taxgirl

Ask the taxgirl: Reporting Year End Income

Kelly — Sat, 19 Dec 2009 14:44:51 +0000

Taxpayer asks:

I have a question about my Paycheck that will determine my Taxes in 2009/10. I get paid Bi-weekly and I get paid this Friday. The next two weeks I wrk will that check be on my 2009 Taxes or rollover into my 2010 Taxes.

Taxgirl says:

The general rule is that cash-based taxpayers are responsible for reporting income either when it’s received or when it becomes available. Basically, if you have a check in hand or funds in your bank via direct deposit.

Of course, there are some caveats. You can’t refuse to pick up your check or just put it in a drawer and walk away until January. That’s what the “becomes available” bit is about. If you could take the income by the end of the year, it’s reportable for that tax year, even if you don’t take it.

But if your employer hasn’t written your paycheck or you otherwise don’t have access to that income (or if it’s subject to a significant penalty if you take it), it’s not taxable until you have the opportunity to take it. That’s true even if you’ve done the work or made the sale.

Again, that’s for cash-based taxpayers. Accrual-based taxpayers are responsible for reporting income when it comes due (generally, when you invoice for services or when the terms of any contract are completed).

The large majority of individual taxpayers and small businesses are cash-based. You have to elect with the IRS to be accrual-based. If you don’t know what I’m talking about, you’re probably cash-based.

So, in your case, assuming you’re cash-based (and I’d be willing to bet the snow-covered house on it), you’ll be taxed on your paycheck from Friday in 2009 – these last two weeks will be taxable in 2010.

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/taxgirlSimilar Posts:

Ask the taxgirl: Overpayment

Fix the Tax Code Friday: VAT

Kelly — Sat, 19 Dec 2009 04:59:17 +0000

It’s Fix the Tax Code Friday!

This week, I wrote a piece for WalletPop about the possibility of a VAT being imposed in the US. The idea is that the VAT would be similar to those in Europe and Asia and would be imposed at each stage of a transaction in an effort to mitigate fraud. It’s a controversial proposal.

So today’s Fix the Tax Code Friday question is:

Would you be in favor of such a tax in the US? And if so, what would you want to happen to offset it: eliminate state and local sales tax; eliminate income tax on dividends and interest, etc.Similar Posts:

Treasury Plays Fairy Godmother to Citi; Kucinich Says Not So Fast

Kelly — Fri, 18 Dec 2009 13:15:14 +0000

Not everyone is as thrilled about Citigroup’s new tax breaks as, well, Citi.

Former presidential contender Rep. Dennis J. Kucinich (D-OH) counts himself of as one of those who has concerns about the Treasury Department’s decision to change the law so that Citigroup could keep billions of dollars in tax breaks. He went so far as to call it an “outrage” during a hearing yesterday. Kucinich has said that he intends to ask Treasury to defend its actions.

The Internal Revenue Service issued “guidance” last Friday in the way of a Rev Proc that would allow Citigroup to keep tax breaks that they would otherwise lose as they get out of TARP.

The old rule prohibited the use of losses if a company changed hands. But the Treasury has clarified that the government stake in the companies won’t affect their ownership for purposes of qualifying under the law. Hey – it’s just the government right? I mean, they totally don’t count.

Treasury said – wait for it – that without the break, Citi could not afford the loss.

Whew. Cause here I was worried that banks were doing things that they couldn’t afford. Like buying lots of toxic assets. And making risky loans. But that’s sooooo 2008.

This year, Treasury is rushing to their aid. With a wave of their magic Rev Proc wand, voila, tax breaks!

Kucinich said that the real losers in this race were the taxpayers:

This does a disservice to the taxpayers, it does not help the taxpayers recover the value of their investment and it raises troubling questions about how the administration is negotiating its role.

Kucinich also wants to know whether Treasury can do what it did in this case. I’ve wondered the same thing. This isn’t “guidance” so far as I’m concerned – it’s a massive shift in the law. And Treasury has been doing a lot of this lately. I’ve gone so far as to say that I think the government may be planning more tweaks since the speed with which banks are hurtling towards repayment is a bit suspect. But hey, that’s just me.

