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What I learned in 1040 class.
Old 12-18-2005, 05:28 PM   #1
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What I learned in 1040 class.

I needed continuing legal eduction credits before year end and took a tax seminar. Some of what I learned:

--It probably is common sense, but you can't avoid taking deductions to avoid paying AMT. (But you can methodically time your deductions) You also will get tagged for playing the game of way overpaying your state taxes in order to deduct them in one year and then add them back in the next year. (I have never been that clever).

--A number of people apparently are getting clever about making sure they get enough quarters of work to be eligible for social security. For example, one spouse might not have worked much over the years. That spouse may become self employed and try to earn about $4000 a year, to be eligible for 4 quarters of coverage that year. The SSA is getting suspicious about some of this supposed self employment because it has discovered some people are making up income to get social security elibility.

--For those of you that use cars partly for business and either deduct mileage at the current IRS rates or are reimbursed from your employer, there is another related deduction you can take. You might be able to deduct a loss on the vehicle when you eventually sell it. The loss can only be for the business use portion of the use of the vehicle, and you have to reduce part of the loss for depreciation that is taken into account in the IRS mileage rates. For example, say your basis in a car is $30,000. You drove it 100,000 miles. Half was for business use. You sell it for $4000. Say the depreciation from the IRS tables is $5000 (roughly 5% of the basis). The loss is $15,000 less $5000 less $2000, for a loss of $8000. This loss is not subject to any AGI limitation. No schdule A is required. Only form 4797.

--The speaker was of the opinion that if you have a health savings account, let the money accumulate and use other money to pay your medical bills.

--Kids, don't forget that you may be able to deduct your moving expenses when moving from college to your first job.

--AMT addbacks are more complicated than most think. For example, interest on home equity lines may be deductible for regular taxes, but will not be for AMT if money isn't used to acquire or improve your home. But, if you used the money for investment purposes, you might be able to deduct the interest as investment interest. Say you bought a condo for investment. If you stay in the condo a few days, it no longer is held for investment and you can't deduct the interest. Gets complicated because so many rules are different for AMT than for regular tax. Deduct interest on a RV used as a second home? If you use the RV at all for transportation, you can't deduct the interest under the AMT set of rules. Park it for a year? Can deduct the interest. We spent half the day on AMT. Sillyness.

--Big audit area of late are passive activities. If you have rental income/partnership income, you might want to read the IRS audit guide on passive losses. You can get it from http://www.irs.gov/businesses/small/...146318,00.html

--The IRS has said it will for sure audit returns where the primary shareholder of an S Corporation claims $0 salary. It is on the march to stop people from claiming income is dividend income rather than income which is really from services. A reasonable salary is required. Currently, the unwritten rule is that if a shareholder is paid at least $90,000 in salary, the IRS isn't worried about whether the owner should be paid more than that as a reasonable salary.

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Re: What I learned in 1040 class.
Old 12-18-2005, 05:57 PM   #2
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Re: What I learned in 1040 class.

Martha,

Good post. Can you say anymore on some people trying to make sure they have enough quarters of work to be SS eligible? How many quarters are needed?
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Re: What I learned in 1040 class.
Old 12-18-2005, 06:28 PM   #3
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Re: What I learned in 1040 class.

DTD, the SS website says the following:

If you were born in 1929 or later, you need to have worked for at least 10 years to be eligible for retirement benefits.

You can learn more at http://www.ssa.gov/

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Re: What I learned in 1040 class.
Old 12-18-2005, 08:43 PM   #4
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Re: What I learned in 1040 class.

Cool. One more milestone I whizzed past without knowing. I had never heard of that. Thanks!!
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Re: What I learned in 1040 class.
Old 12-18-2005, 09:06 PM   #5
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Re: What I learned in 1040 class.

thanks martha!

Quote:
You also will get tagged for playing the game of way overpaying your state taxes in order to deduct them in one year and then add them back in the next year. (I have never been that clever).
Hmm. This is an interesting one.

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Re: What I learned in 1040 class.
Old 12-19-2005, 07:14 AM   #6
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Re: What I learned in 1040 class.

Martha, my wife is self employed with a small business that nets close to $4k a year lately (could ramp up later when the kids are in school). From your comments I infer that $4k a year qualifies one for a full year's worth of SS credit?
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Re: What I learned in 1040 class.
Old 12-19-2005, 07:27 AM   #7
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Re: What I learned in 1040 class.

Quote:
Originally Posted by Martha
* You also will get tagged for playing the game of way overpaying your state taxes in order to deduct them in one year and then add them back in the next year.* (I have never been that clever).

