Posted on November 6, 2012May 31, 2016 by Jan Roberg

Gifting Stock with Long Term Capital Gains—Helping Granny and Yourself

Photo by Amanda Schutz on Flickr.com

I recently wrote about some of the basics of capital gains taxes. Today I’m going to talk about one strategy that you might be able to use to reduce those taxes.

The old strategy to avoid paying long term capital gains tax was to gift appreciated stock to your children because they’d be in the 0% capital gains tax bracket. But now—with the kiddie tax rules—that strategy doesn’t work anymore. Children are taxed at their parent’s rate.

But there may be another way around that rule without using your kids: use your parents or grandparents instead! People in the 15% or lower income tax bracket are in the zero percent capital gains tax bracket. If you have older family members that you’re helping out financially, gifting stock could be a win/win solution for both of you.

Let’s say your mom is retired and basically living off of social security. You want to help her out by giving her $10,000 to cover some of her expenses. You can just “gift” her the money—no tax consequences for her or you, or you could “gift” her some appreciated stock. If possible, I vote for the appreciated stock.

Here’s why: suppose you have some XYZ stock that you bought years ago for $1,000, but today it’s worth $10,000. (Good for you, by the way.) If you sell it now, you’ll have to pay $1,350 in long term capital gains tax. ($10,000 – $1,000 = $9,000 capital gain. Multiply that by the 15% capital gains tax rate, then $9,000 x .15 = $1,350.)

Now if your mom’s only income is social security, then she’s in the zero percent capital gains tax bracket so her tax would be zero! See why this is a good idea?

For 2012 you can gift up to $13,000 to someone with no gift tax consequences. If you are married, then you and your spouse could each gift $13,000 to one person (although you’d have to prepare a gift tax return to show that you were gift splitting.)

This gifting of stock isn’t just limited to your parents; you can potentially gift stock to anyone that is in the zero percent capital gains tax bracket (except for your children.) Of course you don’t want to just gift stock to people you weren’t planning of giving money to in the first place. Once you make the gift, it’s not your money any longer.

This strategy may not be a viable option for 2013 so if you’re thinking about gifting stock, you should at least get your ducks in a row now so that you can do the transactions before December 31^st if necessary.

Be sure to run the numbers with your parent’s first before just “gifting” stock to them. There may be other considerations that you’re unaware of where the capital gains could create a problem for them. Remember, reducing your tax burden isn’t such a great idea if it’s going to cause problems for your parents. Be sure to look at the big picture.

Posted on November 1, 2012May 31, 2016 by Jan Roberg

Income Taxes and the Stock Market—for Dummies

Photo by rvm_71 on Flickr.com

There are many sophisticated investment and tax strategies for individuals out there. This ain’t one of them. This is just plain tax information, what you need to know about your stock transactions and how they affect your tax return.

First—some definitions:

If you sell stock and make money—that’s a capital gain.

If you sell stock and lose money—that’s a capital loss. (I told you we were doing the basics.)

Short term—means you held the stocks for one year or less.

Long term—means that you held the stocks for over one year.

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Here’s how they affect your taxes:

1. Short-term capital gains–are taxed at your ordinary income rate which could be as high as 35%.

2. Long-term capital gains are taxed at rates of up to 15%. If your regular tax rate is 15% or less, then your long-term capital gains tax rate is zero. (Zero is a very nice tax rate if you can get it!)

3. If your personal capital losses are more than your capital gains, you can deduct up to $3,000 of losses against your other income (like your wages). The remaining losses will carry forward to offset against your capital gains in the future. If you have no capital gains in the future—you deduct another $3,000 against your other income and keep carrying it forward. You can do that for several years if necessary.

For example: let’s say your income is $50,000 a year (every year, no raises, life is boring) and you have a $10,000 capital loss. This year, your adjusted gross income (AGI) would be $47,000 and you’d have a $7,000 capital loss carry forward. (You took the $50,000 of income, subtracted $3,000 of the capital loss from the $10,000 and you have $7,000 left over for next year.) Next year your AGI would be $47,000 again and you’d have a $4,000 capital loss carry forward. After that, AGI would be $47,000 with a $1,000 carry forward. And finally in year 4 you’d have an AGI of $49,000 with no carry forward. Do you see how that works?

