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ask the taxgirl

More Sunday Mailbag

October 25, 2009 · 10 comments

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!

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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).

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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.

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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.

kiddos.jpg

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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!

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Ask the taxgirl: Paying Rent to the Parents

October 20, 2009 · 9 comments

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!

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.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl

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Ask the taxgirl: Pastors and Deductions

October 6, 2009 · 0 comments

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:

  1. regularly and exclusively used for business activity; and
  2. 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!

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.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl

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Ask the taxgirl: Foreign Accounts and FBAR

August 21, 2009 · 1 comment

Taxpayer asks:

Hi Kelly,

With all the publicity about UBS and foreign bank accounts, I have some concerns that a lot of parents may be sharing…

I know you’re a mom too (though your kids are too young for you to have to worry about this right now!) But, if you were in my shoes, I’m wondering what you’d advise if this were your daughter.

My daughter was studying overseas last year and she had a foreign bank account, not to evade taxes, of course, but just to pay her rent and grocery bills.

Here are the fact of her situation:

In calendar year 2008, the high balance in her foreign bank account never exceeded $7,000. (We’re absolutely sure of this–we’ve poured over all the bank statements and carefully considered all possible relevant exchange rates during the time she had the bank account.)

In calendar year 2009, the high balance in her foreign bank briefly exceeded $10,000 in late January 2009.

My reading of the law is that she will have a FBAR (Foreign Bank Account Report) requirement for 2009, which means she absolutely MUST file TD F 90-22.1 by June 2010. (And, I know that’s an actually “in the hands of the IRS office in Detroit deadline, NOT a postmark deadline–it’s different from most IRS deadlines in that respect.)

However, my understanding of the law was that she did NOT have to file one for 2008, because her bank account stayed well below $10K in 2008.

The penalties for getting this wrong are draconian. I’ve read that the IRS can impose a penalty of $100,000, or one half the value of the account, whichever is greater, per year. Ouch! That’s a LOT of money for a grad student if her mom gives her bad advice, so I wondered what you’d advise.

I keep wondering about 2008, even though her account was several thousand dollars below the filing threshold that year.

I’ve also read that there’s a special amnesty for people who file late reports before September 23 of this year.

We’re absolutely sure that her balance did not come close to $10K in 2008, but do you think it would be safer to file a TD F 90-22.1 this year declaring the high balance of $7K in 2008, by September 23, just to be super-safe? Or would this just be asking for trouble and causing unnecessary work for the IRS? I know they don’t like people filing unnecessary returns, and if every college kid who had a small foreign bank account during a term abroad filed FBARs, it would create a lot of unnecessary work for them, when they’re probably going to be busy dealing with a huge number of people who absolutely DO need to file to catch up–apparently there are people with years of back reporting to catch up on.

For sure, no matter what, I’ll absolutely make sure that she files the TD F 90-22.1 declaring her high water mark for 2009, before June 30 of 2010.

What would you do, if this were your kid? (To be clear, there’s absolutely no effect on her tax liability either way. She didn’t earn any income on her overseas bank account, and she always declares all her income on her tax return, no matter what! After all, she got the tax goddess for a mom. So even though some of her fellowship and academic prize money doesn’t get reported to the IRS on 1098-Ts or 1099’s, she still very dutifully reports it all and pays taxes on it anyway.)

Even if you don’t feel comfortable addressing this question, I think you’d be doing your readers a service by reminding parents of college students who have been studying abroad in recent years about the possibility that their kid might need to file an FBAR. It sounds like the IRS is really cracking down on this stuff, and the IRS says the statute of limitations is 6 years on the FBAR requirement.

Thanks,

Taxgirl says:

This is a great, great question. The IRS has been cracking down on FBAR reqs and otherwise monitoring foreign accounts as part of their targeted enforcement strategy. And, as blogged earlier today re UBS, they now have a very public platform from which to shout.

Setting up a bank account in a foreign country is generally a big deal to the account owner. I remember waiting in line at Lloyd’s in the UK to open my student bank account when I was studying abroad. I felt extremely important dumping what was the equivalent of about $30/month into a foreign account to pay my expenses; I still have a check (I mean, cheque) from my account in my scrap book. But while I felt important, the IRS could care less. The IRS isn’t so much concerned about “small potatoes” taxpayers – and most college students really are “small potatoes” – as they are the Madoffs of the world.

