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Ask the taxgirl: Do I Need a Form 1099?

Kelly — Thu, 19 Nov 2009 13:32:08 +0000

Taxpayer asks:

Several elderly friends have asked me to help them with administratrive work in there home. I would probably do this on an ongoing basis and I am sure each would end up paying me more that $600 a year. I would report all of this money (Schedule C I think) but am concerned for the people I would be doing the work for. Do they have to issue a 1099 for the work I would do for them? Could I just report the money quarterly without ever getting a form from them and have it be legal, I don’t want to get them into trouble?

Taxgirl says:

If I understand it, you’re going to be kind of like a Girl Friday? Opening mail, paying bills, that sort of thing, at times that are convenient for you – and for a number of different people?

Assuming that you can’t be classed as a household employee (which I think you’re not if my understanding of your situation is correct), then there is no obligation for your customers to report payments made to you.

Forms 1099-MISC are generally issued when payments are made in the course of trade or business. Personal payments are not reportable. If your customers are making payments to you for services in much the same way that they would pay their hairdresser or a kid that occasionally mows the law, there’s no reason to submit a 1099 to you.

Again, this assumes that you’re self-employed and that you control how the work is done. A self-employed worker also usually provides his or her own tools and offers services to the general public in an independent business – which sounds like what you’re doing.

If, however, you could be classified as a household or other employee (which would result in a form W-2 issued to you), or if you’re performing services for your customer’s trade or business (which would result in a form 1099-MISC issued to you), that’s a different story. You can read more about household employees here.

I hope that helps. And good luck with your business!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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Bankruptcy and Tax Deductions

Kelly — Tue, 10 Nov 2009 00:28:45 +0000

I get a number of bankruptcy-related questions submitted via ask the taxgirl. That’s why I was intrigued when I was asked to write a piece on Wallet Pop about how Chapter 13 payments affect your taxes. You can check out what I had to say here: Wage earner’s bankruptcy doesn’t kill all tax deductions.

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Ask the taxgirl: Donating an Engagement Ring

Kelly — Wed, 28 Oct 2009 20:17:02 +0000

Taxpayer asks:

Hi Tax Girl!
I got rid of the husband and now I would love to get rid of the engagement ring. I have thought about donating it to a non-profit animal rescue group for them to auction at one of their charity events. What kind of deduction will I be able to claim and is there any kind of red tape I will have to go through to be able to do this?
Thanks!

Taxgirl says:

Well, good for you!

A couple of things…

The first is that you should check with the non-profit first to make sure that they can use your ring in their auction. Generally, to claim the full charitable deduction, the charitable organization must be able to use (or quickly liquidate) the item. So, you can’t, for example, deduct stock in a closely held corp that’s impossible to redeem or a year’s supplies of steaks to PETA. So, step one: make sure that the charity can use it and will acknowledge the donation.

Step two: get an appraisal. Check out my prior post which references appraisals and fees. Keep in mind that the appraisal should describe the style of the jewelry, the cut and setting of the gem, and whether it’s considerable fashionable. If it’s not in fashion, the appraisal should reference any change in value if the ring is recut or reset.

If the ring is valued at over $5,000, special rules apply (check out Section B of form 8283 which will download as a pdf, if that’s the case).

That said, unlike the wedding dress mentioned in my prior post, jewelry is not considered a “household item.” It’s actually considered a capital gain item and the rules can be a little complicated here since the item is to be sold by the charity. Depending on the length of time you’ve held the ring and its value, there may be some restrictions which apply. For example, which respect to property held for less than one year, the IRS only allows you to claim the purchase price. So, be careful.

The bottom line is that this one can be a little bit tricky depending upon the value of the ring, the appreciation (if any) from the purchase price and the length of time you’ve held the ring. I absolutely recommend checking with a tax pro for the specifics (remember that the cost of the tax pro’s services is also deductible).

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Ask the taxgirl: Wedding Dress Donations

Kelly — Wed, 28 Oct 2009 18:13:15 +0000

Taxpayer asks:

Hi Taxgirl,

Like many women this year, I got married and now I would like to donate my dress to charity. What do I need to do for tax purposes? I paid 1000 for it new and only wore it once. It is in good condition. Do I need it appraised? I still have the receipts. If I send it to a charity, can I deduct the mailing cost? And can I deduct the cost of drycleaning it before I send it to the charity? Also, the charity resells the dresses at an auction/fundraiser and charges a $40 “processing” fee to help cover their expenses. Is this deductible?

