New Year Treat -- Whiskey Bread Pudding

By JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com

When I serve my New Orleans Bread Pudding with Bourbon Sauce, as I often do at Christmas, I never have to worry about leftovers. This pudding is, shall we say, very tasty. When asked for the recipe, I usually respond with a wry smile and a cryptic remark about the Freedom of Information Act.  But now, in the spirit of the Christmas Season, I am revealing my secret recipe. My good friend Laurie McCowan pointed me at this amazing bread pudding recipe 5 or 6 year s ago, and I've been making it ever since. Here's the link. Merry Christmas!!! Enjoy!!!! My only request is that if you try it, you let me know what you think. :)

Jean Patterson's New Orleans Bread Pudding with Bourbon Sauce

How to Avoid Early Withdrawal Penalty on Your IRA

By JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com
jcleahy@TaxHelpWhenYouNeedIt.com

So you are thinking of withdrawing money from your traditional IRA but you think you'll have to pay a 10% early withdrawal penalty? Think again!  Aside from making an IRA rollover (which we all know about and really does not help with cash-flow NOW)  there are 7 other exceptions to the age 59 1/2 early-withdrawal IRA peanlty rule:

• Medical Expenses - If your unreimbursed medical expenses are more than 7.5% of your adjusted gross income, you may take an IRA withdrawal without paying the 10% tax penalty.
• Medical Insurance - If you lost your job, received unemployment compensation and paid for medical insurance and your family, then you might be able to withdraw from your IRA the amount equal to what you paid for the insurance provided you did not receive the IRA distribution more than 60 days finding a new job. 
• Disability - If a physician determines that you are totally disabled from gainful employment due to physical or mental conditions, you can make IRA withdrawals without paying the 10% tax penalty.
• In Case You Die - If you die before age 59 1/2, then your IRA can be distributed to your beneficiaries or estate without paying the penalty. It goes without saying that this is the least desirable way to escape the early withdrawal penalty.
• College Expenses - If you paid expenses for higher education, part (or all) of any distribution for that year may not be subject to the 10% penalty.
• First Time Homeowner - If you use the money to purchase, rebuild or build your first home you can make an IRA withdrawal without paying the 10% penalty. The distributions are limited to $10,000. The money must be withdrawn within 120 days after making the purchase. :
• Annuity Distributions - Anyone can use this one. You can take the withdrawal in little chunks monthly without paying an early-withdrawal penalty. In effect, you are setting up your own, private annuity. You must use an IRS approved method to calculate these chunks. They must be equal payments and they must continue for at least 5 years or until age 59 1/2, whichever is later. There is a one-time change you can make in the amount of the withdrawals.

 Check with a tax expert before you proceed.

JC Leahy, MA Accounting 

TaxHelpWhenYouNeedIt.com

jcleahy@TaxHelpWhenYouNeedIt.com

Tax Planning with a Flexible Savings Account (FSA) for Medical Expenses

JC Leahy, MA Accounting

What a great deal!!!  You can pay your medical expenses AND save Federal income tax, AND save payroll taxes, AND save State income tax all at the same time!!! Just be careful not to bite the razor blade in that apple!! As writer Dachary Carey observed, "When you're thinking about ways to manage your medical expenses, one option that many people fail to consider is the flexible spending account."

Flexible spending accounts were created by Congress eons ago. They help people pay their families' unreimbursed medical expenses such as co-pays, orthodontics, chronic diabetes or asthma medications, eyeglasses, any sort of surgery, hospitalization, or other medical and drug expenses. A flexible spending account (FSA) is sort of like a 401(k). A certain amount of money is withheld from your paycheck each month, free of income taxes or payroll taxes. Usually you can set aside, by installments each paycheck, $4,000-$5,000 per year. The beauty is that for every $1,000 you put into your FSA, you save 28% or 15% (depending on your tax bracket) of income tax. PLUS Social Security tax of 6.2%, PLUS Medicare tax of 1.45%, PLUS your State income tax. This means in the 28% bracket you save $356.50 in taxes for every $1,000 of medical expenses you channel through your FSA!!! In the 15% bracket it's $226.50. If you sock away $5,000 to FSA, you save $1782.50 or $1,132.50!! Plus State income tax!! What a great tool to ease the burden of medical expenses!!! What a rosy apple Congress had dropped into your bag!!!

There is one problem. In true Lex Luthor fashion, Congress has inserted a razor blade into your apple!! The razor blade is this: When you set aside money for your family's medical expenses in an FSA, and you don't spend it ALL by 12/31 (or whatever your annual deadline is) the institution holding your money gets to confiscate the whole balance. Thousands upon thousands of people lose their entire FSA balances to managing institutions every year!! Do you find that harsh? Hard to believe? Unjust? Do you think it would make more sense to just let folks keep their own money in their FSA for rainy-day medical expenses?
Well, with that caveat, the FSA is a really smart way to help pay family medical expenses. You can use it for medical expenses of you, your spouse, and your dependents. Check with your human resources department about how to begin, because there is usually an annual election made sometime before January 1 -- or sooner. And don't bite into that razor blade!!