Bibbidi-bobbidi-boo.Similar Posts:

Ask the taxgirl: Educational Classes Through the PTA

Kelly — Thu, 17 Dec 2009 07:03:09 +0000

Taxpayer asks:

The PTA 501(c)(3) at my son’s local public elementary school sponsors a language and a chess class. Is the tuition we paid for these classes considered a charitable contribution?

Taxgirl says:

Probably not. You generally can’t deduct the cost that you pay for goods or services provided by a charitable organization.

There is a but. If the charitable organization provides a breakdown of the cost and breaks out the difference between the fair market value of the goods or services received from the cost of any donation, you can take a deduction for the donation.

Here’s an example: You pay $500 for a dinner sponsored by PETA. The FMV of the dinner is $50. The overage, or $450, is a donation.

Another example: You join an educational society and pay $50 in membership dues. In exchange, you receive a subscription to the society’s newsletter. The FMV of the newsletter is $15. The overage, or $35, is a donation.

But – and this is sooo important – get it in writing. Most charitable organizations will put the split into a letter; the portion of your contribution which qualifies as a donation will be separately stated. If they don’t offer one, insist on it.

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

Online Merchants Brace for New Reporting Requirements

Kelly — Tue, 15 Dec 2009 22:04:15 +0000

The Housing Assistance Tax Act of 2008 made headlines as part of the larger Housing and Economic Recovery Act of 2008, or HERA, signed into law by President Bush. HERA was introduced as HR 3221 by Rep. Nancy Pelosi (D-CA), with the title: A bill to provide needed housing reform and for other purposes and was ostensibly introduced to kickstart a then-declining housing market. It included $15.1 billion in tax incentives, with a stab at the first-time homebuyers’ credit (this one to be repaid over 15 years); a property tax deduction for taxpayers who don’t itemize; and significant changes to the rules for low-income housing credits.

What really wasn’t publicized in the bill was the “for other purposes” bit… One of the most dramatic changes in the law absolutely nothing to do with housing: tucked in the middle is a new requirement that banks and credit card merchants to report payments to the IRS. It’s just now generating some interest because it takes effect in about a year.

The purpose of the law is to “improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.” Interesting use of the term “voluntary.”

It works like this: certain payments for goods and services paid by credit card or third party merchants will now be reported to the IRS via a new form 1099K, Merchant Card and Third-Party Payments. The look and feel of the 1099-K is very similar to the 1099-INT used by banks to report interest and the 1099-DIV used by banks to report dividends.

Under the proposed Regs (downloadable here as a pdf), the form 1099-K would be required for “reportable payment transactions.” A reportable payment transaction is basically a transaction in which a payment card (such as a credit card) is accepted as payment or any transaction that is settled through a third party payment network like PayPal. Exemptions may apply in certain circumstances, such as if the total payments settled for the year are less than $20,000.

What this means is that taxpayers who have a credit card merchant account, Paypal account or similar account and otherwise meet the criteria will receive form 1099-K from their service provider at the end of the year. The form 1099-K will report the gross amount paid out to the taxpayer with no adjustments for fees or chargebacks (an issue that is, admittedly problematic).

Clearly, there are going to be issues with respect to reconciling these reports against tax returns. I don’t think the IRS is actually expecting to match these up on a dollar for dollar basis, much as they don’t match forms 1099-B on a dollar for dollar basis. It is, however, apparent from the discussions surrounding the Regs that the idea is to “encourage” compliance with respect to reporting – in other words, they’re attempting to track dollars.

Let’s face it: the IRS may be a lot of things but it isn’t stupid. The IRS is aware that there are hundreds of millions of dollars exchanging hands every year that go unreported. These compliance issues are thought to largely be the result of online transactions. Bloggers, etsy sellers, affiliates, eBay merchants and other small businesses have been able to stay under the radar if their income comes from multiple sources or if they are paid from companies outside of the United States that fail to file forms 1099-MISC for services rendered. This is a first effort to try and track that income in a consistent manner.