Thanks for answering this question, I bet a lot of brides will appreciate your answer!

The new Mrs’s

Taxgirl says:

What a great idea!

Generally, you can deduct the fair market value of property donated to a qualified charitable organization. When it comes to clothing, the clothing must be in good used condition or better – it sounds like your dress is nearly perfect.

Usually, the fair market value of used clothing is considerably less than the original price. Usually, you’ll opt for the “thrift store” value of the clothing – what you’d pay for the same item in a thrift store or on consignment.

In this case, however, you will need a written acknowledgment from the charity and, quite possibly, an appraisal. I’m not sure what the value of the dress would be, but assuming that it’s over $500, you’ll want a written determination of the value of the dress (an appraisal will do).

You can’t deduct the cost of dry cleaning the dress but I will say that I’d do that prior to an appraisal. The better an item looks, the higher it’s likely going to be valued. I’ve found this to be true with respect to a lot of artwork. Once cleaned or repaired, the value went up substantially.

Unfortunately, the fees for the appraisal are not deductible as a charitable contribution. But you can claim them as a miscellaneous itemized deduction on Schedule A; they will be subject to the 2% rule.

I think there *might* be an argument on the postage front as an out-of-pocket expense but, personally, it’s not an argument that I’d love to make considering the relatively small benefit. Out-of-pocket expenses as charitable deductions are generally associated with volunteer time (when you can’t take a deduction for the time) or when you incur fees for the convenience of the charitable organization (i.e. you buy postage on your own dime for mailers). In this instance, technically the postage is for your convenience. I’d ask your tax pro for their opinion but if it were me, I’d be inclined to say no to this one.

With respect to the “processing fee”, I think it depends on the description and exact purpose of the fee. I’d check with the charity directly for that one.

I think it’s wonderful that you’re going to do something charitable with your dress rather than stuff it into a closet. Good luck!

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More Sunday Mailbag

Kelly — Mon, 26 Oct 2009 01:56:44 +0000

That yellow ball in the sky this morning threw me for a loop. They say it’s called the sun. At any rate, I was thrilled to see it. I grabbed a cup of coffee and cozied up to the computer for another edition of “Sunday Mailbag.” Here’s a couple of “nontax” ask the taxgirl questions that I’ve recently received – enjoy!

–

Taxpayer asks:

Can you recommend tax software for me? I am single, a homeowner and have a few other deductions. Nothing too complicated.

taxgirl says:

I think most tax software programs are fairly similar. I don’t know that you can pick a “bad” package especially with a situation like yours that sounds largely simple. But when it comes to what I use, I don’t mind saying that we use TurboTax, largely because it works well with Mac (no paid endorsement, folks, just the truth).

–

Taxpayer asks:

A lot of tax stuff is very political. I was wondering which president you think was the best for taxes?

taxgirl says:

Hmm, the best, you say? That’s a tricky question.

I’m going to disregard all presidents prior to Eisenhower – not because there were not significant tax events during those times but because it’s difficult to compare tax policies under those systems to those of today. And, after whittling off nearly a couple hundred years, it makes my answer much easier.

I don’t know that I can point to a president who was the “best” for taxes but in terms of a real change in terms of our modern tax policy, I’d say Reagan. Whether you embrace Reaganomics or not, it was a huge shift in terms of how we viewed taxes in America. Marginal rates in the early 1980s were quite high with the top rate hitting 70% on unearned income and 50% on wages – those rates were reduced dramatically. The so called “marriage penalty” was relaxed to reflect a changing demographic. And the increase in the home mortgage deduction is probably the most utilized of Reagan’s tax changes to this day for most Americans.

Perhaps most significant in terms of tax policy, Reagan did something that our recent partisan presidents would never do: he switched course when things weren’t working as hoped. It wasn’t called flip-flopping. His party didn’t abandon him. In fact, he received wide support when he tweaked his 1981 cuts in 1982, 1984 and 1986. Reagan, either through public opinion or his advisors, realized that the 1981 plan was a bit overly ambitious considering the economic climate of the country and rolled back.

The changes under Reagan were so dramatic that the Tax Code was renamed the Internal Revenue Code of 1986 – the first such retitling since Eisenhower. You’ll still see it written that way today.

While I don’t necessarily agree with each and every one of Reagan’s tax decisions, I just think if you had to choose a president who served during some of the most notable changes in modern tax history happen, I don’t see how you couldn’t choose him.

