Wednesday, October 8, 2008

Fishing for Birdies and Paying Tax

So it's the weekend and you are ready for your favorite leisure activities to replace the hectic work week chores. You can't decide should I play golf, go fishing, work in the garden, or maybe stay inside and organize my favorite stamp collection. While you are deciding what activities are going to fill your weekend you may want to consider how much tax you may be required to pay on them.

What am I talking about? There are activities that some taxpayers pursue (typically more than a leisurely level) that can be considered a business. Golfing, fishing, gardening, sewing, woodworking, coin collecting, stamp collecting, and scrap-booking are just a few of the activities that the IRS could potentially tax as a business if there is a profit created from the participation in these activities. A hobby is an activity that is not pursued for profit. A business is an activity generally carried on with the reasonable expectation of earning a profit.

So how do you know if you need to consider these kinds of activities as a business income instead of a hobby? Here are some simple guidelines to answer that very question:

  • Does the time and effort put in to such an activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge to carry out the activity as a successful business?
  • Did you make a profit through similar activities in past years?
  • Does the activity make a profit in some years?
  • Do you anticipate making a profit in the future due to the appreciation of assets used for the activity?

Generally, the activity in considered a business if it has produced a profit in three of the last five years including the most recent year. Deductions for both business and hobby income are allowed but you must first determine whether your income is from a business or a hobby in order to follow the correct procedures for taking these deductions.

The IRS is not out to spoil your fun, but if these activities produce a profit every year or so you may want to determine whether or not you are required to pay taxes on that money. Don't find yourself behind the "eight-ball" with the IRS who may tell you you owe them taxes on your unreported income. This can become a mess and hard to provide proper documentation leaving you with an unexpected tax liability.

Tuesday, October 7, 2008

IRS Secret Agent

Quote of the Week:

"I like to pay taxes. With them I buy civilization."

-Oliver Wendell Holmes

Monday, October 6, 2008

Closing Costs? Take the Deduction!

So you recently closed on a mortgage finance transaction and you are wondering how you can benefit from paying all those closing costs. You can take a tax deduction on the "points" you paid to obtain your mortgage loan. There are several factors which come into play in regards to how you need to deduct them and if they can be deducted in full or over time. Make sure you understand these guidelines so you take advantage of this unique deduction. You can deduct the entire amount of the points in the year you paid them if the following conditions are met.
  • If your home loan is on your primary residence.
  • You use the loan to buy or build the home you will be living in.
  • If paying points to a mortgage company or bank is a standard practice in your area.
  • The points you paid are not excessive for your area.
  • Points were not paid as a lump sum for other services typically listed separate on the Settlement Statement (i.e. Appraisal Fees, Titlework, Attorney Fees, Credit Report Fees, Inspection Fees or Property taxes)
  • The points were computed as a percentage of the total amount of the loan.
  • The amount is clearly shown on the settlement statement.
  • The points were paid before or at the closing by the borrower or seller but none of the amount owed was borrowed.

Points that do not meet these standards are not wasted money. Most are very necessary to the process of obtaining a mortgage loan from any financial institution. However, if the y do not fit the above requirements - all is not lost. You can deduct them over the life of the loan. Simply total the points and divide them by the number of payments required within the term of the loan and then deduct the points on your annual tax returns (on a Schedule A with your 1040 return) by how many payments were made in that year.

So don't worry you were charged too just gives you a larger deduction. This should make everyone feel better. Well maybe not but anytime we can write off expenses on a tax return is helpful.

Thursday, October 2, 2008

Are you Moving?

Congratulations on your new even get to move to a new could qualify for a tax deduction from your moving expenses. If you have recently moved to a new city for a new job or because your current company has moved it's operations you may qualify for a tax break on your moving expenses. The main factors are how far you moved and how much time you spend on the job. If it is a short-time or part time job or if the move is relatively local you may not qualify.

Your new job must meet the "mileage test" which states that the new job must be 50 miles further away from your home than the old job was. For example, if you drive 3 miles to work on your current job, your new job location must be 53 miles away from your home.

You must also meet the "time test" which states that you must maintain Full Time Employment for at least 39 weeks during the 12 months immediately after the move takes place and 78 weeks of the 24 months immediately following the move. How do you determine that if returns are due before this can be verified??? You can still deduct the expenses even if you have not met the "Time Test" qualifications before your return is due if you realistically expect to meet those guideline requirements. If you are a military personnel and your move occurs because of a permanent change of station you do not have to meet these requirements.

How much can you deduct? You can deduct the expense of moving your household goods and personal items as well as the expense of traveling to your new home which includes lodging. However, no part of the purchase transaction can be deducted as a moving expense. Make sure you take advantage of these deductions in order to save you money on your returns. Also make sure you maintain documentation of all moving expenses with a copy of your tax returns. This will keep you in line later if the IRS decides to audit any of your returns.

IRS Secret Agent

Quote of the Week:

"Only the little people pay taxes."

-Leona Helmsley

Wednesday, October 1, 2008

Beware of Tax Scams!

So you got an e-mail notifying you that you owe taxes to the IRS and you can send the money in to get it resolved. Before you send any money you may want to check the source. The IRS has been one of several government agencies and corporations whose names and websites have been copied by impostors claiming to be IRS employees and asking for your money. Be aware that the IRS does not contact taxpayers through e-mail in regards to tax debt. DO NOT open links in unsolicited messages claiming to be from the IRS.

E-mail isn't the only way for "scammers" to access your personal information. Phone calls are also a good way to obtain information. DO NOT give away any personal information to anyone over the phone claiming to be from the IRS unless you have verified the callers identity. You can do this by calling the IRS at 800-829-1040 to avoid becoming a victim of fraud. Thieves can use your personal information to access accounts, run up credit card balances, apply for personal loans or credit accounts. They can also produce false information and identification enabling them to intercept refund payments and present the IRS with false information leaving you to deal with tax issues you didn't create.

Some of these con artists make a living creating fraudulent tax returns knowing that you (as the taxpayer) are ultimately responsible for all the information on your tax return. Make sure you are using a credible company to file your returns and make sure you review ALL returns for accuracy to make sure they are correct. To avoid these scams takes awareness, a little common sense and making sure you are filing and paying taxes on time as required by the IRS. The last rule of thumb here will help the most.