Ask the tax lawyer!

In My Humble Opinion
1

Just as every rapper has his self-congratulatory “i’m the shiznit” song (or three or four), so must every Doper at some point start a thread inviting others to ask things they know about. Well, looks like it’s that time for me, so ask me whatever questions you may have about U.S. federal income tax (technical stuff, policy, upcoming legislation, evasion and avoidance, etc.) and I’ll do my best to answer them (but I’ve gotta make the doughnuts here at work too, so I may have to just refer some askers to something else that hopefully provides some insight).

BTW, I’ve lurked for quite a while and have finally given into the temptation to actually participate with you bunch of loons; I may be able to commisserate with all you unemployed dopers should I take this too far.

Also, I realize my username is just about the most boring one possible; I’m not feeling all that creative today I guess.

Ask away!

2

ok I have 2 questions…

  1. I recieved a bonus of $2,000 from my old employer. which I will reieve a 1099 form.
    Is there any way of not paying tax on it besides investing it, and what happens if I do not file that along with my 1040?

question 2… or maybe 3…

My old employer does very scetchy things with taxes,
how can a tip be sent to get the company audited.??

3

Welcome to the boards! Here’s my question: I’m going to be renting my townhouse this Feb. Can I write off expenses related to preparing it for rental?

Also, as I understand it, the rent will be considered income. Do still I get to write off the interest on the mortgage?

Oh yeah–I’m in the military, and one of my friends (also military) says he goes to a certain well-known tax preparing company and the guy there somehow makes it so he barely pays any taxes because he exploits loopholes and puts in all the default numbers so as to not raise any flags at the IRS. This friend will literally fly across country to have this guy prepare his taxes every year. I’m a bit leery of it (apparently there’s an extra small fee you can pay in the event you’re audited) and so I don’t partake. As you can see, I don’t have a clear understanding of how they do it, but my friend swears by it. Any thoughts on this?

4

A bonus is gross income just like the regular wages or salary you get, so there’s no way to not claim it as income on your return, even if you invest it. You indicate that you think you can get out of paying taxes on the bonus by investing the bonus. This is not the case.

If you do not file the 1099 with your 1040, the IRS will know it immediately because your employer sent them an exact duplicate of the 1099 they sent you. You’d be screwed, dude.

From the IRS web site:

Sick 'im, merge!

5

Where are the penalties for tax fraud/evasion/protesting/dodging etc. explained ?

6

damn… I actually thought that because I use TurboTax… or something like that… and every year it asks if I put anything into an IRA… I thought it said there was some sort of break for every thousand… I guess I wasa wrong?

Actually… 1 more question.

The year before my friend was paid an extra wage from his employer. not a raise, but an extra $3 per hour off the books.
He had his accountant do his taxes, and paid self employment tax from the extra wages. He ended up paying like $700…

I thought that sounded strange so I filled his info out on my computer, and added the extra money as extra tips and wages. and it says that he should have paid $300 if he filled it out that way.

Did I miss something?

If I didn’t, can he re-file?

7

I have my final exam in Federal Income Taxation tomorrow. How do I pass?

(Actually, the shorter version would be, “how do I do a capital asset analysis?”)

8

Well, I’m gonna have to take the squirrely way out here and suggest you see an accountant. Here’s what I’m thinking, though. There are two issues here: the nature of what you do and when you do it.

On the first: If you do something like clean the gutters, mow the lawn, or clean the HVAC system, that’s definitely an ordinary and necessary business expense that is deductible under section 162. However, if you do something like add a new roof or replace the carpet (i.e., something that will have value for a relatively long time), that’s a capital expenditure, and not deductible.

Second: you can only deduct an expense as a business expense if you are engaged in business. If you do this stuff before you rent the place, you arguably have not started your rental “business” yet. Were I you, I’d make sure and advertise the place for rent before starting the repairs. There is also a provision for amortizing start-up expenses over 60 months, but I’m not sure if that applies.