–

Taxpayer asks:

I’m a tax lawyer, too, and also a mother. I have one child which I had before I started working (I was a nontraditional law student) and am considering having another. You mention your children in your blog from time to time. I was wondering how many children you have and whether you think that having children has been a hindrance in your career.

taxgirl says:

Ooh, here’s where I say things that manage to tick off everyone at the same time…

Um, I’ll start with the easy question. I have three fabulous kiddos. They are all aged 7 and under. I know, it is insanity.

I absolutely believe that being a mother in the legal profession is a hindrance. Law is predominately a male profession, even now. According to law.com, while women start out in approximately equal numbers to men as law school grads, women account for only about 20% of partners at big firms. I think it’s because the expectation is that women will become mothers and be less effective lawyers.

I got my first taste of that bias when, as I mentioned on #22twts, on one of my first job interviews for a law job, I was asked whether I intended to get married and have kids. Yes, now that I’m older and wiser, I realize that the interviewer wasn’t allowed to ask that question but as a soon to be law school grad, I just wanted a job. And I answered the question. I said yes (PS – it happened twice and I was offered the job in spite of the question on one occasion).

At any rate, fair or not, having a child is often viewed as an intrusion upon your availability as a lawyer. It is one of the reasons that I’ve chosen to be my own boss (although I didn’t have children until after I started my own firm). I work long, long hours because you have to in this profession. I’m typically up around 5am and I go to sleep close to midnight. I do this deliberately because I try to schedule my work around my family and not the other way around. That isn’t to pass judgment on anyone who does it differently, it’s just how I’ve chosen to manage my career.

But your career is really what you make it. There can be roadblocks – and, yes, honestly, pregnancy is one of them in the legal profession. How you handle it is up to you. Sandra Day O’Connor has three children. Ruth Bader Ginsberg has two. Clearly, having kids doesn’t end your legal career.

I do think there are certain areas of the law that are easier for moms and tax would be one of them. It requires little in the way of court appearances (if you play your cards right) and generally speaking, your busy times are expected. Summer tends to be the quietest, which works out well when the kids are home or for purposes of planning a vacation. My busiest times are early spring and the end of the year. That kind of stinks because it coincides with the holidays but again, not unexpected so that I can plan.

A little longer answer than I originally planned. It’s a tricky question that really can’t be fully developed in a couple of paragraphs. So let me leave you with this: Could I have been a partner at a big firm if I wanted? Yes (I’ve been headhunted plenty). Could I make a lot more money doing things differently? Yes. Do I get a little envious when I see my single peers climbing up the career ladder? Yes. Would I give up my current life for any of that? Not for a second.

–

Taxpayer asks:

I imagine that you’re pretty excited about the Phillies, huh?

taxgirl says:

You have no idea! Go Phils!

—

As always, thanks for writing in!Similar Posts:

Ask the taxgirl: Should I get married?

Kelly — Thu, 22 Oct 2009 10:24:39 +0000

Taxpayer asks:

Last year, I moved in with my boyfriend at his condo. He lost his job so I paid most of the bills. I paid the mortgage direclty for most of the year. I also paid some of his credit card bills, the car payment and some of his child support paymnets so he didn’t get behind again. Can I take any of these things off on my taxes? Would it make a difference if we got married?

Taxgirl says:

You cannot deduct the cost of credit cards and car payments for personal use. Personal loans are never deductible.

Child support is likewise not deductible; in fact, child support is considered “tax neutral” (neither deductible to the payor nor taxable to the payee), unlike spousal support.

Mortgage interest is only deductible when you’re legally responsible for the note. Here, you’re clearly not since you indicated that it’s your boyfriend’s condo.

Now for the bigger question:

If you got married, it would only change the mortgage bit in terms of your deductions. Your husband would be able to take the mortgage interest deduction and charge it against your income. You’d also be able to claim an additional personal exemption against your income, assuming he’s still not working. Of course, this would not apply to last year – just this tax year if you got married by December 31, 2009.

I’m actually asked a lot whether it makes more sense to be married – or not – based on taxes. The answer is that it always depends on your situation from a tax perspective, though it tends, under the current system, to be more beneficial to file as married than single. Again, really facts and circumstances dependent.

That said, I run a business with my husband. And as I approach my own anniversary (it’s next week), I can honestly say that a business is not the same as a marriage. In business, you tend to make decisions that are largely based on dollars. In marriage, not so much.

This is not to say that financial decisions aren’t an important consideration in a marriage. It certainly is (you want to think about, for example, whether your potential spouse and you are compatible in terms of how you view money). But marriage is tough enough between two people: don’t drag Uncle Sam into it, too.