4. Long-term gains and losses are offset before being applied to short-term gains and losses. That means that there’s an ordering rule as to how the gains and losses are offset.

For example: let’s say you have $500 short term gain, $500 long term gain, and a $500 long term loss and you’re in the 35% tax bracket. The $500 long term loss will go against the long term gain first which would have only cost you $75 (15% * $500) in taxes. You can’t make it offset the short term gain which would cost you $175 (35% * $500) in taxes. My Dad would say, “No cherry picking.”

But—if you only had the $500 short term gain and the $500 long term loss with no long term gain in there, then you can offset the short term gain with the long term loss.

5. Selling a mutual fund is treated the same way as selling an individual stock on your tax return. Selling 500 shares of Vanguard Fund is treated the same as selling 500 shares of Coca Cola as far as the IRS is concerned. It still has to be reported.

6. Finally, watch out for something called “wash sales”. That’s where you sell a stock at a loss and buy it back again within 30 days, or buy another stock that is essentially the same like Coke and Pepsi. Let’s say you sell 50 shares of Coke on October 17 for a loss of $100 but you then buy 50 shares of Pepsi on November 3^rd—you won’t get to claim that loss on your tax return.

Don’t forget, if you get a statement from your broker with stock transactions at tax time, you must report them on your tax return, even if you didn’t make any profit at all. If you don’t report it, you can be certain that the IRS will send you a notice about it.

Posted on October 30, 2012May 31, 2016 by Jan Roberg

Putting an End to Other People Fraudulently Claiming Your Children on their Taxes

TIGTA's MISSION: Provide audit and investigative services that promote economy, efficiency and integrity in the administration of the internal revenue laws. Visit them at http://www.treasury.gov/tigta/index.shtml

Every so often, the good guys win. Every once in a blue moon, putting up a fight for what’s right pays off. We’ve been campaigning for a long time for the rights of parents whose children have been claimed illegally by other persons. The IRS has listened, and they’re going to do something about it.

Glory Hallelujah!

I’d like to tell you that the IRS is responding to the petition that Roberg Tax Solutions sponsored last spring. I’d like to tell you that but it isn’t true, we didn’t get enough signatures to even get the petition read.

But, the IRS is responding to an organization called TIGTA: Treasury Inspector General for Tax Administration. TIGTA’s got the muscle to make some changes.

TIGTA was auditing refundable tax credits and found that they were susceptible to fraud. For those of you who have been victimized by those fraudsters—you realize it doesn’t take Sherlock Holmes to figure that out. But TIGTA was able to come up with some hard numbers—as in of the $2.3 billion dollars that they found to be fraud, the IRS was only able to recover $1.3 billion dollars—that’s a billion dollars gone with the wind!

TIGTA’s recommendation is that the IRS implement additional controls to identify and stop erroneous claims for refundable credits before refunds are issued.

TIGTA requested an account indicator to identify taxpayers who claim erroneous refundable credits. Taxpayers with that indicator should be required to provide documentation before their claims for refundable credits are processed and should be considered for pre-refund examinations of claims for all refundable credits. (That’s basically what Roberg Tax Solutions asked for in our petition!)

The IRS management has agreed with TIGTA’s recommendations and they will take corrective actions. They will develop a pre-refund examination filter so that historical information is available and used as selection criteria. Now that’s not exactly what TIGTA recommended—but it’s a good start.

Is this a perfect win? No—but for victims of child identity theft, it’s definitely a step in the right direction. To read more about the TIGTA report, click here: http://www.treasury.gov/tigta/auditreports/2012reports/201240105_oa_highlights.pdf

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For some more information on this subject, be sure to check out:

Will I Go To Jail For EIC Fraud?
http://robergtaxsolutions.com/2011/04/will-i-go-to-jail-for-eic-fraud/

My Ex Claimed my Kid: Now What Do I Do?
http://robergtaxsolutions.com/2011/01/my-ex-claimed-my-kid-now-what-do-i-do/

Stolen Children
http://robergtaxsolutions.com/2012/05/stolen-children/

Posted on October 26, 2012May 31, 2016 by Jan Roberg

Can I Claim My RV as a Business Expense?

I had a client that owned his own business and he wanted to buy an RV so he could go on vacation with his family. He wanted to know if he could write off the cost of the RV as a business expense if he put a sign about his business on the RV while he traveled around the country. The answer to that is a flat out no. The IRS is all over that idea and they don’t like it.