Also, there are some other deductions you may be able to take (e.g., depreciation), which is why an accountant may be in order here.

Yep.

It sounds like the guy your friend has preparing his taxes is playing the “audit lottery,” meaning that he knows that people with $X of income can usually get away with claiming $Y of charitable contributions, so he claims that amount even if he didn’t really donate that much (or any at all). What your friend is doing is illegal, plain and simple.

Your friend should be aware that there’s no statute of limitations on fraudulent returns, so the IRS could someday march in and tell his grandkids that grandpa’s gotta go to jail cuz he was naughty.

Also, be aware that your friend’s perception of how much money he is saving may not be the case. The return preparer guy might be doing a good job of convincing your friend of how much money he’s saving when it’s really not the case.

Well, all the stuates are in the Internal Revenue Code, 26 U.S.C. All of the regulations issued under these rules are in the Code of Federal Regulations, 26 C.F.R. The best place to get a general idea of what this stuff says is probably www.irs.gov.

9

No, you’re not wrong, there are just two different issues here, and I’m using technical terms (read: I’m being anal (it’s kind of in the job description)). First, the bonus is income, period end of story. Second, you are correct that you may get a deduction for contributions to an IRA (subject to other requirements)

If I would have thought about it before I would have understood what you meant and avoided this discussion entirely. I apologize.

Yeah, here’s what’s going on: employees pay FICA taxes on their wages, and employers pay an excise tax that’s computed in the same manner as FICA taxes on wages paid employees. When a person works for himself, he has to pay both the employee portion and the employer portion of FICA taxes. This sounds like what happened here.

10

Many years ago, I inherited a share in some property that contains active oil wells. I receive royalties from the oil and gas produced on this property which I report on Schedule E. My share of these royalties is typically very small (less than $300 per year).

I believe I may be able to claim a “depletion allowance” on this income, but I’m having a hard time figuring out if I qualify for a depletion allowance, and, if I do, how to correctly figure it.

Where can I find reliable, easy to understand information on the depletion allowance that won’t cost me so much that it makes the whole exercise pointless?

11

Practice problems, lots of practice problems. You can make an outline and study it until you’ve memorized the damn thing, but you’ll still not do so well unless you can put it all together and see the big, medium, and small picture on every problem.

Maybe start here: www.irs.gov/formspubs/page/0,,id%3D11263,00.html

This short article links to several publications that may help. Realize, though, that any deplection allowance won’t be worth that much at all. If you can take percentage depletion, you’ll only be able to deduct up to almost $150 (50% of your income), and cost depletion would probably get you less of a deduction, so we’re not talking life-changing dough here.

12

Hmm. Well, I had hoped for something a little easier to undertstand than that, frankly.

I do understand that claiming a depletion allowance will not have much of an affect on my overall tax liability (the ~$300 I receive annually in royalties is a pretty small fraction of my gross income). I just find it galling that–because the tax code in this area is so arcane–I find myself probably paying the government more than I should. I guess it’s the principle of the thing rather than the money.

Thanks for your help.

13

My wife and I are going to start saving for a condo. We currently rent, and have no children or assets to speak of. Hence, currently a very simple tax picture up to this point. However, we’ve finally paid off the wedding, so it’s time to start socking away money. In general, is there a good way to save/invest money that carries a lower tax burden?

I’ve heard that one can set up an IRA, and then take the money out of without penalty for a first-time home purchase. Does this apply to a condo as well, or does it have to be an actual house? Are there other tricks like this that relate to saving for a house purchase?

Third and final question: what’s the most common mistake people make that ends up causing them to pay more taxes than they should?

OK, I’m done.

14

Yeah, a condo and a house are the same thing for this purpose. Also, you can only withdraw $10,000 for a first-time home purchase without incurring the 10% penalty, and the money can only be used for actually paying for the house, settlement charges, or closing costs.

The one you mentioned was the only thing I’m aware of. I’ll see if I can’t hunt something else down in the next couple of days.