The form won’t be required until 2011. The form 1099K for that year must be filed with the IRS and furnished to participating merchants by early 2012.

The IRS is inviting taxpayers to take a look at a draft of the 2011 form 1099K (downloadable as a pdf).

Believe it or not, the IRS really wants your comments on the new form. They’re accepting public comments on the proposed regulations through Jan. 25, 2010 via email (be sure and put “Draft 2011 Form 1099-K” in the subject) and via USPS:

CC:PA:LPD:PR (REG-139255-08)

Room 5205

Internal Revenue Service

P.O. Box 7604,

Ben Franklin Station

Washington, DC 20044

A hearing on the matter is scheduled for Feb. 10, 2010 in Washington, DC. If you have something to say about the new rules, let the IRS know!Similar Posts:

Big Banks Move On… With a Little Help from Their Friends?

Kelly — Tue, 15 Dec 2009 10:54:24 +0000

Wells Fargo announced early this week that it will repay $25 billion received under the Troubled Asset Relief Program (TARP). The announcement comes on the heels of a similar announcement from the Bank of America. Citibank rushed to join the ranks of those banks committed to repaying TARP funds over the next few months.

So, I guess this means it’s over. The economy has finally settled and things are getting back to normal now. Right?

Maybe not.

Last week, the Congressional Oversight Panel released its 181 page report on the TARP program, “Taking Stock: What Has the Troubled Asset Relief Program Achieved?” (downloadable as a pdf here) The panel, consisting of former Securities and Exchange Commissioner Paul S. Atkins; Congressman Jeb Hensarling (R-TX), Richard H. Neiman, Superintendent of Banks for the State of New York; Damon Silvers, Policy Director and Special Counsel for the AFL-CIO; and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School, found that “after 14 months… significant underlying weaknesses in the financial system remain.”

Hmm. Then, that begs the question: why exit the program now?

Let’s look at a time line.

In February 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law. ARRA allowed small corporations the ability to carryback net operating losses (NOLs) an additional three years. The traditional carryback period for NOLs had been two years: the new law extended the carryback period to five years for businesses with gross receipts of less than $15 million. This means that small businesses which recorded losses for 2009 could carry those losses back to the past five years offset any tax liabilities from profitable years (potentially resulting in a refund).

Wells Fargo, Citibank and Bank of America sat on their TARP funds.

On November 6, 2009, President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009. The Act expanded the NOL carryback provision to include all businesses – the $15 million gross receipt no longer applied. The revised law allows all corporate taxpayers to carryback NOLs incurred in 2008 or 2009 up to five years. The Act also suspended the normal rule that only 90% of NOLs can be carried back for AMT purposes. In other words, even big companies that once reported profits could now benefit from showing losses. Big companies like, say, banks.

There was just one problem: businesses that receive assistance under TARP are not eligible.

But banks (and other companies) that exit TARP?

Just putting it out there.

Considering that many of the banks are reporting that they might incur losses as a result of the payback(Citi alone is predicting an approximate $8 billion pre-tax loss), you’d think that they’d dread rushing to pay those loans back. Unless, say, they owed unpaid federal taxes that might get wiped with some losses? According to TaxProf Blog, of the 23 top recipients of TARP funds, 13 owe a combined $220 million in unpaid federal taxes, even though compliance was a requirement to get the funds in the first place (the names of those 13 recipients have not been released).

“To get money from Treasury, banks and others must sign a contract that states they have no material unpaid taxes. Treasury did not ask these banks and companies to turn over their tax records. Treasury relied on the signed statements when it agreed to invest billions of taxpayer dollars.” – House Ways and Means Oversight Subcommittee Chairman John Lewis (D-GA).

Oops.

Or maybe they had really good years a few years back that might now lend itself to a refund or two?

Of course, I could be wrong here. And I realize that not all of the banks that are in repayment would be eligible to claim the NOL.

The whole thing is making me a little cynical. It could just be that these banks really are “committed to serving the financial needs of consumers and businesses as the economy continues its recovery.”