But, it may be possible to write of an RV as a business expense if you really do use the RV for business. For example, let’s say you have clients in another city that you regularly visit. When you are visiting those clients, you normally need to spend time in a hotel. So, maybe the RV might be a good choice for you. You could travel to the location in the RV and sleep in the RV instead of a hotel.

So I said you might be able to claim it—this isn’t a rock solid deduction. You’ve got to be able to prove it’s truly a business expense. There are a couple of things you must absolutely do.

You must have a log of all of your miles you drive in the RV. Not one of those, oh I drove some business miles and write it down later—a very serious, a very real mileage log. Over 50% of the miles you drive must be used for business to try to take the RV as a deduction.
You must also keep a log of all the nights that you sleep in the RV. Same rule—over 50% of your nights sleeping in the RV must be for business.
You must also keep your business trips shorter than 30 days so that the RV counts as transient lodging. That means I can’t buy an RV and drive down to Florida for the entire tax season and spend my summers in Missouri. (Well I could, but I wouldn’t be able to write off the RV as a business expense.)

And the main point you must absolutely keep in mind—do not use the RV for entertainment. No business parties on the RV. The IRS is pretty strict about that. Entertainment facilities are not tax deductible (things like swimming pools, hunting lodges, and bowling alleys.) Make sure that your RV is for lodging or travel—not for entertainment.

So although my client with the sign idea couldn’t claim the RV as a business expense just for putting a sign on it, if he chose to drive the RV on his business trips and stayed in the RV overnight instead of a hotel—he might be able to claim part of the RV expenses for his business, as long as his business use was more than his personal use.

Remember, trying to claim an RV as a business deduction is kind of “out there” and highly likely to be audited by the IRS. You’re going to want to have really good documentation and a good accountant to back you up on this one.

Posted on October 22, 2012May 31, 2016 by Jan Roberg

Seven Things You Need to Know About Claiming the Foreign Earned Income Exclusion on Your US Tax Return

Photo by mammal at Flickr.com

If you’re an American citizen working outside of the country, you may be able to exclude some (or even all) of that income from your US income taxes by using Form 2555, the Foreign Earned Income form. Here are some things you need to know about the form:

1. Currently, the exclusion for 2012 is $95,100. The exclusion for 2013 will be $97,600.

2. In order to claim the exclusion, you must have a tax home in a foreign county. You must also meet the bona fide residence test or the substantial presence test. Basically, if you work full-time inside a foreign country for the entire calendar year, then you’ll meet the bona fide residence test. If you work outside the United States for 330 days out of a 365 day period, then you’ll meet the substantial presence test.

3. If you are in a foreign country as a US government employee, then you are not allowed to claim the foreign earned income exclusion.

4. When reporting your foreign income, remember to convert any income and expense amounts into US dollars. You can get foreign currency exchange rates from the US Department of the Treasury: http://fms.treas.gov/intn.html

5. If your income turns out to be higher than the exclusion amount, your tax rate will be the higher rate, as if you had to pay tax on the full amount of income. For example, if you prepared your tax return and after claiming the Foreign Earned Income exclusion and any other deductions that you were entitled to, let’s say you have $5,000 of taxable income left. Normally for a single person, $5,000 of taxable income would mean $500 of tax—because that’s the 10% income tax bracket. But not in this case. It’s more likely to be $1400, because when you add back the excluded income, it puts that single person back into the 28% tax bracket.

6. If you are married and your spouse works, you may each claim an exclusion for foreign earned income.

7. If you claim the foreign earned income exclusion, you cannot take the credit for taxes paid to a foreign country on any income that was excluded. If your income exceeds the exclusion amount, it’s generally a good idea to run the numbers both ways to see which gives you the better tax advantage.

Expat taxes can be confusing. If you’re trying to navigate your way through the Form 2555, give us a call, we can help.

Posted on October 19, 2012May 31, 2016 by Jan Roberg

Say Good-Bye to the Payroll Tax Holiday

Have you been watching the presidential debates? I have. I’ve heard both sides trot their “tax plans” out and I’ve heard a lot about what both Governor Romney and President Obama say they’re going to do with taxes if elected. Here’s something I haven’t heard—what about the payroll tax holiday?

What’s that you ask? The payroll tax holiday is the 2% tax cut we got back in 2011 and it got extended for 2012. Nobody’s talking about protecting it now. That means you can pretty much expect your taxes to go up starting with your first paycheck in January. How much? Well, if you make $30,000 a year and get paid once a month—your pay would go down by $50 per paycheck.

Here’s a link to the Kiplinger calculator so that you can figure out exactly how much this will affect you and your paycheck: http://www.kiplinger.com/tools/Social_Security_payroll_tax_increase_calculator/index.php

Full disclosure here: I thought the payroll tax holiday was a big mistake in the first place. That’s money that goes into the Social Security fund—you know the one the tax policy wonks keep saying is going to go bankrupt? So we’ll take money from that fund? I wasn’t happy with that.

But now that everyone has gotten used to that 2% “tax holiday”, when your first paycheck in January comes and it’s a little lighter, you’re certainly going to feel like you’ve had a tax increase, even though technically, it’s not an increase.

Seriously, it’s not considered to be a tax increase because it’s an “expired tax reduction.” And that’s why both sides can say they are not raising taxes—they’re just letting this reduction slide into oblivion.

Personally, I’m just not that sophisticated. I like plain language. Taxes are going to go up or they’re going to go down, or they’re going to stay the same. I know that come January, our taxes are going to go up no matter what the politicians call it.

Posted on October 12, 2012May 31, 2016 by Jan Roberg

Bad Calls

Photo by Otto Greule Jr at Getty Images

Let me start with full disclosure: I am a card carrying member of Cardinal Nation. As I write this I am sitting on the sofa wearing my St. Louis Cardinal’s jersey hoping to type this out before the first pitch of the game. So forgive me if it’s considered blasphemy but, the infield fly rule called against Atlanta during the 2012 Wild Card Play-Off was a bad call. (http://www.nesn.com/2012/10/infield-fly-rule-prompts-criticism-of-umpires-call-for-instant-replay-in-mlb.html) Hopefully we would have still beaten the Atlanta Braves anyway, but we’ll never know.

Another bad call occurred in week 3 of the 2012 NFL season featuring the Green Bay Packers and Seattle Seahawks—a Hail Mary pass was thrown and members of both teams caught the ball while the replacement officials gave conflicting rulings. (http://bleacherreport.com/articles/1346952-packers-vs-seahawks-the-replacement-officials-finally-broke-the-nfl) That was a horrible call.

Sometimes tax preparers make a bad call when they do your taxes. We’re not perfect either. The other day I got a phone call from a woman who needed help. The IRS was going to garnish her paycheck and she needed some help stopping it. After I got the immediate problem taken care of, I asked her some questions about her tax return. After getting enough details, I realized that the woman’s previous preparer had missed a pretty major deduction. I recommended that she amend her return and have it done correctly, it would seriously help with her tax debt. You see, when you make a bad call on your taxes, unlike some of the referee calls in sports, you have a three year period to make it right by amending your return.

The woman asked me what I’d charge to fix her taxes and she was a little shocked by the price. She told me that her other preparer at “Brand X Tax Company” had only charged her half that much so she wouldn’t hire me. Ahem. I used to work for “Brand X”. I know their billing practices and they charge by the form. Had the preparer done all the forms that this woman needed to correctly file her tax return, the price would have been much closer to, if not more than, what I was charging. But besides that, we’re talking about reducing her tax burden by a few thousand dollars. Really I’m not all that expensive. So now who’s making the bad call?

I remember a few years back, an elderly woman came into my office with an IRS letter. It said that she owed about $10,000 and she didn’t know what to do about it. As I looked at the letter and then at her return, I realized that she had a bunch of stock transactions that hadn’t been reported on her tax return. Although the IRS said that she owed $10,000, when I checked things out, she really didn’t owe anything at all, she just needed to have her tax return done correctly.

When I told her the cost, she too was shocked, “But my other lady only charged me $20 to do my taxes,” she said. “But your $20 tax return is going to cost you $10,000,” I replied. She was smart, and now her taxes are done correctly.

Here’s the big hint—if you get a document that says “Important Tax Document”, you probably need to report something from that paper on your tax return. If you give your preparer that piece of paper and she ignores it, that’s a red flag that something’s wrong. Shame on her. If you don’t give that paper to your preparer, then it’s shame on you.

