tax-Solutions/101639683227199

E-mail your picks to :  jroberg@robergtaxsolutions.com

You can get a bracket from ESPN at http://a.espncdn.com/i/ncaa/11mens_bracket.pdf

The Alternative Minimum Tax for Dummies

March 14, 2011 by Jan Roberg · 17 Comments
Filed under: Uncategorized 

AMT for Dummies Okay, first, if you’re paying Alternative Minimum Tax, you’re probably not a dummy.  Most people who have to pay the Alternative Minimum Tax (AMT) are highly paid employees.  If you were really a dummy, you wouldn’t have a job that makes you pay AMT.  That said, AMT taxes are really confusing and can make you feel like an idiot.  I’ll try to make some sense of it here.

Why do we even have the AMT?  Good question!  Our tax laws have benefits for certain kinds of income and special deductions and credits for certain expenses.  For example, you don’t pay tax on the interest from a munincipal bond and you get a tax deduction for paying mortgage interest on a house.  If a person plays his cards right, he could drastically reduce his tax by taking advantage of these deductions.  Congress created the AMT in 1969 so that high income taxpayers who claim lots of deductions still wind up paying income tax.  That was the intention of the law—to make things fair.

Why is AMT such a pain in the behind now?  For one thing, the AMT wasn’t indexed for inflation.  What was considered to be wealthy in 1969 is fairly middle-class in 2011.  People who were never originally targeted for the AMT are now subject to AMT taxes.  Congress passed legislation last December for an “AMT patch” to adjust for inflation.  The patch will be good for 2010 and 2011, but if they don’t make some type of permanent adjustment, we’ll be dealing with this over and over again starting in 2012.

Who has to pay AMT?  Using the IRS definition:  You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

How’s that in plain English? For most people, if you don’t itemize your deductions, you probably won’t have to pay AMT.  If you do itemize, one big deduction people lose has to do with employee business expenses—like when sales people take a deduction for their mileage, those people get hit with AMT.  If you’re a salesperson who claims employee business expense deductions on your tax return, you’re much more likely to be hit with AMT than a person who doesn’t.

Other AMT hot spot issues are your state income taxes that you paid, and mortgage interest expense.  With your mortgage, you can deduct the interest on the money that you used to purchase your home or improve your home.  But if you refinanced your home to pay off a credit card, that part of your interest payment won’t be a deduction for you on the AMT form.  Also, if you had enough medical expenses to claim a deduction on your regular return, it will be reduced or eliminated when calculating the AMT.

There are lots of items that affect the AMT, but those are ones that I see regularly when I’m doing tax returns with AMT.  There are things like mining costs, intangible drilling costs, and research and experimental costs.  I’m sticking with the issues that are fairly common.

If you’re using tax software, it will calculate the AMT for you automatically.  You’ll notice that if your AMT is lower than your regular tax, you don’t get your taxes lowered.  You only get to see the AMT tax if you owe more.  (Doesn’t seem quite fair does it?)

If you’re still doing your return by hand, or just want to estimate of you will have to pay AMT for next year, you can use the AMT assistant on the IRS website.  http://www.irs.gov/businesses/small/article/0,,id=150703,00.html

Claiming Your Dog on Your Tax Return: Part 2

March 11, 2011 by Jan Roberg · 77 Comments
Filed under: Small Business 
Legitimate working dogs can be a business deduction

Photo by nicephotog

 

The first thing you need to know is that you can’t claim your dog as a dependent on your tax return.  Never!   Don’t even think about it.  There are no special rules for St. Bernard’s or Great Danes.  It doesn’t matter how much your dog depends on you or that he’s a regular member of the family.  A dog can never be claimed as a dependent on your U.S. income tax return.

There are two places you can claim a dog on a tax return, as a medical expense, such as a service dog, or as a business expense.  This post is about claiming your dog as a business expense.  If you’re looking for information on dogs as a medical expense, then you need to check my other post http://robergtaxsolutions.com/2011/03/claiming-your-dog-on-your-tax-return-part-1/

If you intend to claim your dog as a business expense, you have to remember the two most important words for business expenses:  regular and necessary.  Is the dog a regular and necessary expense for your business?  For example:  my dog likes to help me when I work from my home office.   She guards my door and prevents my college age children from coming into the room to bother me (i.e. ask for money.)   Her favorite part of her job is barking at the IRS agents whenever I’m on the phone.  How she can tell I’m talking to an IRS agent instead of a client amazes me.  As you might have guessed, I cannot claim my dog as a business expense.  Her service to my company is neither regular, nor necessary.   (No matter how much I get a kick out her barking at IRS agents.)

