Posted on June 28, 2013May 31, 2016 by Jan Roberg

DOMA Overturned—Now What Do I Do?

Photo by Kellie Parker at Flickr.com

Wednesday, June 26, 2013 the United States Supreme Court overturned the Defense of Marriage Act (DOMA). Effective immediately, married gay couples will be able to file their federal income tax returns using the married filing jointly tax status. What does this mean for you?

The first thing to look at is: Does it make sense to amend my back tax returns? You’ll want to review your old returns as far back as 2010 to see if the married filing joint tax status would give you any tax benefit. If so, you will need to amend those tax returns.

For tax years prior to 2010, you would have had to file a protective claim to file jointly, see: http://robergtaxsolutions.com/2012/06/doma-unconstitutional-protecting-your-tax-rights/ Without a protective claim, you cannot file an amended return for years prior to 2010.

On your amended return (form 1040X) you will check the box that says Married Filing Jointly in the section that says “Amended return filing status.” In the explanation box in Part III you will write:

pursuant to US v Windsor, this return is being amended to claim Married Filing Jointly tax status.

US v Windsor is the court case that the Supreme Court heard when they ruled that DOMA was unconstitutional.

You’ll complete the rest of the amended return just as you would any other 1040X form.

You are not required to amend your back tax returns if it does not help you. Because those returns were filed using the law that was in place at the time, you are under no obligation to change your return if it would require you to pay more taxes.

Looking ahead: now that federal law recognizes gay marriage, you may need to do some tax planning given your new status. For many couples, the married filing jointly status is not beneficial. I recommend sitting down with a professional and doing some planning, just that same as any other newly married couple would. Remember, now that the federal government recognizes gay marriage, you are required to claim that you are married on your federal tax return. You will either need to claim the Married Filing Jointly or Married Filing Separately tax status when you file your 2013 federal tax return.

Issues that have yet to be resolved: We know that if you are married in a state that recognizes gay marriage, you may file a federal joint income tax return. What we don’t know yet is what happens to a couple that is legally married in a gay marriage state but moves to a state that doesn’t recognize gay marriage. (For example: a couple gets married in Illinois then moves to Missouri.) I suspect we’ll see some court cases over that in the future. I’ll post updates as I learn more.

If you’d like to read the court case, here’s a link: http://www.supremecourt.gov/opinions/12pdf/12-307_g2bh.pdf

Posted on June 25, 2013May 31, 2016 by Jan Roberg

Can I Deduct My Closing Costs On My Tax Return?

Photo by @Doug88888 at Flickr.com

Now that the housing market is starting to buck up again, I’m getting that question more and more. I figured it was time to spell it out in a blog post.

In general, the big tax deductions that go with home ownership are going to be your mortgage interest expense and your real estate taxes. Now, if you’re a first time homebuyer and you buy your home late in the year, you might not have paid enough interest or taxes to exceed your standard deduction for the first year. Don’t worry, you’ll see the benefits of home ownership on your taxes the next year.

When you’re looking at your closing costs, those figures are going to be on your HUD settlement statement. Here’s a link to a blank one so that you can see what that paperwork looks like: http://www.hud.gov/offices/adm/hudclips/forms/files/1.pdf

Here’s the deductibility status of closing costs:

Real estate taxes: Deductible beginning on the date of sale (lines 106 and 107.)

Assessments: Condo fees and Homeowner’s association fees: Not Deductible.

Commission: Increases the basis (so when you sell the home, your profit is reduced.) This probably doesn’t affect most people, but it’s still good to know. Increasing the basis comes in handy for when you’re claiming a home office, converting a property to a rental, or if you sell it for more than homeowner‘s gain exclusion. Currently you can sell your home for a $250,000 ($500,000 if married filing jointly) profit and pay no capital gain on it. Bottom line, you can’t deduct the commission you pay to your realtor, but you do want to know that number because it can come in handy later.

Loan origination fee, loan discount (points): Deductible (including the amount paid by the seller—if any.)

Items payable in connection with loan: appraisal fee, credit report, inspections, etc.: Not Deductible.

Interest: Deductible beginning on the date of sale—but that’s usually included on the Form 1098 that you get from your bank so you usually don’t have to take it off of the settlement statement.

Items required by lender to be paid in advance like mortgage insurance premium, hazard insurance, flood insurance: Not Deductible.

Reserves deposited with the lender such as hazard insurance, real estate taxes etc: Not Deductible. These are the items on lines 1002 – 1004. These real estate taxes are your escrow and not an actual tax paid, that’s why it isn’t deductible. Later, when the real estate tax is actually paid, then it will become deductible. This is probably the most confusing one on the list. Although you’re paying a real estate tax—the real estate tax isn’t actually getting paid—it’s just going into escrow. The tax usually gets paid once or twice a year. When the bank sends the money to the taxing agency—that’s when it’s considered to be paid. So, taxes with a line number in the hundreds—you deduct, taxes with a line number in the thousands, you don’t deduct.

