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Why is there so much to read?

The simple answer would be because there is so much to say, but then you didn't really expect me to leave it at that. In fact, I never just make it short. Listen to my phone message—that's right, call right now. Even that goes on for a seemingly interminable 40 seconds! My mom—who I must admit is probably my most devoted listener and loyal follower—typically encourages me to tell the story. Even if the story is hers, she nudges me and says, "You tell it; you tell it better." And like Dad, I usually do have a story for almost any situation. Actually, Dad has a joke for almost every situation; you know, the long-winded kind. And Dad just loves to tell them. People listen with rapt attention and often can't wait until another opportunity presents itself for Dad to tell a different joke, just as apropos as the one before and the one after it. He has a tremendous repertoire, but if you've grown up with Dad, you've undoubtedly heard the entire collection over and over and over again. Often, right at the outset of Dad's story, Mom and I just smile at each other and whisper, "Number 56" and then laugh uproariously. In truth, Number 63 is much better but Numbers 17 and 49 are really good, too. So, you see, it runs in the family: Why give a short answer when a long one will do just as well? Except, sometimes even Mother gets exasperated and asks me, "Don't you ever shut up?!" I guess not; not if I have something important to share...

Answers to these FAQ's offer generic advice only. Readers are encouraged to contact me for advice that is personalized to specific facts and individual circumstances.

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Tax Reporting
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2. Is there a difference between the Earned Income and the Investment Income Surtax?
Is there a difference between the Earned Income and the Investment Income Surtax?

Yes. Both are additional federal taxes assessed on the "wealthy". Effective January 1, 2013, wage-earners and self-employed taxpayers with incomes in excess of $200K ($250K if married) will be subject to an additional Medicare tax of 0.9%, payable by the employee or self-employed individual, not the employer. Similarly, taxpayers with net investment income in excess of these same threshold amounts will be subject to a Medicare surtax of 3.8%. Investment income includes dividends, interest, net capital gains, annuities, royalties and net rents as well as the gain on sale of a principal residence in excess of the §121 exclusion of gain on sale of a primary residence. Income sources specifically excluded are tax-exempt interest, VA benefits, self-employed income, IRA and pension distributions. Some unfortunate taxpayers may be subject to both earned and investment income surtaxes!


3. Do I have to report my e-Bay sales?
Do I have to report my e-Bay sales?

Yes. If your online auction sales are the internet equivalent of an occasional garage or yard sale, you do not have to report the sales proceeds. In a garage sale, you generally sell household items you purchased over the years and used personally. BUT if your online garage sale develops into a business and/or you have recurring sales and are purchasing items for resale with the intention of making a profit; you may have started an online auction business which must be reported using Schedule C.

Form 1099-K will be issued to you if you engaged in more than 200 transactions through an online auction house and total receipts exceeded $20,000 during the calendar year. If, for example, you engaged in only three trades that generated $30,000 in the aggregate, Form 1099-K will not be issued. Please note that while the IRS has stated, that "there will be no reconciliation required on the 2012 Form 1099-K," taxpayers are always required to report all income earned (regardless of source and whether reporting documents were issued or received).

If your business is located in California, your internet sales of physical products are generally taxable unless they qualify for a specific tax exemption or exclusion. For sales tax purposes, internet sales are treated just like sales you make at retail stores or other outlets, through sales representatives, over the telephone, or by mail order. Unfortunately, online garage sales are not exempt from CA's sales and use tax: Generally, a person in California who makes three or more sales of merchandise in a 12-month period is considered a retailer and required to hold a seller's permit. When you sell merchandise in California, even temporarily, you are generally required to register with the Board of Equalization (BOE), and to pay sales tax on your taxable sales. Please see Publication 107 Do You Need a California Seller's Permit? For additional information and registration instructions, please refer to: http://www.boe.ca.gov/info/reg.htm.


4. Do I have taxable income if I'm a plumber who occasionally does work for others, such as my dentist, in exchange for free dental service?
Do I have taxable income if I'm a plumber who occasionally does work for others, such as my dentist, in exchange for free dental service?