Real working dogs, on the other hand, are a legitimate business expense.  Sheep herders, guard dogs, bomb sniffers and rescue dogs all are legitimate working dogs.  My dog neighbor used to star in the dog program at Busch Gardens—once again, a legitimate working dog, although now he’s retired.

Breeding dogs can be a little trickier.  A real dog breeder is a legitimate business.  Where it gets a little tricky is that fine line between dog breeding as a hobby versus breeding as a business.  For example, if you’re treating your dogs as “livestock” they have a depreciation rate of 7 years.  If you buy a full grown bitch with the intent to breed her, you may claim the purchase price as a section 179 deduction (that means you can write off the whole purchase price.)  If you purchase a puppy—with the intent of breeding it when it grows up, you can’t write off the whole cost immediately.  The best you’ll be able to do is to claim depreciation.

I once was consulted on a “dog breeder” case.  The woman had purchased two “designer puppies” for $2,000 each with the purpose of mating them together and selling the puppies.  She wanted to write off the entire $4,000.  The woman had no experience with breeding dogs, no experience running any type of a business before, and didn’t seem to have a clue about raising dogs in general.   First, the IRS is clear about not completely writing off “immature” animals so a total write off was out of the question.  Additionally, because there was no income and the client just wasn’t meeting any of the business qualifications, claiming any kind of deduction would be problematic.  I recommended holding off on claiming any deduction.  If the business truly panned out, she could depreciate the dogs when (and if) they were put into service.  Just because the puppies you buy are expensive, they don’t necessarily qualify as a business expense.

Once again, you have to make sure that if you are claiming a dog as a business expense, you really need to make sure you’re on the up and up.  A dog on your return is going to be a red flag so you start out with the assumption that you will be audited.  Document everything.  Have receipts for your expenses, and proof that your dog is a necessary and regular expense for your business.  Dot your i’s and cross your t’s and you’ll be okay.

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Claiming Your Dog on Your Tax Return: Part 1

March 9, 2011 by Jan Roberg · 12 Comments
Filed under: Tax Deductions 

 

Photo by Heartlover 1717.

The first thing you need to know is that you can’t claim your dog as a dependent on your tax return.  Never!   Don’t even think about it.  There are no special rules for St. Bernard’s or Great Danes.  It doesn’t matter how much your dog depends on you or that he’s a regular member of the family.  A dog can never be claimed as a dependent on your U.S. income tax return.

There are only two places where you could claim a dog on your tax return; the first is as a medical expense and the second is as a business expense.   Most importantly, it has to be a legitimate expense.  Dog expenses claimed on a tax return are likely to get audited.   You’ll want plenty of documentation.

Let’s look at medical expenses today.  I’ll post about dogs as a business expense later this week.  According to the IRS medical expense publication:  You can include in medical expenses the costs of buying, training, and maintain a guide dog or other service animal to assist a visually-impaired or hearing impaired person, or a person with other physical disabilities.  

If you have a seeing eye dog or a hearing assist dog, then you’ve got an easily proved legitimate expense.  Note that the IRS definition discusses “physical” disabilities, mental disabilities are conspicuously absent from this category. 

If your service dog is meant to help with a mental disability, you may be able to claim the animal under “impairment-related work expenses.”   This might actually work out to be an even better deduction than as a medical expense, if you qualify.

In order to be considered as disabled to claim an impairment-related work expense, you must have a physical or mental disability that functionally limits your being employed, or a physical or mental impairment that substantially limits one or more of your major life activities such as performing manual tasks, walking, speaking, breathing, learning, or working. 

I cannot stress enough the importance of legitimacy here.   You can’t just go online and purchase a “service dog” vest for your pooch and take him to work with you.  The service your dog provides must be necessary for you to do your work in a satisfactory manner. 

Here’s a question to ask yourself—if you were to be audited for your dog expense, could you obtain written letters from your doctor and your employer that your dog is necessary for you to work?  This is important.  I assisted an audit once where the man had claimed his dog as a medical expense.  The auditor was willing to allow the expense if the man obtained a letter from his psychiatrist that yes, the dog was part of the man’s treatment.  Although the psychiatrist admitted that he had recommended that the man get a dog, he would not issue a letter stating the dog was part of the man’s treatment and the case was lost.  If you intend to claim a dog as a medical expense (other than a seeing eye or hearing assist dog), it is absolutely essential that you have the support of your doctor.

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