Taxes

Business mileage

MAKE THE IRS AN OFFER THEY CAN'T REFUSE

Tax-Smart Investing in a Hot Market

Business mileage is deductible in the following instances:

If the taxpayer's home office is the PRINCIPAL place of business, each business trip from home, traveling between different business locations, is considered a deductible transportation expense. A taxpayer who has a home office but whose PRINCIPAL office is at ANOTHER LOCATION may not deduct the mileage from home to the FIRST business location. This trip is considered a nondeductible commuting trip. (Rev. Rul. 190; Rev. Rul. 55-109)

According to a recent IRS revenue ruling (99-7), daily transportation (commuting) is deductible when a taxpayer is traveling between his/her RESIDENCE and a TEMPORARY work location OUTSIDE the metropolitan area where he/she lives and normally works. This deduction may be taken for trips to the TEMPORARY work locations even if the taxpayer also has one or more REGULAR work locations OUTSIDE their residence. "Temporary" is defined as less than one year.

Some examples of deductible transportation expenses for taxpayers who have a qualified HOME OFFICE and who travel from home to these locations are: office supply, client, post office, and CPE class (except for a master's program which goes beyond one year).

An Offer Even the IRS Might Not Refuse

Until recently, if you were behind in paying your taxes, you had three options: pay the amount owed in full, enter into an installment agreement to pay the tax over time, or make the IRS an offer for less than the full amount. The choice generally depended on your financial circumstances. The first two options were simple and the third, called an offer in compromise, had less than a 25% chance of being accepted. Under the new guidelines recently announced by the IRS, option three has become easier for taxpayers to qualify.

Previously, "doubt as to liability" and "doubt as to collectability" were the only valid reasons for making an Offer. The IRS has added two new criteria to this list: (1) economic hardship; and, (2) exceptional circumstances. Examples of economic hardship include: (1) a taxpayer with limited resources who cannot earn a living due to a long-term illness, medical condition, or disability; (2) a taxpayer with a dependent having a long-term illness, that will deplete the taxpayer’s resources; and, (3) where liquidating a taxpayer’s assets to pay outstanding tax bills would render the taxpayer unable to meet his or her basic living expenses. In short, the IRS will now have more flexibility in considering an individual’s unique financial hardship when computing a taxpayer’s allowable expenses.

If you think you qualify to make an Offer, you will need to determine how much you must offer. You do this by submitting a financial statement on an IRS form. The IRS has developed more precise rules and uniform standards for evaluating your assets. You must offer an amount equal to the sum of: (1) the total amount of cash you have available; (2) the after tax value of any retirement plans from which you can cash out or borrow funds; (3) the value of your assets less any secured debts; and (4) your net future income over a period of either 48 or 60 months.

Other recent reforms made by the IRS in this area include: (1) development of new national and local living standards for basic living expenses; (2) an independent administrative review before an Offer is finally rejected; (3) the general right to appeal a rejection; (4) suspension of collection activity while an Offer is pending, or for 30 days following a rejection or appeal; (5) waiver by the taxpayer of the running of the statute of limitation on collections; and, (6) innocent spouse protection for joint compromise agreements where one spouse complies and the other spouse defaults.

Even with IRS’ relaxed new rules, it sometimes can be hard to handle an Offer in Compromise by yourself. If you find yourself in a situation where you cannot pay your taxes, consider enlisting the help of a qualified accounting or tax professional before the tax man cometh.

Tax-Smart Investing in a Hot Market

With various stock market indexes regularly posting new record highs, and investors chasing rising gains like there’s no tomorrow, sometimes it’s hard to remember that there can be tax consequences to investment decisions. It can be even harder to make good investment decisions in such a hot market. What’s a prudent investor to do?

First, don’t panic. Try to remember why you got into the market in the first place. You had a goal, and your investments are a means to that end. Was your goal to fund your kids’ college education, put an addition onto the house, or buy a vacation home? Has your timeframe or goals changed? Has something fundamental changed with respect to the investments you picked – company management, technology, the market sector, the product line? If nothing’s changed, does it really make sense to sell stocks you won just to chase after the latest internet darling? Before you get caught up in all the euphoria, step back and take stock of your holdings and their purpose.

Unless your portfolio is in a tax-advantaged retirement account like a 401(k) or IRA, you probably need to consider the tax implications of any investment decision. At the same time, you shouldn’t let the tax tail wag the investment dog. Your buy or sell decision has to be sound from an investment perspective before it can make sense tax-wise. If it is time to sell a particular holding, then the goal of course should be to minimize taxes.

If you hold an investment for less than one year, any gain is treated as ordinary income and taxed at your marginal income tax rate, which can go as high as 39.6%. For investments you hold for a year or more, more favorable capital gains rates apply. Depending on your tax bracket, the gain may be taxed at either 10% or 20%. This, of course, creates an incentive to hold assets for at least 12 months – again, assuming it makes investment sense to do so.

Now it a good time to assess your portfolio to see if there are any under performing investments. Selling a few carefully selected losers can be a good way to offset other gains. Use this strategy carefully, and especially near the end of the year, though it does have its limits. Once your capital losses exceed your gains, there is a $3,000 cap on the excess you can deduct each year. Any losses in excess of the $3,000 limit are carried forward to your next year’s tax return to offset future gains.

Another tax-smart investment strategy to be on the look out for is the timing of sales and purchases on mutual funds just before the fund distributes dividends; this often happens in late December. Once a dividend is declared, the price of the fund usually goes down by the amount of the dividend. If you buy into a fund before the dividend is declared, you get taxed on income someone else earned. If you wait until after the dividend is actually paid to buy in, you will owe no tax and can buy more shares at the lower price. On the other hand, if you sell a fund before the dividend date, the sale will be taxed under the capital gains rules. If you wait until after you receive the dividend to sell, part of the income instead could be taxed at your ordinary income tax rate. Decisions, decisions.

With the stock market going gangbusters, don’t lose sight of your goals and don’t get caught up in the hysteria that could lead to a poor financial decision. If you need to get a reality check, ask your accounting or tax advisor for advice.