Years ago (pre AMT) I did this routinely. The problem is that the next
year you gotta report that big state refund as income. What to do?
Well, every year you can increase the state tax overpayment in order to offset
the tax refund.
Otherwise, you gotta wait for a "bad year" to offset.

Disclaimer: I am NOT giving tax advice.

JG
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Re: What I learned in 1040 class.
Old 12-19-2005, 07:37 AM   #8
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Re: What I learned in 1040 class.

Quote:
Originally Posted by brewer12345
Martha, my wife is self employed with a small business that nets close to $4k a year lately (could ramp up later when the kids are in school). From your comments I infer that $4k a year qualifies one for a full year's worth of SS credit?
The number is $3880 for 2006. The amount can be earned any time during the year. http://tinyurl.com/an6pt
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Re: What I learned in 1040 class.
Old 12-19-2005, 07:42 AM   #9
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Re: What I learned in 1040 class.

Quote:
Originally Posted by dusk_to_dawn
Martha,

Good post. Can you say anymore on some people trying to make sure they have enough quarters of work to be SS eligible? How many quarters are needed?
Actually, they don't use the term "quarters" anymore, but instead use "credits." In one year you can earn a maximum of 4 credits. For 2006, you earn a credit for each $970 of income. Theoretically, you could earn all four credits January 1 if you earned $3880 that day. You need 40 credits for eligibility for social security.
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Re: What I learned in 1040 class.
Old 12-19-2005, 07:44 AM   #10
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Re: What I learned in 1040 class.

Quote:
Originally Posted by MRGALT2U
Years ago (pre AMT) I did this routinely. The problem is that the next
year you gotta report that big state refund as income. What to do?
Well, every year you can increase the state tax overpayment in order to offset
the tax refund.
Otherwise, you gotta wait for a "bad year" to offset.

Disclaimer: I am NOT giving tax advice.

JG
Kind of nice to push the limits on your state tax estimates if you anticipate lower income the next year. And I too am not giving tax advice--as noted by my perpetual disclaimer. But I sure like talking about it.
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Re: What I learned in 1040 class.
Old 12-19-2005, 07:48 AM   #11
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Re: What I learned in 1040 class.

Quote:
Originally Posted by Martha
I needed continuing legal eduction credits before year end and took a tax seminar. Some of what I learned:


--The IRS has said it will for sure audit returns where the primary shareholder of an S Corporation claims $0 salary. It is on the march to stop people from claiming income is dividend income rather than income which is really from services. A reasonable salary is required. Currently, the unwritten rule is that if a shareholder is paid at least $90,000 in salary, the IRS isn't worried about whether the owner should be paid more than that as a reasonable salary.

A timely post Martha. Thanks.

ERees who maintain an S corp may not be drawing any salary. If the corporation has a profit the shareholder may take the profit as a distribution. It is subject to income tax but not payroll tax. If your distribution is more than your salary you are playing russian roulette with the IRS.

This gambit is named after Senator John Edwards who, as a trial lawyer organized his biz as an S Corp. He paid himself a small salary and took the profits as a distribution.


http://www.traderstatus.com/IRSsaudits.htm

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Re: What I learned in 1040 class.
Old 12-19-2005, 10:45 AM   #12
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Re: What I learned in 1040 class.

I am curious...I've never been audited. I know the IRS has something like 7 years to review your return and audit you, and if fraud is suspected, there is no time-limit...but under normal circumstances(if there is such a thing)...if you were going to get an audit notice, when would that occur relative to when you filed your return.

For example, if I filed last year (2004's return) on April 15th 2005...when might someone get a notice? I've always assumed they give your return a quick "computer review" when its filed, and if there is a problem, you'd know w/in months....true?
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Re: What I learned in 1040 class.
Old 12-19-2005, 11:11 AM   #13
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Re: What I learned in 1040 class.

I too have never been audited but have received a couple of letters in the past indicating what the IRS found a "possible error" in my returns. One came about 5 months after I sent in the return. Luckily, the letters were describing paper errors easily corrected with no penalties. Phew.

MJ
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Re: What I learned in 1040 class.
Old 12-19-2005, 11:13 AM   #14
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Re: What I learned in 1040 class.

Quote:
Originally Posted by farmerEd
I am curious...I've never been audited. I know the IRS has something like 7 years to review your return and audit you, and if fraud is suspected, there is no time-limit...but under normal circumstances(if there is such a thing)...if you were going to get an audit notice, when would that occur relative to when you filed your return.