Yes.  The fair market value of property or services received through barter is taxable income; both parties must report the value of the goods and services received in the exchange as income.  NOTE:  Barter and trade dollars are the same as real dollars for tax reporting purposes.  Bartering is taxable in the year it occurs. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income depending upon the type of transaction that took place.  Generally, if you are in a trade or business you report bartering income on Schedule C Profit or Loss from Business and may be able to deduct certain business costs against the income claimed.


5. Is the interest received from federal agency bonds subject to state income tax?
Is the interest received from federal agency bonds subject to state income tax?

Yes. Government agency bonds are debentures issued by a Federal Agency or a government-sponsored enterprise (GSE). Bonds issued by a Federal Agency are usually backed by the full faith and credit of the United States government, whereas agency debentures issued by a GSE are backed only by that GSE's ability to pay. GNMA ("Ginnie Mae") bonds and all bonds from GSEs are subject to federal tax, as well as state and local income tax in most states. Most other agency bonds are subject to federal income taxation but are exempt from state and local income tax.

GSEs issuing bonds include:

  • Farm Credit Banks
  • Farm Credit System Financial Assistance Corporation
  • Federal Home Loan Banks
  • Federal National Mortgage Association (“Fannie Mae”)
  • Federal Home Loan Mortgage Corporation (“Freddie Mac”)
  • Federal Agricultural Mortgage Corporation (“Farmer Mac”)
  • Student Loan Marketing Association (“Sallie Mae”)

6. I have a foreign financial account. Do I have any special filing requirements?
I have a foreign financial account. Do I have any special filing requirements?

Yes. US citizens, residents and business entities have a filing requirement if they have signature authority over foreign financial accounts, including bank, brokerage, annuity or mutual fund accounts with a combined value over $10K. Each account must be valued separately at its highest value during the calendar year; the value must be converted to US currency using the applicable exchange rate on the last day of the year. The account values are then aggregated to determine whether the filing threshold has been met. Form TDF 90-22.1 ("FBAR") must be received by the US Treasury on or before June 30th each year – no extension is available. Penalties for failure to file are steep!

In addition to FBAR reporting, certain taxpayers may be subject to additional reporting requirements. For example, Form 8938 Statement of Specified Foreign Financial Assets must be submitted to the IRS along with the taxpayer's income tax return if the taxpayer's foreign assets exceed specified thresholds: A domestic taxpayer must file if he has an interest in foreign financial assets with an aggregate value of either $50,000 on December 31st or $75,000 at any time during the year; married individuals must file if they exceed the thresholds of $100,000 and $150,000, respectively. For taxpayers residing abroad, the filing thresholds rise to either $200,000 on December 31st or $300,000 at any time during the year for single taxpayers; $400,000 and $600,000, respectively, for those filing jointly. Again, substantial penalties for non-compliance are assessed.

Taxpayers may be subject to yet more reporting requirements if they received gifts or bequests from abroad; if they transported, transferred or received in excess of $10,000 during the year; if they transacted business with a foreign corporation, partnership or trust; or [heavens!] attempted to expatriate.


7. Do I have to include the investment income my kid earns in his UTMA account on my tax return?
Do I have to include the investment income my kid earns in his UTMA account on my tax return?

No. An account established under the Uniform Transfer to Minors Act (UTMA) is held in the name and Social Security Number of the child, but administered by an adult custodian until the child reaches the age of majority as determined by state law (usually age 18 or 21). UTMA income is always attributable to the kid. However, a child who has annual investment income less than $1,000 and no other earned income, has NO income tax filing requirement. If a tax return is required, the child's investment income is first reduced by his standard deduction ($1,000 in 2014; $1,050 in 2015). The next $1,000 is taxed at the child's rate and the remainder is taxed at the parents' rate.

There are two filing options:

  1. Child files his own return. Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's individual income tax return (Form 1040). This method is available to any child. If the parents have more than one child subject to kiddie tax, investment income of all such children is combined with the income of the parents to determine the tax.