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Ask the taxgirl: Finding Natural Birth Parents

Kelly — Wed, 21 Oct 2009 10:24:13 +0000

Taxpayer asks:

I don’t even know how to start.

Last year, I found out that I was adopted. My parents have no interest in helping me find my birth mother but it something that I have to do.

I have found a lawyer that says he will help me find her but it is very expensive. My question is can I deduct any of the costs in finding my real mom?

Taxgirl says:

Wow. That sure is a lot on your plate.

Unfortunately, no, the expenses associated with your search are not deductible. You can only deducted attorney’s fees as an individual in limited circumstances which include certain tax advice; defending a lawsuit that was filed against you on a work-related issue; or for your business. As a side note, you can only take that deduction as a miscellaneous 2% deduction on your Schedule A.

You may think that it’s deductible because fees (including attorney’s fees) related to an adoption may be taken as a credit on your tax return. However, those expenses relate to fees incurred while adopting or trying to adopt a child, not for an adopted child trying to locate a birth parent.

In other words, there’s no available offset (credit or deduction) in your case.

I’m totally not being flip here but I think it might be a good idea if, along the way, you engaged in a little therapy to deal with this big change in your life. On the plus side, that is deductible (assuming that you itemize).

I wish you well.

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Ask the taxgirl: Failed Adoption Expenses

Ask the taxgirl: Paying Rent to the Parents

Kelly — Tue, 20 Oct 2009 11:00:44 +0000

Taxpayer asks:

Thanks for taking my question.

I moved back home last year after I lost my job. I’ve been paying my parents some rent but I can’t afford to pay the original amount that we agreed on. Can they take the difference between what I promised to pay and what I actually paid as a deduction?

I feel bad about the whole thing and I’m hoping that I can give them some good news.

Taxgirl says:

Ugh. You’re soooo not going to like my answer here.

If you’re not paying fair market value for the rent, your parents are not entitled to a loss for the difference.

And it gets worse. They should be reporting the rent that they do receive from you as income on their tax return. On the plus side, they may be able to deduct some of the expenses associated with the rental from the income. This last bit can be tricky because of the relationship between you and your parents and their actual personal use of the home: there’s a huge likelihood that, under the circumstances, no deductions would be allowed at all. Your parents will want to check with a tax pro with respect to their specific situation (the rules on this can be tricky).

And finally, that difference between what you actually paid and what you promise to pay? That’s a gift to you from your parents. And that brings in another whole host of issues.

Bottom line is that this arrangement may feel like a good idea but come April, it’s likely to cause more harm than good. Not only are you not paying what you promised, you’re adding to your parents’ tax headache.

I don’t know what you’re paying but I’m guessing if you’re paying something, you might be able to make rent with a roommate somewhere else. It seems like your parents aren’t amenable to you staying for free. Maybe your parents would consider loaning or giving you some cash to get back on your feet?

I know the market stinks. But my advice is to find a new place as quickly as possible. The tax consequences of your current situation are far from ideal and that can’t make for a comfortable stay.

Good luck and I hope you find a job soon!

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Ask the taxgirl: Filing Single When You’re Married

Kelly — Wed, 07 Oct 2009 11:50:21 +0000

Taxpayer asks:

Can you file single if you are married? Short info I am still in school only have 1 more year then I am done. My insurance ran out so my husband and I got married for the insurance. We were engaged and already had a date. Just had to bump it up to get covered. So how many laws could I possible be breaking?

Thank you for your time,

Taxgirl says:

Easy answer: no. Your filing status is determined as of the last day of the tax year. So if you’re married on December 31 under the laws of your state, you’re married for tax purposes. Exceptions apply for same sex marriages (the feds don’t recognize these), widows and widowers, annulments and married persons who live apart but meet very tailored criteria.

But another question: why would you want to file single? Generally speaking, it tends to be more advantageous to file as married filing jointly.

If, however, you have concerns about filing with your spouse or if you have a financial situation that lends itself to not filing jointly, you can file as married filing separate. It’s similar to filing single with one enormous exception: both spouses must agree to itemize (or not) on their return. One spouse may not elect to itemize if the other spouse takes the standard deduction.

I’m not sure which laws you’re worried about breaking but if it’s financial aid related (which is what I’m guessing from your question), check with your school’s financial aid office. They should be able to help. If it’s tax related, I’m not terribly worried so long as you haven’t previously file a false return. If you have, it’s not the end of the world: it can be fixed. Contact a tax pro if this situation is trickier than you’ve indicated or if you still have questions.