For example, if I filed last year (2004's return) on April 15th 2005...when might someone get a notice? I've always assumed they give your return a quick "computer review" when its filed, and if there is a problem, you'd know w/in months....true?
Most audits happen within 36 months of filing. *The majority occur immediately after filing or at the tail end of the 36 month period.
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Re: What I learned in 1040 class.
Old 12-19-2005, 11:20 AM   #15
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Re: What I learned in 1040 class.

Quote:
Originally Posted by farmerEd
I am curious...I've never been audited. I know the IRS has something like 7 years to review your return and audit you, and if fraud is suspected, there is no time-limit...but under normal circumstances(if there is such a thing)...if you were going to get an audit notice, when would that occur relative to when you filed your return.

For example, if I filed last year (2004's return) on April 15th 2005...when might someone get a notice? I've always assumed they give your return a quick "computer review" when its filed, and if there is a problem, you'd know w/in months....true?
Retire@40 has real life experience with what is typical, but problems can come up years later, depending on what catches the tax man's eye. *And remember that the limitation period runs from the date a return was filed. *An example I recently heard about was a sole proprietor who hired independent contractors in her business. *She never paid payroll taxes or filed any "no employees" payroll tax returns. *She was audited recently for failure to pay payroll taxes going back nine years (the IRS claimed the independent contractors were really employees). *If she would have filed payroll tax returns saying there was no employees, the IRS couldn't have looked back the full nine years. *
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Re: What I learned in 1040 class.
Old 12-19-2005, 11:24 AM   #16
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Re: What I learned in 1040 class.

Retire@40, do you electronically file returns? At the seminar, the speaker recommended against electronic filing because the downloads to the IRS enable the IRS to cross check many things that they simply are not equiped to cross check when returned are filed manually. She also believes that a number of coding items that don't actually appear on the return are transmitted along with the return. I am thinking about not filing my own returns electronically anymore.

Your thoughts?
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Re: What I learned in 1040 class.
Old 12-19-2005, 11:30 AM   #17
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Re: What I learned in 1040 class.

In the olden days you had to earn X amount of creditable earnings in a given calendar quarter to get credit for that towards Social Security retirement/disability, hence the term "quarters of coverage". Earnings were only credited in the quarter earned, so you needed to work throughout a calendar year.

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Re: What I learned in 1040 class.
Old 12-19-2005, 11:33 AM   #18
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Re: What I learned in 1040 class.

Its actually one of my favorite things about being er'ed...my tax situation is so simple, I can do it in about 1 hr per year, and the amount of money at stake is relatively small, so even if a mistake is made, chances are it wouldn't be worth pusuing (for example, last year I filed a Schedule-F for the first time...even if the IRS disallowed ALL my deductions for my farming activities, I'd still own no taxes)...so I kinda think my personal financial profile, for the most part, is causing me to fly under the radar.

For the 10+ years I ran my business and had complicated 1120's to file, payroll, payroll taxes, SS, FICA, unemployment returns etc, it was a constant stress; the money was good, but it was not w/out its "cost".

Now no mortgage, no SS no FICA, and zero tax liabililty, except property taxes...I guess having 4 little deductions running around helps quite a bit.
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Re: What I learned in 1040 class.
Old 12-19-2005, 11:54 AM   #19
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Re: What I learned in 1040 class.

Quote:
Originally Posted by Martha
An example I recently heard about was a sole proprietor who hired independent contractors in her business. *She never paid payroll taxes or filed any "no employees" payroll tax returns. *She was audited recently for failure to pay payroll taxes going back nine years (the IRS claimed the independent contractors were really employees). *If she would have filed payroll tax returns saying there was no employees, the IRS couldn't have looked back the full nine years.
Unless the payer can claim safe harbor under Sec 530, I don't see where filing payroll tax returns with no employees would help in not having the IRS look back the full nine years.
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Re: What I learned in 1040 class.
Old 12-19-2005, 12:05 PM   #20
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Re: What I learned in 1040 class.

Quote:
Originally Posted by Martha
...At the seminar, the speaker recommended against electronic filing* because the downloads to the IRS enable the IRS to cross check many things that they simply are not equiped to cross check when returned are filed manually.* She also believes that a number of coding items that don't actually appear on the return are transmitted along with the return....
Electronic filing catches (some) mistakes (like wrong social security numbers) early and rejects returns before they can be processed to allow you to fix those problems first.

If you file a paper return with an error (like double counting a dependent), the IRS could wait until month 35 to let you know.* At that point the paper return could cost you some penalties and interest for the 35 months.

The only part I hate about filing electronically is that it costs money.* Why

In any case, go with electronic filing if you qualify.
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