Items payable in connection with title charges (Settlement or closing fee, abstract or title search, title examination, notary fees, attorney’s fees, etc): Increase Basis but Not Deductible.

Government recording and transfer charges, recording fees, tax stamps: Increase Basis

Additional settlement charges (survey, pest and other inspections): Increase basis but not deductible.

The bottom line is you might not receive any benefit from your closing costs on your tax return. (Remember, your itemized deductions need to be more than your standard deduction for itemizing to be worth your while.) But, if you do get to itemize, you need to know what to look for. There’s no sense in wasting a deduction that you’re entitled to if it’s going to help.

Posted on June 21, 2013May 31, 2016 by Michael Siebert

A Great Time in Chicago! – The 2013 Midwest in Motion Seminar

Photo by Michael R. Siebert

Hello everyone. Mike here. On the way up from the elevator to our office, I overheard two young ladies conversing about their trip to Atlanta over the weekend. Later on in the day, a CPA on our floor told us about his upcoming vacation to the Philippines—certainly a fun time to be desired. Near the end of the day, Jan told me she was going to Florida on a business trip with her husband. At this point, I’m thinking in my head “Oh come on! Everyone is leaving Missouri except me!”

Fortunately in the mail we received an invitation to the 2013 Midwest In Motion Education and Networking For Tax Professionals hosted in Chicago and sponsored by the Illinois and Indiana Societies of Enrolled Agents. In need of a small vacation, and especially in need of a grasp on the Patient Protection and Affordable Care Act, I went up to Chicago for the two day symposium (Ok you got me, I also needed continuing education credits).

Upon my arrival, I was the only RTRP (Registered Tax Return Preparer) in the room full of Enrolled Agents; I felt like a fish out of water at this point. But as I settled in and conversation naturally bloomed, I could not have felt more comfortable. Everyone was extremely nice and friendly and I felt like I belonged in the tax industry.

The two speakers, James R. Hasselback, PhD, and Robert E. McKenzie, JD, EA, were great and very articulate. They discussed such topics as the healthcare act, cancellation of debt, bankruptcy, audit reconsideration, and Schedule C hotspots. It’s hard to stay attentive at an all day seminar and they made it easy.

But the real fun was after the seminar. Karen Miller of Eberhart Accounting Services, P.C. located in Bolingbrook Illinois was kind enough to show me around Chicago. We took a walk along Lake Michigan and snapped a few pictures. What a beautiful city.

Furthermore, we went to the Navy Pier and rode the big Ferris Wheel. This was certainly a “Kodak Moment” as the dusking sun created some nice illuminations off the city skyline.

For someone who doesn’t get out as much as I should (because I’m too busy reading tax law I guess), a change in scenery was definitely in order to expand my horizons. I am very young to be in this industry—as I write this I am 24 years of age—and I plan to get my Enrolled Agent license by the end of December 2013. This event sparked this notion and I am truly grateful to have been a part of it.

Thank you again to the Illinois and Indiana Societies of Enrolled Agents and a very special thanks to Karen Miller of Eberhart Accounting Services, P.C. I would also like to thank Ana G., Bill B., and Jeff S. and the speakers, James Hasselback and Robert McKenzie.

Posted on June 18, 2013May 31, 2016 by Jan Roberg

Innocent Spouse Relief

If you had no knowledge of your ex-spouse’s business dealings and tax issues, you may be eligible for innocent spouse relief from the IRS.

Innocent Spouse and Injured Spouse are two terms that often get confused when people are looking at IRS issues. You are an injured spouse if the IRS takes your tax refund to pay for a debt that is owed by your spouse. You may be able to retrieve some (if not all) of that money by filing an injured spouse claim. For more information on that see Injured Spouse Relief: http://robergtaxsolutions.com/2011/03/injured-spouse-relief/

Innocent Spouse is where your spouse (or rather ex-spouse) has done something where there is tax liability for which you don’t have any responsibility for. Let me give you an example:

Abusive spouse is running around and gambling behind your back. You’re living in a hovel while spouse is living large, playing at the casino and spending money on fancy hotels and alcohol. You finally escape the situation and divorce bad spouse only to find that the IRS is after you for spouse’s tax debt from the gambling winnings. You had no knowledge of the money, and the spouse was forging your signature on the tax returns. This is where you would file for innocent spouse relief.

It used to be that you had to file an innocent spouse claim within two years of the actual tax return. Most innocent spouses weren’t able to file that quickly. It often takes longer than that to realize there’s a problem, or get out of an abusive situation. Fortunately, the IRS realized that and they’ve eliminated the two year rule. If you have applied for innocent spouse relief before and were denied because of the two-year rule, you may re-apply.