PS -- There is legislative movement in Obamacare to limit and ultimately eliminate FSA's.   As one arrogant SOB, Ron Lieber, wrote in the New York Times, "Use the tax break before you lose it, because many of you probably don't deserve to have it in the first place." Is that arrogant or WHAT?? 
You might want to e-mail and/or telephone your senators and congressional representative about this. Tell them to enhance, not limit, your FSA and get the razor blade out of the apple!!! Here's the link for that:

REMOVE THE RAZOR BLADE FROM THE APPLE!!!CLICK HERE:
CONTACT YOUR CONGRESSMAN AND SENATORS HERE

Tax Planning: Deducting the Cost of Fixing Up Your House For Sale

 By JC Leahy, MA Accounting

JC Leahy

Twitter@TaxHelpWhenNeed

When you want to sell a house or condo, you might feel the need to fix it up before you show it to prospective buyers.  Much has been written about the wisdom of doing this.  This article is about whether or not you can deduct fix-up expenses on your income tax return.  The answer is: maybe, maybe not.

For tax purposes, fix-up expenses include the cost of decorating and repairing a house for sale.  Fixing-up expenses do not include major outlays for capital improvements, which are treated differently.  Fixing-up expenses are subtracted from the sales price of the house to reduce the capital gain (or increase the capital loss).  Like Cinderella and the stroke of midnight, fix-up expenses have certain time limitations.  To be counted as fix-up expenses, the decorating or repair must be PERFORMED no more than 90 days before the sales contract, and PAID not later than 30 days after date of sale – otherwise, you are, as they say, SOL.

If the stroke of midnight has passed, your fix-up expense deduction might still be saved if this slipper fits:  If the house was a rental property, then you might well make the case that repair and decorating expenses are deductible as rental (Schedule E) expenses.  In that event, they will either offset ordinary income (if your $25,000 passive loss exception kicks in) or carry forward to the house’s capital gain calculation as unrecognized passive loss  -- thereby reducing your capital gain. 

For more information about how to compute capital gain/loss, CLICK HERE.  For assistance with your income tax filings contact:

JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com (tm)
Silver Spring, Maryland

Tel.: (301)537-5365

Tax Planning: Travel While Away From Home on an Educational Fellowship

JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com


Question from Janice in Chicago:

JC Leahy

JC, I read this is taxable, so my question is:  I am taking a post-doctoral Fellowship in Washington, DC that pays 94 K and an additional 12,000.00 for housing relocation for a 14 month period. The place I am thinking about renting is 1550 per month almost the same as my mortgage. (Yikes) Will I get a tax break by paying to live in both DC and Chicago? The rent in Dc is unbelievable! No longer will I be making 119/year

Answer:

Hi Janice! I tried calling your home phone but missed you, so here's your answer. Even though you view it as a scholarship, your fellowship, is (1) post-doctoral and (2) requires you to perform services. For both of these reasons, it, indeed, is taxable.

The next question is whether or not your out-of-town expenses are deductible.  Generally, if you are away from home for a temporary period of time on business, your expenses for travel meals and lodging are deductible. That is the general rule, but the details can be problematic. The key phrases are "away from home" and "temporary period."

Let's talk about the "away from home" part. To be away from home, you must have a home from which to be away. This is called your "tax home." If you don't have a "tax home" then your home is where you hang your hat.  In that event, the IRS views you as an itinerant.  Itinerants' travel expenses are not deductible. Your tax home is where you live on a permanent basis and either own or rent.  It must continue to be your home while you are away. For example, if you were a young person still living free-of-charge with your parents and you got a temporary out-of-town assignment, your parents' home would not qualify as your tax home because you would not have the burden of rent and other upkeep during your absence. Therefore, your travel expenses would not be deductible. For another example, suppose you owned your home and took a temporary out-of-town assignment and you decided to rent your home out during your absence. In this case, your house does not qualify as your tax home because you have rented it to be a home to someone else. In your case, you have a home in Chicago and I surmise that you are going to keep it there unrented, available to you while you are gone. So your situation in that regard is compatible with having deductible travel expenses.


The next key requirement is that you be away for a temporary assignment. This must be far enough from your tax home to require you to obtain lodging and sleep. Your 14-month assignment several hundred miles away from Chicago certainly meets that test. Your assignment must also be for a definite period. If the period is indefinite, it is not a temporary assignment for tax purposes. Your fellowship is for a definite period, which is good. However, the general rule is that a temporary travel assignment is not temporary if it lasts longer than a year. This seems like an arbitrary rule, but it is a rule, nevertheless.  If you could obtain a 12-month assignment, that would be great. If it must be for 14 months, just make sure that the 14-month limit is clearly stated in writing. Then I would recommend asking for an IRS determination

You are going to receive a separate housing relocation stipend as part of your 14-month compensation package. If your employer thinks this is a non taxable stipend, it will appear on your W-2 in box 12 with a code of "L". When taking deductions, you generally are not allowed to pay for a tax deduction with tax-free money. This would be a double tax break. Therefore, I believe that your travel costs, including meals, transport, and lodging, would only be deductible to the extent that they add up to more than your tax-free housing stipend. In other words, If you have $15,000 of travel costs and a $12,000 stipend, $3,000 is deductible. The stipend in this way would be counted like a reimbursement of travel expenses.