I’m sorry. I couldn’t even type that with a straight face…Similar Posts:

Lights, Cameras, Plea Agreement!

Kelly — Tue, 15 Dec 2009 00:23:15 +0000

It sounds like something right out of Hollywood: a lawyer takes a kickback in exchange for setting up wealthy clients in a multi-billion dollar tax loss-generating scheme. He then applies for a false passport using an assumed name – which passport is found, along with crystal meth, date-rape drugs and horse tranquilizers, inside his home.

In fact, it is out of Hollywood – only it’s not a movie. It’s real life and Hollywood tax attorney Matthew Krane is center stage. Krane has pleaded guilty last Thursday to evading tax by failing to claim $36 million in undeclared income. As part of his plea, he’s agreed to cooperate with the feds as part of an ongoing investigation. As a result, he’ll serve no more than five years in prison for the tax evasion charge, as well as a charge of attempting to obtain a false passport, ostensibly to flee the country after his participation in the scheme was discovered.

Krane will testify against Jeffrey Greenstein and former tax attorney Charles Wilk, who were the alleged masterminds behind a tax shelter referred to as the Portfolio Optimized Investment Transaction, or POINT. Six investors, including Robert Wood Johnson IV (heir to the Johnson & Johnson fortune) and Haim Saban, contributed more than $1.5 billion to the tax shelter, which generated false losses.

If the name Saban rings a bell, it’s because he has aligned himself with such politicos as Shimon Peres and was, at one time, the Democratic Party’s biggest individual donor (interestingly, though, he supported Bush’s re-election in 2004 on national security issues and only “grudgingly supported” Obama in 2008). He has consistently been ranked by Forbes magazine as one of the richest people in America for the past few years.

Saban, Johnson and the other investors were eventually found to be on the hook for more than $400 million in back taxes, penalties and interest; Saban alone was said to owe $250 million. The six investors will not face criminal charges.

Greenstein and Wilk were indicted in June 2009 as part of an ongoing government investigation into Point. Greenstein faces 18 counts of conspiracy, fraud and tax evasion. He is the former chief executive and a co-founder of the Quellos Group. Quellos was considered one of the world’s largest managers of mutual funds made up of hedge funds: the funds portion of the company was sold to BlackRock in 2007 for $1.7 billion. BlackRock is not part of the investigation.

Dechert’s Andrew J. Levander, Greenstein’s lawyer, has stated that his client “adamantly denies the allegations in the indictment and looks forward to clearing his name at trial.” Wilk is being representing by John Keker of Keker & Van Nest.

Greenstein and Wilk have apparently rested their defense on the idea that the POINT plan was reviewed and blessed by outside firms, including, reportedly, mega-firms Cravath and Bryan Cave. Their trial is scheduled for September 2010.Similar Posts:

Philadelphia Amnesty Program

Kelly — Mon, 14 Dec 2009 11:09:11 +0000

Philadelphia is having a tough time these days, much like many other cities. Expenditures are up and revenues are down. What’s a city to do?

One thing that the city is doing is pursuing collections matters very aggressively. I’ve probably gotten more city tax related phone calls at my office in the last month than in the entirety of my career. And I don’t mean that in a good way. They are mostly low-dollar matters, with penalty and interest generally exceeding the amount of tax due.

You’d think they’d do better to try and collect from the bigger fish. According to the City’s own web site, “business tax delinquents owe the City more than $53.3 million in outstanding judgments.” The top ten on the list each owe more than $1 million. You can see the list here (downloads as a pdf).

To deal with the number of tax delinquents, the city is considering an amnesty program, the first for the city in 20 years. The program was unanimously recommended by the City Council’s Finance Committee last week.

The amnesty program would forgive all penalties and half of the interest on unpaid tax bills. I haven’t seen the details yet but generally, amnesty programs only apply to matters which have not already been subject to judgment (meaning the business tax delinquents on that list would not get a pass). The current administration believes that it will net between $25 million and $30 million with the program.