There are three types of Innocent Spouse Relief:

Innocent Spouse Relief – you filed a joint return and there is understated tax that is due to erroneous items like unreported income or unsubstantiated deductions, and you had no knowledge of these things. (Example, you get an audit letter about income your ex had that you had no knowledge of.)

Separation of Liability Relief – this is where an unpaid tax liability is divided between you and your ex-spouse for taxes that were filed while together. No refunds are granted in this case, only a separation of liability for unpaid taxes. (You get divorced and you agree that you will pay $X amount of tax which was your responsibility and your ex will pay $Y amount. You pay your share and your ex doesn’t so the IRS goes after you for the tax money. This is a good time to file for Separation of Liability Relief.)

Equitable Relief – if you don’t qualify under one of the above categories but it would be grossly unfair to force you to pay the tax, like in the abusive spouse example above.

A couple of other general things you need to know. First, you can’t have transferred assets or done anything fraudulently try to avoid paying taxes. You either had to not know about the tax owed or you were forced to sign documents against your will. Often, there is some type of abuse in these innocent spouse cases, you will be required to substantiate that. This isn’t an easy process. The worst part is if you file for Innocent Spouse Relief, your ex will be informed. If you are the victim of an abuser, you need to make sure that you are physically safe before you file this type of claim.

To explore if you might qualify for Innocent Spouse Relief, try this interactive questionnaire on the IRS website: http://www.irs.gov/Individuals/Explore-if-you-are-an-Eligible-Innocent-Spouse

Here’s the form that you file for Innocent Spouse Relief: http://www.irs.gov/pub/irs-pdf/f8857.pdf

You file this separately; it does not go with your tax return. It gets mailed to

Internal Revenue Service
Innocent Spouse
Stop 840-F
PO Box 120053
Covington, KY 41012

OR,

You may fax the Form 8857 and attachments to the IRS at 855-233-8558.

Make sure that you put your social security number on every page of the attachments.

Posted on June 14, 2013May 31, 2016 by Jan Roberg

Common Law Marriage and Your Tax Return

Photo by Carrie Phisher on Flickr.com.

I often get contacted by people who are facing an audit based upon their “family relationship.” The IRS will send an inquiry about a person’s relationship to a child in an EIC claim and the person being audited will say that he or she is “common law” married to the child’s birth parent.

Here’s the thing: the rules for common law marriage are very specific. I know that a lot of people seem to think that a couple is common law married if they live together for seven years. That’s just not true. (I used to believe that too, it’s something I was told when I was a kid.)

But in reality, there are only certain states that recognize common law marriage. If a couple is deemed common law married in one of those states and then move to a non-common law marriage state, the new state still has to recognize the marriage.

In most common law states, you can’t just say you’re married, you have to “hold yourself out to be married”. For example: you call yourselves husband and wife, you file joint income tax returns, you use the same last name.

If you have a common law marriage, and you end your relationship, then you must get a divorce even though you never had a wedding.

If you’re going to argue to the IRS that you have a common law marriage, you need to know the facts. First, you need to know which states recognize common law marriage in the first place:

Alabama
Colorado
District of Columbia
Georgia (if created before January 1, 1997)
Idaho (if created before January 1, 1996)
Iowa
Kansas
Montana
New Hampshire (but only for inheritance purposes, this won’t work on your tax return)
New Mexico
Ohio (if created before October 10, 1991)
Oklahoma (but there’s conflict in the courts, marriages created before November 1, 1998 are recognized, common law marriages after that date may not be recognized)
Pennsylavania (if created before January 1, 2005)
Rhode Island
South Carolina
Texas
Utah

If you live in one of these common law states, you will need to check with your state to find out the rules that make you qualify as married. This link gives you an outline of some of the state requirements. http://www.uscis.gov/ilink/docView/AFM/HTML/AFM/0-0-0-1/0-0-0-26573/0-0-0-30679.html

Common law marriage is not to be taken lightly; it’s marriage. Before you use the common law marriage argument with the IRS, make sure you’re serioius about being married.

Posted on June 11, 2013May 31, 2016 by Jan Roberg

Investment Art

Painting by Mark Witzling reprinted with permission. For other paintings, please visit http://www.markwitzlingart.com/index.html

I recently went out with a bunch of my artist friends and the talk turned to some billionaire heiress who purchased a plastic toilet seat piece of art for $2 million dollars as an investment. Now I couldn’t authenticate the $2 million toilet seat story for this blog post, but we sure did have a lively conversation contemplating what someone would do with a $2 million piece of toilet seat art.

Since I’m an accountant, not an artist, I couldn’t help but think about the tax implications of that investment. (Yes, I’m that big of a geek.)

I love to buy art. Although I wouldn’t count any of my purchases as “investments”, the gallery owners and auctioneers will often talk about the investment quality of a purchase. One of my favorite art stories happened to a former employer of mine who really did purchase a piece of art as an investment.

I’m going to call him Fred for this story. (I’m changing his name to protect the innocent. Fred‘s basically a good guy.) Anyway, Fred had been talked into purchasing a $10,000 piece of investment art at a gallery while he was on a trip. It was a large piece; 3 feet high and 6 feet wide.

The gallery owner told Fred that it was by a “breakout” artist and this was going to be his signature piece. He also said that the artist was old and would probably die soon and the value of the art piece would go up substantially when the artist died. The gallery owner called it a great “investment piece.”

So Fred bought the art and somehow it wound up in my office. “Wow,” I hear you say, “You must have been really important to get a $10,000 piece of art in your office!” Sadly, that’s the wrong assumption. You see, this $10,000 piece of investment art was butt ugly. Fred hated it; he only bought it because he thought it was a good investment. I was awarded the art on my wall because I was the lowest ranking person with wall space big enough for it to fit on. Did I mention it was ugly?

So I got the art on my wall, and Fred waited for the art to appreciate so he could sell it and get rid of it. Sadly, the artist wasn’t gaining fame at the rapid rate that the gallery owner had implied. And apparently, the artist wasn’t as close to death as was implied either. (And let’s be real, isn’t it kind of morbid to make an investment based on the idea that somebody’s going to die and their art value will go up because they’re dead?)

I left the company long before the art appreciated. But who knows? Fred did have a knack for making money and I wouldn’t be surprised if that art did go up in value.

So how does that work if it does? Let’s say Fred’s painting is now worth $50,000 and he wants to sell it. Collectible art is taxed at the 28% tax rate. If Fred just sold the painting directly to a buyer himself, he’d pay tax on $40,000—that’s the $50,000 he made less the $10,000 he paid for the art in the first place.

Most likely, he’d use a gallery or auction house to sell the painting and they’d take a commission. The commission would be deductible as well. So if the gallery charged a $15,000 commission, then Fred would pay 28% on $25,000 ($50,000 less the $15,000 less the $10,000.)

Purchasing art as an investment has its ups and downs. It can be very risky—like Fred’s piece, or very rewarding—like the woman who purchased a Renoir for $7 at a flea market. http://www.timesdispatch.com/news/local/article_f88cd6ec-80f2-591f-b8cf-0effeccca114.html

I vote for purchasing art you like. That way, you get to be around beautiful things you like to be around. If it happens to become more valuable, great. If not, you have beautiful things you like to be around—and that’s a winning investment.

Posted on June 4, 2013May 31, 2016 by Jan Roberg

Help! I Got an IRS Letter About My Education Tax Credit!

Photo by Jack Amick at Flickr.com

Did you receive a letter from the IRS denying your Education Tax Credit? Before you give up on that important tax benefit, take a few minutes to see if perhaps you can reclaim it.

First—did you have your taxes done by H&R Block? They had a little glitch in their tax program early in the tax season. Although most of those tax returns have been fixed, if you had an H&R Block prepared return, make sure you call them and let them know about the problem. They will take care of it. If you cannot reach your local HR Block tax preparer, then call their national number at 1 (800) HRBLOCK. Be patient with the automated answering service. Eventually you will get through to a human being who can help you.

So you got a letter and you didn’t use H&R Block? Well that’s not so surprising. Although Block had all the publicity for their software having a glitch, it turns out they weren’t the only ones. (They were just the biggest and got all the blame.)

Before you write the IRS a check (or accept a smaller refund), take a look at your Education Tax Credit Form (number 8863) and see if it was done correctly. Here’s where I’m finding mistakes:

Question number 23: Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 prior tax years?

The question means: Have you claimed a Hope or American Opportunity credit 4 times already for this particular student? The way it reads, it seems like it’s asking if you’ve ever claimed it at all in the last 4 years. You want to answer NO (unless of course you’ve already gotten the credit 4 times already.)

Many people have been answering YES. If you say YES, you don’t qualify for the American Opportunity Credit; you only qualify for the Lifetime Learning Credit which is smaller.

What I’ve been seeing is that some programs have let the American Opportunity credit carry through on the 1040 even though the taxpayer said YES. Usually, the software “idiot light” tells you about the error, but not all tax software did that. And the question is so confusing that it’s an easy mistake to make. Once the IRS reviews the returns, they’re catching the YES and sending out letters.

So, if this is your problem, you don’t need to amend your tax return. Just call the IRS at 1 800 829-1040 and talk to someone there. You will be able to fax a corrected form 8863 form to them and they’ll take care of it right away saving you a couple of weeks of waiting.

If you had a different IRS problem with the Education Tax Credit, please post about it. Thanks.