4 Tips From a Tax-Saving Guru

Wouldn’t it be nice to write off that flight to Hawaii? Or what about the champagne-and-caviar-adorned soirée at Carnegie Hall?  Maybe you can, says Doug Stives, a CPA from Red Bank, N.J., who re-engineered his life in 2006 to become the Most Tax-Efficient Man in America, as Tax Report columnist Laura Saunders writes. Stives shared a couple of practical, tax-saving suggestions with SmartMoney.com.

Get on someone’s payroll. Stives had been a partner at an accounting group for nearly four decades when he decided to take on a role as a tax and accounting professor at Monmouth University in central New Jersey. He also started his own consulting business on the side. While his paycheck is now 25% lower than it had been, his take home is nearly 90% as much, says Saunders. Stives estimates that the fringe benefits from working at the university – health insurance, disability insurance, life insurance, pension-plan coverage, unemployment coverage and workmen’s compensation coverage, among others – add up to about $40,000 a year.

Mix business and pleasure. Usually it’s a No. 1 professional no-no. But combining your work life with your personal life can slim the price tag of otherwise expensive vacations. As a part-time consultant and full-time teacher, Stives travels a considerable amount for seminars and teaching gigs, often to alluring vacation spots like Hawaii and Lake Tahoe. To deduct airfare, you need to spend more than half your working days on business, says Stives. Weekends don’t count, nor do travel days. If Stives leaves for Hawaii on a Friday, works three days mid-week and returns home the following Monday, he’s squeezed a mostly tax deductible 11-day trip out of three working days. (Hotels, meals, and rental cars are only partly deductible.) But make sure you don’t get carried away, he says. It’s a good idea to pay in full for at least some trips you take to show the IRS you don’t deduct everything.

Million-Dollar Homes Face More Audits

Some people who owe more than $1 million on their homes are coming under the microscope at the Internal Revenue Service over how much of their mortgage interest they can deduct on their tax returns.

The number of taxpayers involved could be in the tens of thousands because in some parts of the country, many homes sell for more than $1 million and even a buyer who puts down 20% or 30% may need to borrow. The amount of interest at stake is substantial, in some cases as much as $50,000 to $60,000 on a $1.1 million mortgage.

The IRS didn’t comment, but the scrutiny follows a period of confusion by taxpayers, advisers and even some IRS agents about how much interest can be deducted, based on what kind of debt the homeowner holds. Tax rules distinguish between two kinds of home debt. There is home acquisition debt, which is a loan used to acquire, construct or substantially improve a qualified home, and is secured by the home. Then there is home equity debt, which is any other kind of loan that is also secured by the home.

Some tax advisers were telling clients it was acceptable to deduct all interest on a single mortgage of up to $1.1 million. Others contended that the limit for mortgages was $1 million, but they could also deduct interest on another $100,000 in a home equity loan, according to Melissa Labant, tax technical manager at the American Institute of Certified Public Accountants.

IRS guidance last June helped set the rules straight. The agency said acquisition loans over $1 million may also qualify as home equity indebtedness. Now, says Labant, it is clear the taxpayer can deduct interest on the full $1.1 million, even if he has only one loan. The development, she adds, is “good news for taxpayers.”

The rules can get “particularly complex for a mere mortal” when various refinancings get thrown into the mix, and the taxpayer owns several homes, say a house in upstate New York and a condominium in New York, according to David A. Lifson, a certified public accountant at Crowe Horwath LLP in New York, who has clients caught up in these mini-audits. In past six months, he says, the Internal Revenue Service has notified many people that it is looking at their mortgage interest write-offs.

New Tax Rules for Gamblers? You Bet

A bad economy could have some folks looking to Lady Luck for a ladder out. While most gamblers end up empty-handed, a select few win big. And when the amount of money in your pocket grows or shrinks, you know the IRS isn’t far behind. The agency has different rules for amateurs and professionals, as Tax Guy Bill Bischoff previously reported. What’s more, the IRS updated some of its recordkeeping guidelines to make them simpler and more realistic. Check out the Tax Guy’s most recent tips about how to keep your books and stay out of trouble.

Form W-2G Helps Keep Winners Honest

For most types of gambling at a legitimate gaming facility, that facility will issue you a Form W-2G (Certain Gambling Winnings) if you win $600 or more. Of course, the IRS gets a copy too, so you better make sure the gross gambling winnings reported on page 1 of your Form 1040 (or on Schedule C if you are a professional gambler) at least equal the amounts reported on the Forms W-2G.