Community Legal Services would like to see the final amnesty bill include unpaid water bills. That provision has not yet been included; one would hope that if such a provision were included, it would be limited to low-income residents. There’s no point in giving many of the existing slumlords in Philadelphia a free pass; it’s bad enough that many don’t pay their taxes.

I am generally a fan of amnesty programs because the statistics show that they tend to work. Whether you believe that folks act in good faith with respect to these programs is a different matter altogether – but they do tend to pay up, something that wasn’t happening before. For many, it’s a fresh start.

But amnesty without reform, especially in a city like Philadelphia, can be meaningless. Hopefully, we’ll see a step forward there, too.Similar Posts:

Ask the taxgirl: Holiday Sunday Mailbag

Kelly — Sun, 13 Dec 2009 15:48:14 +0000

The holiday season is in full swing at our house. The tree is up, we’ve bought more wrapping paper since we, of course, can’t find the paper we bought last year and we have so many varieties of Domino sugar in the pantry that you’d think we own stock in the company.

We ended the week with our kids’ holiday concerts. They’ve been practicing for weeks. My favorite has been the 5 year old’s rendition of “Rudolph the Red-Nosed Reindeer”:

“You know Dasher and Dancer and Prancer and Vixen, Donner and Cupid – And Carter and Nixon…”

Clearly, the reindeer are bipartisan. It’s the spirit of the holidays!

So now, cozied up by the tree with my trusty coffee mug in hand, I thought I’d tackle the taxgirl mailbag, answering some more “non-tax” questions. Enjoy!

–

Taxpayer asks:

In September, I sat for the LSAT. I guess everyone else did, too, since I read that there were a record number of test-takers. And I know that there aren’t a lot of jobs out there. Now, I’m scared. Is going to law school a mistake? I read you every day and I respect your opinion.

taxgirl says:

I’m often asked if I regret going to law school. All jokes about my massive debt aside, the answer is no. If I hadn’t gone to law school, I wouldn’t have met my husband (which means that I wouldn’t have these three crazy kids that look like him running around). And I wouldn’t have moved to Philadelphia. And I probably wouldn’t have had the opportunity to study in Rome. And I wouldn’t have started my law practice and I wouldn’t have started my blog. My life would be completely different – and I like the life I have now.

The thing is this: everything you do in life sets you up for a million other things. Where you live, where you go to school, who you associate with yourself – it all means something down the line. So make smart choices. Don’t use law school as a stop gap or go because you don’t know what to do next.

Competition for law school and law jobs is crazy tough right now. So go for the right reasons: because you believe in the law, because you want to be a lawyer. If you do that, you won’t be disappointed.

But don’t go to get a job, to make a lot of money, to be respected. Those things aren’t guaranteed. And not to sound all corny, but they won’t make you happy.

I can’t make your decision for you. But I can advise you to be thoughtful and think about what you want in life.

And don’t let being scared stop you. Fear can be a good thing: indifference is the real worry. To quote one of my mom’s favorite people, John Wayne: “Courage is being scared to death but saddling up anyway.”

–

Taxpayer asks:

I saw on Twitter that you said your law office is all Mac. Is that true? I’m a tax attorney and most of the software is PC only. How do you manage?

taxgirl says:

Yep, it’s true. We’re all Mac. I think we have, between us, four Mac laptops and seven Mac desktops. And lots and lots of iPods, iTouches and iPhones.

It can be frustrating navigating some of the legal practice software because ~~Microsoft is an evil empire~~ some programs aren’t written for the Mac. Fortunately for me, I don’t do tax returns, so I don’t have to worry about tax prep software. And most of the research guides that I use are either on paper, CD or web-based, all of which work well.

For bookkeeping, we were forced to get Windows for Mac using Parallels, but otherwise most of the software that we use is written for Mac or is Mac-compatible. I use Skype, Mail, iChat, Safari and Firefox for communications; Pages for word processing (works with Word and Acrobat); Numbers for spreadsheets (works with Excel); iCal for calendaring and Mars Edit for blogging. I think that’s those are the highlights.