Some caveats: Meals cannot be extraordinary in amount. Also, if you decide to go back and visit Chicago (your tax home) every now and then during your temporary assignment, those costs are personal, not deductible. Finally, clarify with your temporary employer whether they will give you a W-2 or a 1099. I have known some educational institutions to issue 1099's. If you get a 1099, you will have to worry about paying self employment taxes.

I hope this helps, Janice! Let me know if there is anything else I can tell you!

JC Leahy, MA Accounting
TaxHelpWhenYouNeedIt.com (tm)
Tel.301-537-5365

Tax Planning: Raffle Tickets as Charitable Deductions

By JC Leahy, MA Acccounting
TaxHelpWhenYouNeedIt.com
Income Tax Preparation & Consulting
jcleahy@taxhelpwhenyouneedit.com

JC Leahy

Question from James in Silver Spring, Maryland: 

If I buy raffle tickets from a charitable or educational organization, how much is deductible on my income tax return?  For example, what if I buy a raffle ticket from my child's school?  How much of that is deductible as a charitable contribution?

Answer:

The general rule is that if you give something to a tax exempt organization and receive something in return, you must subtract the value of what you received, to determine the amount of your charitable contribution. For example, if you give a charity $10 for a box of candy which normally sells for $8, then only $2 is deductible as a charitable contribution: $10 minus $8.  In the case of a raffle ticket, when you buy the ticket, you get something in return - a chance to win the prize. In the IRS's eyes, the value of the CHANCE to win the prize is always WORTH THE  PRICE  you pay for the raffle ticket; therefore, NOTHING  is deductible. So if you buy a $10 raffle ticket from you child's school, zero is deductible: $10 minus $10 equals zero.

The exception occurs if you pay money to a tax exempt organization and then get a raffle ticket free. For example, you might pay $200 regular annual dues to a tax exempt organization and the organization might send you a raffle ticket free of charge. Since you paid nothing for the raffle ticket, EVERYTHING you paid to the charitable organization is deductible. In the example, the full $200 is deductible.

So the answer is:  Everything, nothing, or somewhere-in-between, depending on the situation..

Tax Planning: Athletic Coaching and Automobile Expense Income Tax Deduction

By JC Leahy
Twitter@TaxHelpWhenNeed

JC Leahy

TAX QUESTION, FROM MIKE, IN BOWIE, MARYLAND:  As a paid sports referee, what  mileage can I deduct when traveling to referee a basket ball game? Can I count the mileage from home to game site and from the game site back to home?

ANSWER:
Mike, you are refereeing games as a regular, paid activity.  You are paid on a 1099-basis  You are, in fact, conducting a small business, and the basketball sites are, in fact, your client work sites.  I know from our conversations that there is no out-of-town overnight travel involved.   You drive from home to the basketball courts and back.

As a rule, when you use your personal automobile to drive to a business site, or between business sites, or to run business errands of any sort -- you are entitled to deduct  automobile costs at the IRS-designated mileage rate.  The exception to this rule is commuting.  Commuting is travel from home to and from a place of regular employment or business.  Commuting miles are personal expenses and are not tax deductible.  If you regularly referee at several athletic facilities and you drive from home, the mileage would probably be classified as nondeductible commuting. All other business mileage EXCEPT commuting is deductible.  This includes mileage for referee-related business errands of any kind as well as mileage for transportation between any business or client locations.

 One way to optimize your mileage deductions would be to have a tax-qualified home office for your referee business, and to engage in business related activities in your home office before and after each trip to an athletic facility.  That way, when you get in your car, you are not driving from/to HOME; you are driving from/to YOUR OFFICE -- to a game.  That's deductible.

For your home office to "qualify", it must be your "principle place of business."  Ever since the aftermath of the Solomon Case in the early 1990's, it has been much easier for a home office "qualify" as your principle place of business.  If any one of these 3 tests is true, your office is your principle place of business:

1. The primary value of your business is delivered in the home office, or
2. You regularly meet with customers or prospects in the home office, or
3. The primary management or administration of your business is conducted in the home office.

Additionally, the home office must be used ONLY for your business, and not for ANY personal things.  And your home office must be physically separated from personal-use areas of your home, as by the walls of the room or by any sort of partition.  If you office meets any of the 3 use tests, is used only for business, and is physically separate, then the office "qualifies" as your as your principle-place-of-business tax-deductible home office

For documentation, you'll need a contemporaneous log of your mileage, and also some sort of written log or evidence about the before-and-after business use of your home office. 

Here's material for further reading:
Small Business Mileage Deductions

Any further questions, of course, let me know!

JC Leahy, MA Accounting