Preparers can make mistakes. (Even me, that’s why I have my staff review my returns just like I review theirs. We’re all human.) If you get an IRS letter, the first thing to do is to contact your tax preparer and give her a chance to fix it. She might not have even made a mistake; sometimes it’s an IRS mistake. They’re human too—(some of them.) But if your preparer can’t or won’t help you when there’s a problem, it’s time to make the right call and move on.

Posted on October 9, 2012May 31, 2016 by Jan Roberg

What to Do if You Owe the IRS Lots of Money

Photo by splorp on Flickr.com

My phone’s been ringing off the hook this week and this seems to be the big question, “I owe the IRS a lot of money, what should I do?”

Although everyone’s situation will be different, here are some general guidelines that might help you muddle through this mess.

1. First, and most important—don’t ignore the IRS. Make sure you contact them, let them know you’re looking for a solution to the problem and keep them informed. Your natural reaction may be to want to hide, but that won’t work. Make them your ally, not your prosecutor.

2. Second—and this is my big issue—do you really owe that much? The reason I ask is because often when people have huge debt, there’s a mistake in the taxes. Not always but quite often. If the IRS did your taxes for you—definitely check that option out. (The IRS doesn’t do taxes very well—no joke.) I cannot tell you how many times I’ve completely cleared someone’s tax debt because their taxes were just done wrong in the first place. More likely, I’ve reduced the debt to a more manageable amount. The point is—getting a second opinion is usually a good idea.

3. Could you afford to make a monthly payment? Generally an installment agreement can be made for up to 6 years, but if you can pay off the debt in two or less that’s so much better. The quick and dirty—if you owe less than $25,000, take that amount and divide by 60. If you can pay that much a month then that’s your installment payment. Remember, if you can pay more than the minimum—do it. Penalties and interest keep adding on while you’re paying so the faster you pay it off, the better off you are.

4. If you owe more than $25,000 or you can’t afford the minimum payment—you’ll need to provide the IRS with financial information to prove your situation. At this point you may want some professional help to get you through the paperwork. If you’re really broke, or unemployed, you might qualify for the currently uncollectable status. It gives you a temporary break from making payments until you get back on your feet. Unfortunately, penalties and interest keep getting added.

5. One option may be an offer in compromise (OIC). That’s where you offer the IRS a smaller amount of your debt –a compromise. Watch out for those late night TV ads selling OICs. Sadly, many of those companies are rip-offs. They charge somewhere between $5000 to $8000 for the OIC but the fine print says “if an offer in compromise can’t be reached we will do an installment agreement.” There’s a formula for doing an OIC—they pretty much know up front if you’ll qualify or not. Paying $8000 for an installment agreement that you could negotiate yourself is a rip-off. Ask lots of questions and get references.

6. Another thing to look at is how old is the debt? Not only are you paying interest, there’s a late payment penalty of 1/2 of 1% per month up to 25%. If the debt is for 2011—well then you’re still paying that extra 1/2% per month—that’s an additional 6% per year on top of the IRS interest rate. You might be better off putting the debt somewhere else. Most credit cards have higher rates than that, but if you’ve got access to cheaper credit elsewhere, that might be worth your while to pay the IRS debt off.

7. Also, if this is only one year of taxes that you owe—then you might be able to have the penalties abated. If you have a couple of years of debt—that’s another story. Don’t ask for the penalty abatement until you’ve got the taxes paid off—otherwise they’ll just start accumulating all over again. But keep that in mind as you get closer to the payoff. A penalty abatement is where you ask them to take the penalties off your debt. Often, if this is the first time you’ve ever owed like this, you can get an “abatement.” That’s the word you want to use.

8. Last but not least, if you got hit with a big tax bill, you need to make some adjustments to your withholding or estimated tax payments so that it doesn’t happen again. Once or twice—okay that happens, but if this is happening every year, that’s just plain irresponsible. If you have an offer in compromise and wind up with another tax debt—it can void the offer making you owe those taxes all over again. It can also terminate your installment agreement. It’s really important to keep current with your taxes.

Posted on October 5, 2012May 31, 2016 by Jan Roberg

Tax Court Determines that Poor Health and Turbo Tax is No Excuse for a Bad Tax Return

Photo by left-hand at Flickr.com

This is one of those geeky tax court issues that I usually don’t report on, except this is sort of a big deal for normal people, so I figured I should write about it.