If you’re looking for more information about Mac law offices, I recommend that you check out:

The Mac Lawyer

MacAttorney

I also recommend this great list of resources compiled by Sheryl Sisk.

Finally, you can sign up for the Macs in Law Office (MILO) list serve. Free, but application required.

Happy Mac-ing!

–

Taxpayer asks:

This semester, I have to choose between Partnership Tax and Fiduciary Income Tax. I’m a 2L and I’ve taken Income Tax and Corporate Tax so far. I don’t know what kind of tax I want to practice yet. Which course do you recommend?

taxgirl says:

I’m totally biased: Fiduciary Income Tax.

I say that for a few reasons:

Fiduciary Income Tax builds on the concepts from baby tax (Income Tax), so I think it’s a logical progression.
I think it’s important to be well-rounded in law school, to help you make your decision about what to practice. You haven’t taken any estates-related courses yet and this would intro you to the concepts.
Even if you don’t practice in estates law, you will likely be a beneficiary of an estate or know someone who is a beneficiary of an estate. A little knowledge of FIT can come in handy.
Partnership Tax was, bar none, my least favorite tax course in law school. And nobody really understands it anyhow.

(I warned you that I was biased.)

–

Taxpayer asks:

My boss is a tax lawyer (I’m a paralegal). Can you recommend an appropriate holiday gift for him?

taxgirl says:

Gosh, what do you get a tax lawyer for the holidays? Um. Okay, here are my quick suggestions, keeping in mind that I am both cheap and a tax geek:

bottle of wine (assuming he’s a drinker, but I think that’s a good assumption)
coffee – I recommend something a little different, like the coffees from Grounds for Change (assuming he’s a coffee drinker, but I think that’s also a good assumption)
A little something from the Singing CPA: No Accounting for the Holidays
A nice pen: attorneys use a lot of pens. But not too nice: attorneys also lose a lot of pens.
The Tax Code for the iPhone (no, not kidding and yes, I have this)
If all else fails, consider making a donation to your boss’ favorite charity on his behalf: you give the gift AND get the tax deduction. A win-win!

Any suggestions from my readers?

(Editor’s note: I was reminded that there is a great selection of lawyer gifts and greeting cards at The Billable Hour Co. – also worth checking out!)

Just to make it crystal clear: none of these suggestions are paid endorsements of any kind. I’m not getting a thing for mentioning any of these products. Na-da. Nothing.

–

Taxpayer asks:

I know you’re a big Philly sports fan. What do you think about the Eagles’ chances this year?

taxgirl says:

Ask me after the Giants game tonight…

–

Enjoy the holidays!Similar Posts:

Lesson Learned: Even Madams Pay Their Taxes

Kelly — Fri, 11 Dec 2009 13:46:08 +0000

For the most part, I’ve tried to avoid blogging the Tiger Woods scandal. I mean, you can pretty much turn on any channel at any time and hear all about it. And, except for the potential prenup/divorce issues, it has zippo to do with tax. And this is a tax blog. And even I have standards.

Except. Well. Er. C’mon – hookers and forms 1099? I.am.powerless.to.stop.blogging.it.

Michelle Braun, who allegedly made at least $8.5 million from her job as a madam, was eventually busted by the feds for charges related to a prostitution ring. She operated a high end call girl service which catered to Hollywood actors and royalty (if the name rings a bell, think Charlie Sheen).

Interestingly, she always paid her taxes – smart woman!

Braun has told TMZ that two of the women who have claimed to have relationships with Tiger Woods, Jamie Jungers and Holly Joy Sampson, were active in her escort service. Braun paid the women for their services out of Global Travel Network, her escort front. And she issued them forms 1099.

I know!

Tiger or no Tiger, the best part of this story is the whole “upstanding tax citizen” bit. Braun was apparently properly issuing forms 1099 for “non-employee compensation.” Remember, according to the Tax Code, even compensation received for illegal activities is subject to tax. Clearly, this woman had some pretty savvy tax pros at her side.

(And see how good I was there? Nary an off color comment!)

You can view the alleged tax forms here.Similar Posts: