Professor Can't Use Mileage Log Created After-the-Fact:
Here's a story from a recent tax court case that should be a lesson for us all (Daniel-Berhe v. Comm'r, T.C. Summary 2013-33 (4/29/13)).
A professor, who taught at five different schools, could not deduct vehicle expenses related to traveling to the various schools because he did not adequately substantiate the remainder of his car and truck expenses. A mileage log created after the year at issue could not be used to substantiate his travel expenses. The mileage had to be entered at the time the vehicle was used, the court stated. In addition, the taxpayer provided no evidence to corroborate entries in the mileage log for random trips to the schools other than testimony that he made various trips to prepare for the semester. The court was unable to verify whether these trips were for business or were personal and thus denied the related expense deductions. However, the court concluded that the taxpayer had a genuine misunderstanding of the law and thus held that the taxpayer was not liable for the accuracy-related penalties. [Code Sec. 162].
The Code and Regulations clearly state that a contemporaneous log must be maintained for your mileage records, not one created a year after-the-fact. Here the court clearly upheld the letter of the IRS Regulations and denied the deduction for business travel expenses. Lesson learned!
Happy Valentine’s Day to all you lovers out there. Say is today the day you're going to “pop the question”? Best wishes to you and yours! But wait…let’s talk taxes first. Suppose you were married today (instead of the single bliss you now enjoy) would the taxes that you and your sweetie now pay be more or less after you are married? Sorry to rain on your joy but it is something you may want to think about. Good news, however, is at hand. The Tax Policy Center, a non-profit organization, has a “marriage penalty calculator” available for you so you can calculate exactly what the penalty for being married will be based on your return and your sweetie’s return. And guess what, it’s called a “marriage penalty calculator” but it could turn out that you owe less taxes being married, making it a “marriage bonus” in the tax world. Check it out and let us know if it is a penalty or a bonus. If you're already married you can play along as well it's just http://taxpolicycenter.org/taxfacts/marriagepenaltycalculator.cfm
The IRS announced today that January 30 will be the first day they will begin to process most 1040s. This means that January 30 is the first day they will accept e-filed returns. Although they will accept paper-filed returns before that date, they will not begin processing them until then.
The IRS also announced that the processing date for returns containing certain forms will be delayed until “late February or into March.” Two of the more common forms on the list are Form 4562, Depreciation and Amortization (Including Information on Listed Property), and Form 8582, Passive Activity Loss Limitations. For those who use tax preparation services, we recommend bringing in your 2012 work as soon as it is ready, as you normally would do. Just because the IRS can't process the returns yet doesn't inhibit us from preparing your return and getting it ready for submission.
This delay, due most notably to the late Congressional action on the Alternative Minimum Tax Patch, was expected.
The Fiscal Cliff Tax Bill
Congress has sent what I'm calling the Fiscal Cliff Tax Bill to the President for his signature this morning. I expect that he will sign the bill and it will become tax law. Here are some of the important areas that are included in the bill.
Congress passed a permanent Alternative Minimum Tax (AMT) patch, adjusted for inflation! This patch is made retroactive to 2012 and it is an important, permanent, change to the AMT formula; and making provisions of the AMT adjust for inflation means that this alternative-tax system we have will likely not be a middle-income tax problem in the future.
Now, looking at the changes for 2013 and beyond, the top income tax rate goes to 39.6% (from 35%) and it will be imposed on individuals making more than $400,000 at year ($450,000 for a married couple). The capital gains reported by those affected by the higher rates will now be taxed at 20% (instead of 15%). Also, gone immediately, is the 2% Social Security reduction for everyone. This means that if you are an employee the Social Security withheld from your wages beginning January 1st will be the full 6.2% instead of the lower 4.2% of 2012.
For taxpayers who itemize, the old "itemized deduction phase-out" is reinstated as is the personal exemption phase-out. The thresholds where these phase-outs happen is different than it was in the past. For 2013 the phase outs begin with Adjusted Gross Income (AGI) of $300,000 for married, joint filing taxpayers, $275,000 for head of household and $250,000 for single filers.
The estate tax system will continue forward and the exemption is an inflation-adjusted $5 million (effectively $10 million for married couples). The tax rate on estates will now go to 40%, which is up from the 2012 rate of 35%,
The following tax credits were extended: the $1,000 Child Tax Credit, the enhanced Earned Income Tax Credit and the enhanced American Opportunity Tax Credits are all extended through 2017.