  2. Parents report child's income on their tax return. The election is made by completing Form 8814, Parents' Election to Report Child's Interest and Dividends, and is available if all of the following criteria are met:
    • The child's only income is from interest, dividends and/or capital gain distributions.
    • The child's gross income for the year is less than $10,000.
    • No overpayments are applied to the child's current-year return.
    • No estimated or withholding tax has been paid in the child's name.


Filing Issues
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8. Are my returns required to be electronically filed?
Are my returns required to be electronically filed?

Yes. As per new IRS regulations, all individual income tax returns that I prepare for my clients must be electronically filed for tax year 2011 and beyond – California's e-file mandate has already been in place for a number of years. However, clients may independently choose to file on paper.

If a client wishes to opt-out of the e-file program, he must provide me with a signed statement notifying me that he understands that electronic filing may provide a number of benefits (including an acknowledgment that the IRS received the returns, a reduced chance of errors in processing the returns and faster refunds). The statement must acknowledge that despite these benefits, the client nevertheless does not want to file electronically and will instead mail or otherwise submit his paper return to the IRS. Upon receipt of this signed statement, I will prepare Form 8948 Preparer Explanation for Not Filing Electronically. This form must be attached to and submitted with the mailed paper returns.

Of course, some returns are impossible to e-file for various reasons and are therefore exempt from the e-file requirement. Currently, the e-file mandate applies to returns using Forms 1040, 1040A, 1040EZ, and 1041.


9. Are penalties imposed for missing the tax filing deadline?
Are penalties imposed for missing the tax filing deadline?

Yes. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty; so if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.

If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.


10. Am I required to file an amended return?
Am I required to file an amended return?

No. Generally, you do not need to file an amended return to correct math errors. The IRS will automatically make that correction. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules; the IRS normally will send a request asking for those. If there are other issues to report – including information received after the filing date and change of filing status, amongst many others – you must file Form 1040X Amended U.S. Individual Income Tax Return by mail (it cannot be e-filed) and attach all affected schedules and forms. Form 1040X must be filed within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later. If applicable, be sure to also file an amended return with the state tax authority. Please contact me if you need assistance.


11. What if I don't have a Social Security Number?
What if I don't have a Social Security Number?

Your Social Security Number (SSN) is a unique identification number assigned to U.S. citizens and resident aliens at birth or upon application. The SSN is required for tax reporting purposes and is used to identify each taxpayer, spouse and dependent on federal and state income tax returns. Certain individuals, such as non-resident and illegal aliens, are ineligible to obtain an SSN, but may nevertheless have a tax filing requirement. It is for this purpose that the IRS issues an Individual Taxpayer Identification Number (ITIN), a nine-digit number that always begins with the number 9. ITINs are issued regardless of immigration status. Individuals may not use the ITIN to work in the U.S., receive Social Security benefits, or claim the Earned Income Tax Credit.


12. What can I do if I do not receive a W-2?
What can I do if I do not receive a W-2?

Employers are required to issue Form W-2 Wage and Tax Statement annually by the end of January. You should allow an additional 2 weeks to receive it in the mail. However, if you have not received the form by mid-February, contact your employer and make sure that he has your correct address. After February 14th, you may call the IRS at (800) 829-1040 if you still have not received your W-2. Be prepared to provide your name, address, phone number and Social Security number, as well as your employer's name, address and phone number, your employment dates and an estimate of your wages and federal income tax withheld in 2012 based upon your final pay stub, if available.

You should file your tax return on or before April 15th, even if you have not received your W-2. Instead, use Form 4852 Substitute for Form W-2 Wage and Tax Statement in place of the W-2 to estimate your income and withholding taxes as accurately as possible. The IRS may delay processing your return while it verifies your information. If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, you must correct your tax return by filing Form 1040X Amended U.S. Individual Income Tax Return. (Alternatively, you may request a 6-month extension of time by filing Form 4868 Application for Automatic Extension of Time to File US Individual Income Tax Return if you think that you will receive the elusive W-2 in the interim.)


13. Do I have to file as an "independent contractor" if my employer incorrectly issued a 1099 to me?
Do I have to file as an "independent contractor" if my employer incorrectly issued a 1099 to me?

Yes. A worker who receives a Form 1099-MISC attributing Nonemployee Compensation to him is presumed to be self-employed and "in business". As a result, he must attach Schedule C Profit or Loss from Business to his income tax return and pay both the employer and employee halves of the Social Security Tax (computed on Schedule SE Self-Employment Tax), as well as register as a "business" with the local tax authority. However, if the worker believes that his employment status has been misclassified and that he is in fact an employee who should have received a W-2 (instead of the offending 1099), he has two options:

  1. Agree with the way the business has classified him, file Schedules C and SE, and pay self-employment tax on the earnings, OR
  2. File Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

If Form SS-8 is filed, the IRS will determine if the worker should have been treated as an employee, subject to income and FICA tax withholding. The worker should weigh the pros and cons of filing Form SS-8 carefully. In the event of a favorable determination by the IRS, the worker will nevertheless remain liable for all federal and state income and one-half of the payroll taxes attributable to his earnings. The employer will be held liable for the other half of the FICA taxes along with a 100% penalty (!) and will likely be very unhappy with his now properly classified employee. As a result, it might be wise to file for reclassification only if the potential self-employment tax savings are significant and/or in cases in which the worker is unconcerned about burning his bridges with his employer and foregoing future job opportunities.

Additional information (as well as Form SS-8) is available on the IRS website here. If you should decide to file, you must attach Form 8919 Uncollected Social Security and Medicare Tax on Wages to your income tax return to ensure that your Social Security account is properly credited for income earned (and taxes paid). NOTE: You will likely owe tax (plus penalties and interest) when filing your income tax return since the employer did not previously withhold the proper amount of federal, state and payroll taxes from your paycheck unless you proactively made quarterly estimated tax payments throughout the year.


Payments & Refunds
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14. Can I pay my tax bill with a credit card?
Can I pay my tax bill with a credit card?

Yes. Although paying by credit or debit card is convenient and may even allow you to accumulate frequent flier miles or other card benefits, it is also costly. Since credit card payments are not processed by the IRS, taxpayers will be required to pay a processing fee to one of four service providers authorized to process payments on behalf of the IRS. Please refer to the IRS website for a detailed listing of convenience fees charged and additional information. California also allows payment by credit card; similar fees will be charged by the sole authorized credit card processor at CA.gov. Federal and state tax authorities offer many other payment options, including web-pay and installment plans. Please contact me if you need assistance.


15. Where is my tax refund?
Where is my tax refund?

If you e-file, you can generally expect to receive your federal refund within 10 - 21 days or 4 weeks after mailing a paper return. (Some tax returns require additional review and may take longer to process.) If you have not received your refund within that time frame, please contact your bank or check your monthly statement. In many cases, your refund will already have been electronically deposited. Since neither the tax authority nor the bank provide transaction confirmations, it is necessary to check your statement online, by phone or in person.

After your return has been filed, you can track the status of your refund (including a specific date on which the transaction will be processed) with the Where's My Refund? tool available on the IRS website. Information will generally be available within 24 hours after the IRS receives your e-filed return or 4 weeks after you've mailed a paper return. The computerized system updates every 24 hours, usually overnight; so there's no need to check more than once a day and there's no need to call the IRS unless the web tool instructs you to do so. To use the system, you must have a copy of your tax return for reference. You will need to input your Social Security number, filing status and the exact dollar amount of the refund you are expecting.

The FTB also offers an online tool to check your California refund status. Once again, you will need your social security number, your mailing address, and the refund amount shown on your tax return. You will generally receive your state tax refund within 7 – 10 days if you e-filed your return or 8 – 12 weeks from the date you mailed your return.

NOTE: Using e-file is the best way to file an accurate tax return; and using e-file with direct deposit is the fastest way to get a refund


16. What should I do if my tax refund was deposited to someone else's account?
What should I do if my tax refund was deposited to someone else's account?