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Ask the taxgirl: Pastors and Deductions

Kelly — Tue, 06 Oct 2009 12:21:00 +0000

Taxpayer asks:

I read this article today and it seemed very aggressive, bordering on overly aggressive. Can you comment?

http://www.startchurch.com/blog/view/name/can-pastors-deduct-tithes-as-business-expenses

The tithe situation here just seems too good to be true. Next, my understanding that pastors are considered self-employed only for purposes related to the SE tax, not for deducting expenses. Therefore the home office must be for the employer’s convenience, not the employees. Can a pastor with a church office make a case for his home office being at his employer’s convenience?

Taxgirl says:

My readers send me a number of links and I am often asked to comment on posts like the one in your question. I tend not to post links publicly if there’s not value in them – especially if I’m being baited or if I feel like my response would just be critical.

But this is a pretty interesting question and I get the feeling that you’re actually looking for an answer and not just a critique. So I’m going to oblige.

The long and short of it is that I agree with many of your points. The IRS does assign a kind of “dual” status for ministers (and in fact all clergy but I’m going to refer to ministers in this post) but it’s not as easy-breezy as the author implies. Ministers may be considered self-employed for the purposes of FICA but that doesn’t confer special treatment by allowing them to otherwise classify their relationship with the church. If a minister receives wages from the church and has established an employee-employer relationship, the IRS will expect that expenses and benefits be reported as such. This means that business and professional expenses would be deducted on Schedule A, not Schedule C. Those expenses are subject to the normal reporting requirements.

A minister who clearly has independent status (such as a traveling minister who serves many churches) or who also performs “a la carte” independent services (such as officiating at weddings not connected with his ministerial duties at the church) may receive one or more forms 1099 and may file a Schedule C. But otherwise, wages are reported on a form W-2 and the regular rules apply.

So now let’s get to the tithe as a business expense. On its face, I would agree that a tithe could meet the criteria as “ordinary and necessary.” It is, in fact, common and accepted in many religions to tithe. And by qualifying it in a contract, it could be viewed as helpful and appropriate for your trade or business. But it would not qualify as a business expense reportable on Schedule C for ministers classed as employees.

Quite frankly, even if it did qualify, I think it’s a case of the tax tail wagging the dog. No matter how you characterize, it’s still a 10% cut in salary if you’re required by contract to pay it out to the church. A SE savings doesn’t make up for a required outlay as a condition of employment. Is it worth it to tie yourself to a condition of employment? Not to mention the whole lack of warm fuzzies I get at the idea that my pastor would be required to give money back to the church. Is that just a case of robbing Peter to pay… Peter?

However, believe it or not, creating an employment contract that requires you to turn over a portion of your salary to a charitable organization could actually qualify the tithe as a charitable donation. Even though there’s clearly an expectation of something in return (in this case, a job) the IRS has specifically addressed this very situation and determined that it may be allowable. It’s also worth noting that while there’s an upper limit to the amount of charitable deductions that you can take, there is no threshold to meet as with unreimbursed employee expenses.

With respect to the home office, I agree with your comments about the commute. To qualify for the home office deduction, the home office must be:

regularly and exclusively used for business activity; and
your principal place of business.

I think it’s a tough argument to make for many ministers that a home office qualifies as the “principal” place of business. Generally, a church is the place where most of the work takes place.

Additionally, a home office is, as you correctly point out, for the convenience of the employer, not the employee. I know of few churches which do not have suitable space available for ministers. If the space is available, the employee may not opt to work from home (as a choice) and claim a home office deduction. This isn’t restricted to churches – that’s the rule.

You can’t deduct the cost of commuting to your place of work. If your home office is for your convenience – and not for the convenience of the church – traveling to the church would be considered a commute and therefore wouldn’t qualify as a business expense.

And again, the restrictions relating to home office and commuting are for the minister as an employee, not as an independent contractor. You can’t act as though you’re an independent contractor when you’re an employee, minister or not.

If you’re interested in finding out more, check out Weber v. Commissioner, 103 T.C. 378 (1994), aff’d 60 F.3d 1104 (4th Cir. 1995). This is more or less the case as far as the IRS is concerned on the tax treatment of ministers. In that case, which the IRS won, a Methodist minister claimed to be self-employed for the purpose of income tax and Social Security. The case, which was upheld on appeal, found that the employee test for income tax purposes is the same for ministers as regular folks, regardless of Social Security status.

I hope that clears up any confusion. Thanks for writing in!

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