The quick scoop of the case is that Robert and his wife Diolinda filed their 2007 tax return with lots of mistakes. To be brutally honest, I think they were trying to pull a fast one and got caught, but the court document refers to the tax underreporting as “errors” so I will too.

Anyway, these “errors” amounted to Robert and Diolinda owing an additional $44,643 in taxes. That’s a lot of money. And if the IRS finds that you’ve under reported the tax you owe by over 10%, they add additional penalties. In this case, the penalties amounted to an additional $8,179.

So why is any of this relevant to the rest of us? It’s because of those penalties. Robert argued in his case that he shouldn’t have to pay the penalties because he suffered from various health ailments including depression, cardiac disorders and memory loss. He had suffered from those ailments since 1997. He also claimed that he used the tax software Turbo Tax and that other people who used Turbo Tax did not get assessed penalties due to computer errors.

The response from Tax Court? Well I’m paraphrasing here but basically they said, “Garbage in, garbage out.” You see, if you use Turbo Tax and you follow the directions and prepare your return the way Turbo Tax tells you to—well then you should get a proper tax return. If you input your numbers correctly and Turbo Tax messes up your return, then Turbo Tax would be to blame. But if you go and input a bunch of crazy crap—then it’s your own fault your taxes are wrong and you can’t blame the errors on Turbo Tax. The court basically decided that Robert and Diolinda input a bunch of crap (like I said, paraphrasing.)

What about the argument that Robert’s poor health, confusion and memory loss was an excuse for the errors? The Tax Court held that since he failed to get competent help for preparing the return that it counted as negligence—so bam—penalties.

So what does this mean? If you are mentally or physically unable to prepare your own taxes properly, then you need to get competent help to assist you.

The case is Robert L. Bernard and Diolinda B. Abilheira v. Commissioner of Internal Revenue. It was filed on August 1, 2012. Here’s a link if you want to read the whole case: http://www.ustaxcourt.gov/InOpHistoric/bernardmemo.TCM.WPD.pdf

Posted on September 28, 2012May 31, 2016 by Jan Roberg

Planning Your Home Budget

Photo by Tax Credits at Flickr.com

Updated December 2013

Today, I’m talking about budgets. I’ve even got a free “gift” for you. It’s a home budget planner. All you have to do is click on this link RTS Budget Planner and download the excel spreadsheet and start inputting the numbers.

The basic idea is that you want to make more money than you spend. Now I confess, I have a little experience with this—it’s not always as easy as it looks. I’m way better at spending than at making money (Just ask my husband). But I also know that when I set up a budget, I’m more careful with my money, and for me that’s half the battle.

If you’ve never tried using a family budget before, here are some things that I’ve learned over the years.

Expect your first draft of the budget to not be perfect. Make your budget and try it for a month or two and see how it works. What did you leave out? What did you underestimate? What did you over estimate? Expect to make some changes.
The first draft of your budget should include everything that you really do spend money on. You may need to trim your budget, but you have to know what you’re spending your money on before you start trimming expenses.
Budget for things that are important to you, don’t eliminate stuff just to make your budget look good. If you go to the movies regularly, budget for it. If you smoke (even if you want to quit)—budget for it.
If you’re married, be prepared to compromise. When I’ve done budgets in the past, I cut my husband’s lunch money and cable TV. I bring my lunch to work and I don’t watch that much TV, so why pay for those things? But if I want to stay married, my husband needs to eat and have access to his beloved Cardinals baseball team. We kept the cable TV and trimmed the budget someplace else.
Remember to budget for charity and savings. Now many people do a budget to see how much they can save or how much they can give to charity. I suggest that you decide up front how much you want to save and to donate and stick that right into your budget from the get go. If you do the budget and decide to save what’s left over—you won’t be saving anything. The general recommendation is 10% of your take home pay for savings and another 10% for charity.
Depending upon who you talk to, your housing costs should run somewhere between 25 to 33% of your take-home pay, but that’s just a guideline. For many people, housing costs take up a much higher proportion of their income.

Those are my main tips. If you’ve got a good budget tip, please put it in the comments section below. In this economy, we all need all the help we can get.

Happy budgeting.