If you have not received your Direct Deposit Refund (DDR), you must wait at least 25 working days from the authorized date of the refund (seven days for e-file returns and eight weeks for paper-filed returns) before contacting the tax authority. The agent will verify that your return was filed and will ask you to fax a bank statement showing that the deposit was not made to your account. The IRS will then ask you to submit Form 3911 Taxpayer Statement Regarding Refund (Form 3851 Taxpayer Affidavit of Misdirected Refund Deposit for the FTB) to start the replacement check process. The IRS and FTB then contact the bank or financial institution where the misdirected refund was deposited requesting information on the account holder who received the misdirected refund. Once they receive the information from the bank or financial institution, a paper check refund will be issued to the correct taxpayer.


17. Are there advantages to applying a prior-year tax refund to the estimated tax due for the current year?
Are there advantages to applying a prior-year tax refund to the estimated tax due for the current year?

Yes. By using your refund to reduce your estimated tax liability for the current year, you may be required to make fewer and smaller ES payments throughout the remainder of the year. Front-loading – paying more estimated tax early on (by applying the refunds) – also helps to minimize (and possibly even eliminate) under-payment and late payment penalties that the tax authority might otherwise assess.

Depending on the date you file your prior-year return, you may find that by the time you get your refund, you would only have to turn around and write a check for the next ES payment that is due almost immediately. And since little or no interest can be earned by depositing your refunds into the bank for only a short period of time, you are forfeiting nothing by allowing the tax authority to keep the money to which it will inevitably be entitled.

Finally, if you are a high-income earner, you are required to make ES payments equal to 110% of your total tax liability for the prior year under the federal Safe Harbor Rule. Yes, that means you will likely over-pay but that is precisely what the tax authority wants. It is also the only way to ensure that no penalties can be assessed in the coming year.


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18. How long do I have to keep tax records?
How long do I have to keep tax records?

The easy answer is five years, but there are many caveats. The IRS has three years to audit a timely filed return (California has four years); so it's wise to keep all tax-related documents until the period of limitations has expired. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that a tax authority can assess additional tax. Records that should be kept include copies of the filed tax returns and all documents which substantiate income reported (e.g. Forms W-2, 1099-INT, 1099-DIV, 1099-R, SSA-1099, year-end bank and investment account statements, trade confirmations, 1099-B, 1099-MISC, etc.) and deductions claimed (e.g. DMV registration invoice, property tax statement, Form 1098, charitable receipts and letters of acknowledgment, gambling losses, etc.).

Some records must be kept for longer periods, including those which pertain to property (e.g. primary residence purchase and home improvements, securities and other financial investments, rental real estate, royalty property, etc.) until the property is sold, exchanged, liquidated, or otherwise disposed. These records are necessary to calculate depreciation, amortization and depletion deductions, as well as the eventual gain or loss upon disposition. If you received property in a non-taxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

When your records are no longer needed for tax purposes, check to see if you have to keep them longer for other purposes; for example, your insurance company or creditors may require you to keep them longer than the IRS does. And be sure to shred any document that contains personal data, including your name, Social Security Number, address or other contact information.


19. What are the substantiation requirements for charitable contributions?
What are the substantiation requirements for charitable contributions?

All cash contributions, regardless of amount, require either a bank statement, a receipt from the charity, or a payroll deduction record. For cash donations of $250 or more, a written acknowledgment from the charitable organization is also required. Unsubstantiated cash contributions – such as those dropped into the Salvation Army bell-ringer's cup – are not deductible.

Noncash contributions require additional documentation that varies depending on the value of the donation:

Noncash Donation Documents to Substantiate
Less than $250 Receipt from charity with name, date, and description of donation
Greater than $250 but less than $500 Contemporaneous written acknowledgment from charity
Greater than $500 but less than $5,000 Written acknowledgment (as above) plus file IRS Form 8283, Noncash Charitable Contributions
Greater than $5,000 (not including stock, art, and autos) Qualified appraisal and IRS Form 8283

Taxpayers who donate clothing and household items must keep detailed descriptions of items donated as well as the condition of the items in order to substantiate the value of the donation. It is up to the taxpayer to prove "good used condition or better," so taxpayers should take photos of items donated. Photos are also recommended if the donated items are unusual and unique.


20. Where can I find help when applying for financial aid for my college-bound son or daughter?
Where can I find help when applying for financial aid for my college-bound son or daughter?

