Category

ask the taxgirl

Category

Taxpayer asks:

Just read your article on Forbes “Working From Home? Your Home Offices Expenses Are Probably Not Tax-Deductible.

Now, it is as my understanding that an employee could still deduct home office if they are REQUIRED by their employer to work from home. My employer shut the doors early in March and required all of us (small business, less than 50 employees) to work from home only, no choice (many of us had to buy a laptop or monitors as well in order to maintain our normal productivity). This may last for as long as four months, maybe more according to my employer. Shouldn’t everyone at my company qualify for the home office and equipment deduction (assuming we meet the other exclusive space requirements)?

Taxgirl says:

I hate to be the bearer of bad news, but unfortunately, that was the old rule.

The Tax Cuts and Jobs Act (TJCA) eliminated the home office deduction altogether for employees from 2018 to 2025. You can confirm this with IRS Publication 587 which states:

Employee expenses for business use of the home no longer allowed. You can no longer claim any miscellaneous itemized deductions on Schedule A, including expenses for using your home as an employee. Miscellaneous itemized deductions are those deductions that would have been subject to the 2% of adjusted gross income limitation.

Now, home office expenses can only be deducted on Schedule C for independent contractors, freelancers, and small business owners (or Schedule F if you farm).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Any idea whether the filing extension applies to gift tax returns?

Taxgirl says:

AUTHOR’S NOTE: There is (finally) official word from the Internal Revenue Service (IRS) on this issue: Normal filing and payment due dates continue to apply to estate and gift taxes.

That said, my original reply remains below:

Honestly, I don’t know. My gut is no, and here’s why.

The Internal Revenue Service (IRS) has announced that the tax filing season been pushed to July 15, 2020. The IRS also issued guidance making clear that the due date for filing tax returns and making tax payments has been extended from April 15 to July 15. You can read the guidance here (downloads as a PDF).

The relief applies to federal income tax payments and federal income tax returns. According to the guidance, the relief doesn’t apply to any other taxes. In other words, there’s no automatic extension for any other type of federal tax or for the filing of any federal information return. I would interpret that to mean that gift tax returns are not covered by the relief but there is no specific guidance on this out yet.

Someone pointed out extensions language in the instructions (downloads as a PDF). It’s not terribly clear. the instructions say about the due date, “Generally, you must file Form 709 no earlier than January 1, but not later than April 15, of the year after the gift was made.” That’s not tied to the income tax return.

However, the instructions say that if you’re granted an extension of time for filing your calendar year 2019 federal income tax return, that will also automatically extend the time to file your 2019 federal gift tax return. It also says, “income tax extensions are made by using Form 4868, Application for Automatic Extension of
Time To File U.S. Individual Income Tax Return, or Form 2350, Application for Extension of Time To File U.S. Income Tax Return. You may only use these forms to extend the time for filing your gift tax return if you are also requesting an extension of time to file your income tax return.”

I don’t love the ambiguity. If this were me, I’d likely err on the side of caution by filing a Form 8892 (downloads as a PDF).

What is clear from the instructions (and Regs) is that any extension of time to pay the gift or GST taxes, you must be separately requested.

If I find out differently, I’ll let you know.

Taxpayer asks:

What if I already filed my 1040 and scheduled an EFTPS automatic payment on April 15? Is there a way to cancel that automatic payment and take advantage of the deferral to July 15?

Taxgirl says:

To be honest, I didn’t know the answer to this one, so I had to do a little bit of legwork.

First, the backstory. The Internal Revenue Service (IRS) pushed the filing deadline to July 15, 2020. The IRS also issued guidance about payment relief – waiving penalty and interest on payments previously due on April 15, 2020. That means that tax payments aren’t due until July 15, 2020.

Some taxpayers schedule payments in advance through Electronic Federal Tax Payment System (EFTPS). EFTPS is a free service from the U.S. Department of the Treasury. All federal taxes can be paid using EFTPS. You can make payments via the web, a voice response system, or special channels designed for tax professionals, payroll services, and financial institutions. You can schedule business and individual payments up to 365 days in advance.