Well, I don’t think that most people make any mistakes that cause them to pay more tax. Most people take the standard deduction instead of itemizing, and they’re taxes are really fairly simple. There’s really just nothing to screw up.

People that engage in complicated transactions, on the other hand, probably do often pay more than they should have. They shoulda called a tax attorney (of course).

15

Is this travel expense: I use a paratransit system to get places. When I begin working, may deduct the $ I spend on the tickets as business/travel expense?

16

Welcome TG,
If you have the time for a political / opinion question
I realize there’s a “self-preservation” issue here but would appreciate your views (as unbiased as possible) to the following:

The way I see it:

  1. The cost of compliance for businesses & individuals is outrageous ($135B ann est.).
  2. Tax law is written to by attorneys for attorneys. Vaguely worded code leaves too many gray areas and hence a greater demand for tax specialists.
  3. The income tax laws punish the honest & reward the shady. No matter how thick the statutes grow, they will never be able to touch the underground economy (i.e. paying for products & services with cash).
  4. Corporations don’t pay taxes, they pass them off to their consumers.
  5. Taxing income & dividends (as opposed to consumption) has an adverse effect on savings (a higher savings rate would provide more capital for investment).
  6. FICA is very similar to the pyramid schemes popular in the early 90s.

Opinion Question:

Isn’t it time the US completely scrap the tax laws as they now exist and phase in a consumption tax (with perhaps a progressive per person exemption) on goods (at the point of manufacture / importation) while gradually shifting toward a personal saving account system for retirement?
Though inflationary at first, wouldn’t compliance & enforcement costs all but disappear while tax evasion & cheating be all but eliminated?

17

By this logic, I don’t pay taxes either, I just pass them on to my employer. Where else are corporations going to get the money to pay taxes?

18

First, I’m not sure what a paratransit system is (you’re paralyzed? parachuting? riding parakeets? wearing a parapants?). I’m going to assume you’re saying the following: when you begin working, each day you will leave your house, jump on the paratransit system and arrive at work, then around dinner time you’ll hop back on the paratransit system and go home for the evening, where you will sleep. If this is the case, you may not deduct this expense.

Congress seems to feel that you can choose where you live and where you work, so just because you chose to live far away from where you work doesn’t mean you get to deduct your travel expenses to work as an ordinary and necessary business expense. If you travel for work on the paratransit system and have to sleep overnight somewhere, then you may be able to deduct the transportation expense, but there are some other limits we need to look at.

19

JohnBckWLD

You know, I really don’t have strong feelings on this issue one way or another. I figure that the government needs $X a year to run the whole inflated mess, so they’re going to get their pound of flesh from me whether it’s by taking some from my paycheck or taking some at the grocery store. I do realize that people generally respond to incentives and that an incentive to make more money may be a good thing, but I’m not entirely sure that not taxing income actually does create an incentive to make more income (some people may be like “Cool, by not paying taxes on my income I just got a 28% raise. I think I’ll work about 20% less and be happy with the extra 8%”). Additionally, if a consumption tax instead of an income tax encourages people to make more, it might also encourage them to spend less, and this may be bad for the economy. This is something that would need to be empirically tested.

Additionally, all of your numbered points leading to your conclusion are highly debatable. It would take me too long to really parse through all of them right now, but maybe I will later.

I do like the idea of privatizing Social Security, which I assume is what you were getting at there at the end of your post. I think it’s OK if a very small number of people get absolutely crushed so that the vast majority of people are better off (go Kaldor-Hicks!).

Emilio Lizardo

The answer is: from the capital markets instead of the product markets. There’s a huge ongoing debate about whether the incidence of the corporate income tax falls upon consumers or those with capital. What is clear, however, is that it ultimately falls on human beings for the very reason you state (i.e., where else do corporations get their money but from humans?).

20

Sorry, I (obviously) need to clarify. by “para-transit” I meant: I use a transportation system for disabled people, to go places, door-to-door, and we use prebought tickets as fare ($1.50/ea.). can I deduct the cost of buying books of these tickets?