Recordkeeping Issues

Technically speaking, an amateur gambler must report the full amount of each and every win on the miscellaneous income line on page 1 of Form 1040. So in a profitable year, you cannot simply subtract losses from winnings and report the net amount of winnings on page 1 of Form 1040. But let’s face it: Even folks who attempt to keep good records will probably only record their daily net winnings and daily net losses. Reporting an amount of gross income equal to the sum total of the net winnings from all days you had net winnings on page 1 of Form 1040 will probably keep you out of trouble with the IRS (assuming the amount reported as income equals or exceeds the sum total of any amounts reported as income on Forms W-2G).

Whether you are an amateur or a professional gambler, you must adequately document the amount of your losses in order to claim your rightful gambling-loss deductions. According to the IRS, taxpayers must compile the following information in a log or similar record.

Court Rejects Anchor’s Tax Deductions

That sunny face chirping on your local news each morning doesn’t come without a cost. There are the elocution sessions, maybe a film-production course, perhaps even a master’s degree in journalism. And then you’ve got to consider all those on-the-job expenses. You know – sports jerseys, evening dresses, bikini and thong underwear. These are some of the business expenses that a Columbus, Ohio-area television news anchor tried to deduct.  Not surprisingly, the U.S. Tax Court didn’t buy it.

From 2005 to 2008, Anietra Hamper claimed deductions for unreimbursed employee business expenses of around $20,000 each year. Some of the more outrageous items Hamper tried to deduct include the cost of bedding, self-defense classes and Internet expenses, according to the Tax Court’s opinion.

“You should never get a deduction for anything that’s personal,” says Brookes Billman, a tax-law professor at NYU School of Law.  “The problem is trying to negotiate the business/personal line.”

To help taxpayers navigate this gray area, the Tax Court has established fairly high standards for clothing deductions, says Billman. 1) The clothing must be specifically required as a condition of employment; 2) the clothing is not adaptable to general usage; and 3) the clothing is not so worn. What passes the test? Think lab coat, construction hard hat, bulletproof vest. What doesn’t?  Many of Hamper’s deductions.

To abide by her employer’s “Women’s Wardrobe Guidelines,” which requires anchors to maintain a “professional and conservative appearance,” Hamper incurred “considerable” expenses for clothing and grooming, according to the opinion. However, she followed her own set of rules. She’d ask herself, “‘[W]ould I be buying this if I didn’t have to wear this’ to work? ‘and if the answer is no, then I know that I’m buying it specifically’ for work, and therefore, it is a deductible business expense,” according to the opinion. The Court disagreed, but hasn’t yet decided how much she’ll owe.

New Deduction for Medicare Premiums

Sole proprietors, partners, limited liability company (LLC) members, and S corporation shareholders can deduct qualified health insurance premiums paid to cover themselves and family members. This is the so-called self-employed health insurance deduction.

For 2010, you claim it on Line 29 on Page 1 of Form 1040. Because it’s an above-the-line deduction (meaning a deduction claimed on Page 1), you don’t have to itemize to benefit.

Medicare Part B Premiums Suddenly Count as Qualified Expenses

For years, the IRS had taken the position that Medicare Part B premiums did not count as qualified health insurance premiums. This was bad news if you are an older small business owner because your Medicare Part B premiums for 2010 could range from about $1,300 to over $4,200, depending on your income. If you are married, your spouse’s premiums could be in the same range. So we can be talking about major bucks.

Now for the good news: with no fanfare, the IRS suddenly reversed course on the Medicare Part B premium issue. We know this because the 2010 instructions for Line 29 of Form 1040 explicitly allow you to include Medicare Part B premiums in your health insurance costs for purposes of the self-employed health insurance deduction.

Make sure you (or your tax preparer) take the new taxpayer-friendly IRS attitude into account when putting together your 2010 return. The additional Line 29 write-off could lower your federal income tax bill by hundreds of dollars or more.

Deducting Noncash Donations Not Easy

If you want to claim itemized deductions for noncash charitable donations on your 2010 Form 1040, gird your loins. Thanks to herds of unscrupulous taxpayers who once made a habit of claiming bogus and inflated charitable write-offs, the Feds have tightened the screws over the years (justifiably so).

Unfortunately, innocent folks (like you) get squeezed as a result. Here’s a quick summary of the seven rules that apply to the most-common types of noncash charitable donations.

Rule 1

For a donation of a noncash item worth less than $250, you need a receipt from the charity–like the familiar slip you get for noncash donations to Goodwill or the Salvation Army. You need to have the receipt in hand by the time you file your return. Keep it with your tax records, but don’t file it with your return.