(For more payment options, click here.)

So what happens if you’ve already scheduled payments through EFTPS? I called up EFTPS to find out. Those numbers are:

  • To reach an EFTPS® customer service agent: 1.800.555.4477 (en español, 1.800.244.4829)
  • TDD (hearing impaired): 1.800.733.4829 (8 a.m.-8 p.m. ET M-F)
  • If you’re outside the United States, call EFTPS® at 1.303.967.5916 (toll call).

They are available by phone or online 24 hours a day, 7 days a week. (You can find more numbers here.)

According to an EFTPS rep, to cancel a previously scheduled payment, you need to call them and have the following information:

  • Your name and Tax ID number;
  • The exact amount of the payment; and
  • The date of the payment.

EFTPS can cancel – and reschedule – the payment with that information.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Is the 1st 2020 quarterly still due on April 15? This means selling securities in a down market to cover that. What’s official? What’s your take?

Taxgirl says:

No, estimated payments are no longer due on April 15, 2020.

As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. Most recently, the Internal Revenue Service (IRS) has issued guidance about payment relief – waiving penalty and interest on payments previously due on April 15, 2020. The guidance made clear that relief includes estimated tax payments for the tax year 2020 that are due on April 15, 2020. You can read more FAQs about payment relief in this piece.

It’s worth noting that the current Senate proposal would push all estimated tax payments to October 15, 2020. That is not yet law but it is being considered. You can find out more about the Senate bill here.

Finally, in case you didn’t see it, the filing deadline has (finally!) been pushed to July 15, 2020.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Ma’am I’m new to the Tax issue so if this has been asked I apologize. I’m a union Ironworker, I’ll be filing single and have made $41,000 will my tools (welding hoods etc.) still be a deduction and will my union dues be a deduction as well?

Thank you for your time.

Taxgirl says:

Unfortunately, no.

It’s confusing because in prior years, union dues and expenses were deductible on Schedule A. They, along with other miscellaneous job-related expenses like tools, were deductible to the extent that they exceeded 2% of your adjusted gross income (AGI).

Under the Tax Cuts and Jobs Act (TCJA), unreimbursed job expenses and miscellaneous deductions subject to the 2% floor have been eliminated for the tax years 2018 through 2025. Those expenses include those that you incur in your job for which you are not reimbursed, like tools and supplies; required uniforms not suitable for ordinary wear; dues and subscriptions; and job search expenses. They also include unreimbursed travel and mileage, as well as the home office deduction.

The TCJA did not change the deduction rules for self-employed persons. If you are self-employed, you can continue to deduct qualifying expenses on Schedule C, Profit or Loss From Your Business on your 1040.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Since 2002, I have owned (via a single-member LLC) an office complex in upstate new york. I purchased it as an investment to either sell or rent. Unfortunately, this property has been vacant and producing no income as a result of town opposition to the use of the property for office purposes. Similarly, the market value was destroyed by the Town. 

My property taxes paid 2018 are approx 20,000.00. My CPA says that his CCH program does not allow for the full deduction and that it defaults to the 10,000 SALT limit.

I am wondering if you have any experience with the applicability of the SALT deduction to a vacant rental or investment property. Any help would be appreciated. Thanks,

Taxgirl says:

The $10,000 SALT limits cap the aggregate of individual state and local taxes, including real estate taxes. But some taxes don’t apply – those are spelled out at section 164 of the Tax Code which says:

The preceding sentence shall not apply to any foreign taxes described in subsection (a)(3) or to any taxes described in paragraph (1) and (2) of subsection (a) which are paid or accrued in carrying on a trade or business or an activity described in section 212. (emphasis added)

In other words, the cap doesn’t apply to state and local taxes that are paid or accrued in carrying on a trade or a business or an activity described in section 212. Section 212 says:

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year:

 (1) for the production or collection of income;

 (2) for the management, conservation, or maintenance of property held for the production of income; or

 (3) in connection with the determination, collection, or refund of any tax.

So that rental real estate you have? You’re using it to produce income, right? Then it should not be subject to the cap. The cap is intended to apply to those state and local taxes claimed on a Schedule A.

I don’t know whether your CPA is getting hung up on the vacancy bit. The timing could be an issue. You didn’t say how long the property has not been producing income, but the IRS likes to see businesses making money. A good rule of thumb is that you should be showing a profit three of five years. If you have not made money for years, it may be that your CPA is treating the investment as a hobby or personal asset instead of as a business. I’d ask him to explain his thinking, and if you’re not satisfied with the answer, seek a second opinion.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

If the sole owner of a home passes – is there a capital gains write off or is it lost at death?  If not lost at death, is there a time limit?

Taxgirl says:

When an owner – sole or otherwise – of a home passes away, there’s a step-up in basis. What that means is that the fair market value of the home as of the date of death becomes the new basis (if there are multiple owners, the new basis is pro-rated). That’s true no matter what you paid for the house originally.

Here’s a quick example. Let’s say your mother bought her home for $100,000. And let’s also say that it was worth $250,000 at her death and you sold it a year later for $300,000. The capital gain on that sale is $50,000. That’s because the original purchase price ($100,000) is no longer applicable. The new basis is $250,000 – that date of death value. You calculate your capital gains based on the regular formula: selling price – basis = capital gains (or loss). In this case, that’s $300,000 – $250,000, for a capital gain of $50,000.

There’s no time limit on the sale for capital gains purposes. The basis doesn’t expire or fade away. However, the longer you hold onto the residence, the more likely it is to appreciate in value (thus increasing the capital gain). Remember this is a federal capital gains question: there may be applicable state and local probate and tax laws. 

Finally, there’s typically no write-off or loss for the sale of personal property: capital losses do not apply to a personal residence or other personal use property like your car. If you sold the home for $10,000, you can’t usually claim a loss on the difference between the basis and the selling price. Losses associated with property used in a trade or business and investment property, like stocks, may be deductible. However, that’s where an exception might apply for estate property: if you argue that the home is held by the estate for investment purposes, you may be able to treat it as a capital asset (and thus, realize a loss). This can be a tricky concept so it’s best to consult with a tax professional.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Hi! Thank you for your time.

My husband and I are volunteering at a charity event for a few days, and we have to have a babysitter. She’s babysitting at no cost to us (she’s family), but can she deduct any of her babysitting expenses? Would it be charitable giving on her part? Thank you!

Taxgirl says:

Unfortunately, no. You cannot claim the value of your time as a charitable deduction on your federal income tax return even if you’re volunteering directly for a charity. This is true even if you can value your time (for example, $10/hour for babysitting or $60/hour for house painting).

You can typically deduct associated expenses, like mileage, for volunteering with a qualified charitable organization; in this case, however, your babysitter is doing this as a favor for you (which is super nice) and not as a direct benefit to the charity. Those expenses would not be deductible.

(On the plus side, your babysitter is not missing out on much. Congress hasn’t changed the charitable mileage deduction since the Clinton era, and it remains just 14 cents per mile.)

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Reading about you connected me to this site. I had a small question.

That is can I double my deductions on my 2019 taxes being that last year I took the standard deduction. Such as House taxes, mortgage, charitable donations. 

Thank You

Taxgirl says:

I’m glad that you found the site!

Under the Taxpayer Cuts and Jobs Act (TCJA), more taxpayers are claiming the standard deduction. The changes typically benefit taxpayers who might have some itemized deductions (like home mortgage interest) but not so much that they exceed the new standard deduction amounts. The amounts are pretty generous with the standard deduction amount for married couples starting at $24,400 in 2019 (higher standard deductions may be available for those over age 65 and/or blind). You can find the numbers for 2019 here and for 2020 here.

If the numbers work out for you to claim the standard deduction in 2019, that doesn’t necessarily mean that it will work out the same for 2020. Circumstances change. And it’s absolutely the case that you can opt to claim the standard deduction in one year and itemized deductions in another. 

It sounds as though you are asking whether if you claim the standard deduction in one year – and therefore have unused itemized deductions in that year – you can simply roll those deductions into the next year. The answer is no. The rules regarding deductibility remain the same as always: you’re entitled to the deduction in the year the expense is paid. So, if you pay home mortgage interest in 2019, you can only claim that expense in 2019. If you claim the standard deduction for that year, then your deduction for home mortgage interest is “lost” (I used quotes here because you’re still benefiting from the higher standard deduction that year).

But this does lend itself to some planning ideas. If you expect that you might have higher expenses in one year – say, you have a significant medical procedure coming up in 2020 – you can adjust the timing of your other costs. So instead of writing that check to charity in 2019, consider doubling up in 2020. That’s called “bundling” – the idea that you can bundle expenses in one year to produce a higher itemized deduction total. It’s totally legitimate planning, but again, it only works if you pay the expenses in the year that you intend to claim the deduction.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

In September 2017 we refinanced our house to pay off crushing credit card debt we incurred during the recession and could not hope to get out from under. 

My question — Is the 2018 refinance law stating that we can only use home equity to pay for work on our dwelling/property retroactive or can we still claim that since it was before that took effect in December 2017? 

I appreciate your time and your blog with so much confusing tax information. 

Taxgirl says:

I agree that this is one of the more confusing pieces of the Tax Cuts and Jobs Act (TCJA) because there are so many working parts. On the one hand, the new law limits the deduction but also allows for some grandfathered bits and tweaks some definitions. With that, a quick recap is probably in order.

Under prior law, if you itemized your deductions, you could deduct qualifying mortgage interest for purchases of a home up to $1,000,000 ($500,000 for married couples filing separately) plus an additional $100,000 for home equity debt. The interest on the home equity debt was deductible no matter how you used the debt, so long as the total of the mortgage and the home equity debt didn’t exceed the fair market value of your home. With those rules, the loan you took out before the TCJA took effect would have been deductible.

The new law limits the amount of debt that qualifies for the home mortgage interest deduction. Beginning in 2018, taxpayers can only deduct interest on $750,000 of new qualified residence loans ($375,000 for a married taxpayer filing separately). The limits apply to the combined total of loans used to buy, build, or substantially improve your home (and a second home, if you have one). 

Congress recognized that some taxpayers bought homes in reliance on the old law, so they grandfathered some of those provisions. Specifically, if you took out a home mortgage before December 15, 2017, you can still deduct the interest payable of up to $1,000,000 of home acquisition debt.

That, of course, left a lot of taxpayers confused: What about home equity loans?

To help, the IRS issued guidance in 2018 which made clear that home equity loans may still be deductible – no matter what they are called – so long as they are used to buy, build or substantially improve your home. However, the TCJA otherwise suspends the deduction from 2018 through 2025. In other words, if the home equity loan is used for a purpose other than to buy, build, or improve your home, it is no longer deductible.

So, is that rule grandfathered, too? Unfortunately, no. Even if the home equity loan was taken out before the law was changed, if it was used for a purpose other than to buy, build or improve your home, it is not deductible. That would include using the loan to pay down other debt.

Here’s a quick example.

  • Let’s say that you bought a home in 2015 worth $900,000 and took out a mortgage worth $800,000. And let’s say that you took out a home equity loan in 2016 worth $75,000 that you wanted to use to pay off your credit card balances.
  • In 2015, you could deduct the interest on the mortgage. In 2016 and 2017, you could deduct the interest on the mortgage and the interest on the home equity debt. But beginning in 2018, you could only deduct the interest on the mortgage on the first home – even though it’s over the $750,000 limit. The rule which grandfathered up to $1 million of home acquisition debt would apply, but the home equity loan interest would not be deductible.
  • If, however, you had taken out a home equity loan in 2016 worth $75,000 to pay for a new kitchen and bath, the interest on the loan would still be deductible because it was used to improve your home.

It’s no wonder that you’re confused: the rules are anything but simple. I hope, however, that clears it up for you. For more info on home mortgage interest, check out IRS Pub 936 (downloads as a PDF).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.