You more or less nailed the FBAR criteria in your question, but here it is again for folks that aren’t aware of it… First of all, FBAR is the Report of Foreign Bank and Financial Accounts which was authorized under the Bank Secrecy Act. You have to file an FBAR if you are a “US person” who owns or has authority (basically, you can control or sign for the account) over a foreign financial account or accounts AND the aggregate total of those accounts exceeds $10,000 at any time during the calendar year. A “US citizen” means a citizen or resident of the United States, or a person in and doing business in the United States. There are a few exceptions, including some for military, but those are really narrow – if you think you qualify for an exception, check with your tax professional.

This is not the same rule as the “Report of Cash Payments Over $10,000 Received in a Trade or Business” – the FBAR only applies to foreign accounts.

The due date for the FBAR is June 30 of the following year (i.e. for 2009, the FBAR would be due on June 30, 2010). It’s important to note that you don’t file the FBAR with your federal income tax return since the due date of the return is NOT the due date of the FBAR. Additionally, getting an extension for your federal income tax return doesn’t extend the due date for the FBAR. This is because there is no extension available for filing the FBAR.

The FBAR is not terribly complicated – it’s mostly long so that you have lots of room to write. To file, you can check the appropriate block on your federal form 1040 at Schedule B and file form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (available here as a pdf).

All of that said, I think you’re right that you should file for 2009 but I say no for 2008.

Since I’m a mom, I understand that you want to be 1000% certain that you’re not doing anything wrong since it involves your daughter. The penalties for failing to comply are indeed draconian and can involve civil and criminal penalties. But if you’re sure that those accounts never topped $10k (which is easy enough to confirm), you’re not required to file and you wouldn’t be subject to penalties. If it were my daughter (who, at the age of 4 advised us that she was planning to move to Paris to study), I would say exactly the same thing.

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.

Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl

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Ask the taxgirl: Pageants and Deductions

18 August 2009

Taxpayer asks:
A friend of mine asked me to buy an ad in a book for her daughter’s beauty pageant. She claims that it is tax deductible. I didn’t think that beauty pageants were charities, so how is this true?
Taxgirl says:
This question turned out to be far more complicated that I thought – even [...]

3 comments Read the full article →

Ask the taxgirl: Sellers and Homebuyer’s Credit

5 August 2009

Taxpayer asks:
Do you have any advice for how SELLERS should best take advantage of the credit? Should we advertise about the credit with our real estate listings?
Taxgirl says:
That’s a great question!
I think the credit is a real selling point (though I’m not a fan of the concept). It definitely makes sense to advertise it. [...]

4 comments Read the full article →

Ask the taxgirl: Amount of Homebuyer’s Credit

4 August 2009

Taxpayer asks:
Hi Taxgirl,
[I emailed you last week when we received the refund to our amended return for 2008 because we claimed the new homebuyers $8000 credit. I was perplexed that it was for $7978 instead of for $8000. The following info explains why, and continues my question.]
We just received a letter from the IRS explaining [...]

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Ask the taxgirl: Subsequent Marriage and Homebuyer’s Credit

4 August 2009

Taxpayer asks:
Single taxpayer elgible for and takes advantage of $8000 first time homebuyer credit. Prior to 3 yrs ownership, taxpayer gets married and wishes to put new spouse name on deed. Does that disqualify and require repayment of the $8000?
Taxgirl says:
Nope. Eligibility for the first-time homebuyer credit is determined on the date of [...]

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Ask the taxgirl: Co-signers and First Time Homebuyer’s Credit

3 August 2009

Taxpayer asks:
I bought my first house in April. I asked my dad to co-sign on the mortgage for me because my credit was not strong enough for a good interest rate. Can I claim the first time homebuyer’s credit?
Taxgirl says:
Yes, you can, so long as you otherwise qualify. From the facts, I’m [...]

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Ask the taxgirl: Internships

29 July 2009

Taxpayer asks:
Hi taxgirl,
I love reading your blog. I think you’re funny and insightful. I’ve learned more from your site than from a whole semester of tax law.
I actually just graduated from law school and I am really interested in writing for your site. I checked out the “about” and “find me” tabs but [...]

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