Rule 2

For a noncash item worth $250-$5,000, you need a written acknowledgment from the charity (more detailed than a receipt) that meets IRS guidelines. Once again, you need to have this in hand when you file your return. Charities know about this rule, and you should have no problem collecting a suitable acknowledgment. Keep it with your tax records, but don’t file it with your return.

Homebuyer Credit Tax Fraud for Fun and Profit

This week, IRS released tax tips about the homebuyers credit, which also happens to be the subject of this week’s TaxWatch column. Just in time, the Justice Department also released their news about the homebuyers credit – a list of indictments issued and lawsuits filed against tax preparers who filed false or fraudulent claims for the homebuyers credits.

Considering the millions of dollars stolen by these people, at a time when the U.S. Treasury is already seriously depleted, it’s a relief to know that criminals are being caught (as detailed in the Tax Blog post about easy money in refundable tax-credit fraud).

Of course, I simply can’t see why these tax professionals engaged in this fraud. There simply isn’t enough profit in it for them to run the risk to their future livelihood.

In a way, I have to envy those preparers who took a short-cut in filing their homebuyers credit claims. Simply by knocking out tax returns and phony documents, you can complete those tax returns in no time at all.

My office filed over 1,000 claims for a national home community developer. We sweated over each and every tax return, meticulously gathering documents from the buyers and the seller, trying to ensure that IRS had enough proof of the purchase and residency. Sometimes, getting proof of prior home ownership, or lack of it, took creativity. Everyone has special or unusual issues.

Friends who were buying homes together are allowed to split the credit any way they choose. So we developed forms to help protect us, the developer and the buyers, in case anyone later changed their mind about the credit split. We dealt with divorce issues, family issues, bankruptcy and even someone who was absent from home– in prison– after buying the house. Each tax return took hours, instead of the hour or so we had anticipated. Reality is complicated.

Nursing Mothers Finally Get a (Tax) Break

Good news, moms. Finally that little bundle of joy will help you save, not spend. The IRS said today that breast pumps and other nursing supplies now qualify as tax-deductible medical expenses. The equipment can even be reimbursed under flexible-spending accounts or health-savings accounts.

The move reverses last year’s ruling that excluded breast pumps and other similar breastfeeding aids from favorable tax treatment.

Here’s what WSJ’s Juggle blog has to say:

“Until now … nursing mothers couldn’t use flexible-spending accounts to pay for breast pumps and other nursing supplies because the IRS said that breastfeeding didn’t have enough health benefits to qualify as medical or preventative care.

Now, though, the IRS says that like obstetric care, nursing supplies are ‘for the purpose of affecting a structure or function of the body of the lactating woman.’ … The new ruling means that families can use pretax funds from their flexible spending accounts and health savings accounts for pumps and other supplies.  Medical expenses, meanwhile, are not deductible until they exceed 7.5% of adjusted gross income. Breast pumps typically cost more than $200 and, along with supplies, can run as high as $1,000 in the first year of a baby’s life, Reuters reports.”

Easy Money From Refundable Tax Credits?

As long as there’s a tax code there will be fraudsters looking for loopholes. And what could be easier than opening the spigot to free cash already rubber-stamped by Congress? Enter the refundable tax credit.

Last week’s Tax Guy column explains how refundable tax credits, which allow you to get a check from the government even if you owe no tax, encourage fraud. Claiming some of these credits requires minimal time and paperwork, and can promise hefty sums of cash—in the thousands of dollars.  All a recipe for fraudulently prepared returns, says Tax Guy Bill Bischoff.

Bischoff predicts the $13,170 refundable credit for adoption expenses—and the relative lack of proof needed to claim it—will result in thousands of sham returns this tax year.  But the adoption credit is neither the first nor will be the last tool of tax swindlers.  Here are a few eyebrow-raising examples of credits filers have used to dupe Uncle Sam.

First-Time Homebuyer Credit.  It conjures up the tender image of a young couple buying their first nest, all with the help of the U.S. government. But the now-expired $8,000 credit became an easy target for tax fraud because initially, you didn’t even need to file paperwork proving your home purchase. The Joint Committee on Taxation estimated that first-time homebuyers would be paid more than $4.3 billion in fiscal years 2009 and 2010. Meanwhile, a Treasury Inspector General for Tax Administration (TIGTA) audit last June revealed a number of disturbing statistics that could further plump this figure. Among them, 18,832 taxpayers filed claims for just 7,695 addresses, totaling more than $134 million. And at least 1,295 prisoners received fraudulent credits from their 2008 returns at a $9.1 million price tag.