In addition to the above items, these deductions and exclusions are extended through 2013:
o Discharge of qualified personal residence exclusion;
o $250 above-the-line teacher deduction;
o Mortgage insurance premiums treated as personal residence interest:
o Deduction for state and local taxes;
o Above-the-line deduction for tuition; and
o IRA-to-Charity exclusion (plus special provisions allowing transfers made in January 2013 to be treated as made in 2012).
The legislation also included the following business provisions –
o The Research Credit and the production tax credits, among others, will be extended through 2013;
o 15-year depreciation and Section 179 expensing allowed on qualified real property through 2013;
o Work Opportunity Credit extended through 2013;
o Bonus depreciation extended through 2013; and
o Section 179 deduction limitation is $500,000 for 2012 and 2013.
This is a typical tax bill in that it contained lots of completely non-tax provisions and so-called port-barrell spending but, hey, they got something out! As we analyze the bill's provisions in more depth we will keep you informed and alerted to tax planning and saving moves you can make.
While politicians dither your 2012 tax liability is going up. No AMT patch will mean that as many as 100 million taxpayers (2/3 of all returns expected) could be affected. Most won’t be able to file their return until late March 2013! Call your Congressman and Senator - tell them to do something now about the AMT patch. Let the rest of the debate roll on, just get 2012 settled now.
A week from today will be “Black Friday” the day when brave shoppers will brave cold, crowds and the weather to queue up at crazy-early hours in front of their favorite retailer awaiting the opening rush for sales, sales and sales. And all to save $20 on a Wii set or $40 on a television. Here’s a thought: what if the IRS had a sale and let you save thousands of dollars on your taxes? Would you wait in line for that sale? Well, the IRS isn’t going to be holding a sale, exactly, but you can still save, maybe thousands of dollars in taxes; and you don’t need to wait in line to do it either. But there are only 45 days left in this special “shopping season” for you to secure your savings. How do you do it? Planning, that’s how.
Tax planning is the key to paying the legal minimum in taxes and now, with the changes anticipated ahead for us, the “fiscal cliff” if you want, it is more important than ever to think and plan. Here is an article that we wrote to help you in planning for the year-end: http://www.jkmcpa.com/year-end-tax-planning.html
We’re here to help you if you need it. You can also call me today (707) 964-6325 for an appointment to review of your 2011 tax returns and discuss some ideas for reducing your 2012 income tax.
NEW CA TAX RATES
On election day, November 6, 2012 the California voters passed Proposition 30 and retroactively increased certain tax rates as of January 1, 2012. Pay attention now, you might need to consider these changes in your 2012 tax projections and planning.
The table below shows the increases passed as well as the level of income that will be impacted by the changes.
Governor's Ballot Initiative (Prop 30) changes:
10.3% (1% increase) on income of:
$250,001–$300,000 for single/MFS;
$340,001–$408,000 for HOH; and
$500,001–$600,000 for MFJ.
11.3% (2% increase) on income of:
$300,001–$500,000 for single/MFS;
$408,001–$680,000 for HOH; and
$600,001–$1,000,000 for MFJ.
12.3% (3% increase) on income of:
More than $500,000 for single/MFS;
More than $680,000 for HOH; and
More than $1,000,000 for MFJ.
(Note: Income in excess of $1 million is also subject to the 1% mental health surcharge.)
Do you provide your employees with cell phones or pay their cell phone bills? Well then you will be interested in this news, as this week the Internal Revenue Service (IRS) issued guidance on how a business should be treating employer-provided cell phones. As you know, providing something of value to an employee is going to be taxable to the employee and deductible by the business. The exception to this situation is when a business provides an employee with a tax-free fringe benefit. How does a benefit get to be “tax-free” is summarized as follows: Congress says so. Congress hasn’t said cell phones are a tax-free fringe benefit so they are taxable to the employee at the fair market value of the employer gift or payments.
But, now, with the new guidance from the IRS, the situation is a little better. For instance, the cell phone you gave to your employee may be exempt from tax for the employee if you gave it to the employee for “noncompensatory business reasons.” An example of this would be if you gave your employee the cell phone so they could talk to clients when they are away from the office. The IRS guidance specifically says that if the cell phone is provided to promote employee morale or goodwill then it is not provided for noncompensatory business reasons and the value of the phone is taxable income to the employee.
If you can get over the “noncompensatory business reasons” for giving the employee a cell phone then the IRS will treat the employee’s use of the cell phone as related to the employer’s business and thus as a working condition tax-free fringe benefit. That means that the payment of the cell phone bill is also not subject to tax to the employee. And one more benefit of clearing this hurdle, is that the IRS will treat any personal use of such a cell phone as a de minimis fringe benefit, excludible from the employee’s income.
This guidance is effective as of December 31, 2009 and thereafter. (Notice 2011-72)