The IRS offers students and parents a free data retrieval tool that allows easy and secure access to tax information required for the Department of Education's Free Application for Federal Student Aid (FAFSA). The tool automatically transfers required tax data from their federal tax returns directly to their FAFSA form. Using the tool saves time, improves accuracy and may reduce the likelihood of the school's financial aid office requesting that you verify the information.

To complete the 2012 -2013 FAFSA form, taxpayers must have filed a federal 2011 tax return, possess a valid Social Security Number, have a Federal Student Aid PIN [individuals who don't have a PIN will be given the option to apply for one through the FAFSA application process] and have not changed marital status since December 31, 2011. The IRS Data Retrieval Tool cannot be used if an amended tax return was filed for 2011, the federal tax filing status on the 2011 return is married filing separately, or a Puerto Rican or other foreign tax return was filed. Additional information and a link to the online FAFSA application are available here.


Miscellaneous Rules
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21. I am a LYFT driver; may I deduct miles when I do not have a paying passenger in my car but am available to pick-up my next rider?
I am a LYFT driver; may I deduct miles when I do not have a paying passenger in my car but am available to pick-up my next rider?

No.  Unfortunately, the IRS has not yet promulgated specific regulations about the deductibility of transportation costs incurred by Uber, Lyft and other rideshare drivers.  However, the IRS Publication 463 sets forth the following rules:

Transportation expenses include the ordinary and necessary costs of all of the following:

  • Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home.
  • Visiting clients or customers.
  • Going to a business meeting away from your regular workplace.
  • Getting from your home to a temporary workplace when you have one or more regular places of work. These temporary workplaces can be either within the area of your tax home or outside that area.

Obviously, most of these situations do not apply to you although you might argue that each of your passenger pick-up points represents a temporary workplace and, therefore, you should be allowed to deduct the expenses of the daily round-trip transportation between your home and the temporary location.  However, the publication next states, “If you have no regular place of work but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between home and a temporary work site outside [emphasis added] that metropolitan area. You cannot deduct daily transportation costs between your home and temporary work sites within your metropolitan area. These are nondeductible commuting expenses.”

That, then, leaves us with deductions merely for traveling from one workplace to another with the definition of “workplace” uncertain.  The conservative approach would say that you are working only when you have a passenger in your vehicle.  Transportation between the drop-off point of one passenger and the pick-up of another – particularly, when it is uncertain that you will in fact be called upon to pick up another passenger – become non-deductible commute costs.

If you wish to take a more aggressive stance, you could consider your home as your base and deduct all transportation costs while you are in drive-mode; whether you have a passenger in the vehicle or not.  This, however, would mean that your home would have to qualify as your “home office” for tax purposes.  Your home must:

  • be used regularly and exclusively for business AND
  • be your principal place of business

The IRS has identified two primary red flags on individual returns with reporting Schedule C business income:  (1) mileage deductions and (2) home office deductions.  Should a taxpayer’s return be pulled for audit, the examiner will in all probability disallow these deductions in part or in full.  As a result, it is my suggestion that you deduct only those miles when you are actually carrying a passenger in your car.  Kindly provide a tally of those miles to me when you provide the remaining missing data.

Please be sure to maintain accurate records.  IRS rules require a contemporaneous record of beginning and ending odometer readings, date and business purpose of each trip.  [See Blog entry March 8, 2013 Miles & Meals for additional recordkeeping requirements.]


22. Do the new "repair regulations" really apply to me?
Do the new "repair regulations" really apply to me?

Yes. Behind the scenes of everyday life for most US taxpayers, the IRS and the tax professional community have been debating whether the cost of tangible personal property used in a trade or business should be classified as a repair, a maintenance item or a new asset. "Big stuff" has been litigated all the way up to the US Supreme Court; smaller issues have been audited and fought over at lower levels of the courts and appeals process. In an attempt to create unimpeachable rules, the IRS issued "temporary" regulations nearly ten years ago. Recently, the IRS promulgated their "final" regulations which are disturbingly complex and involve a nightmarish onslaught of filing requirements. In response to a collective outcry from the tax professional community seeking to protect their clients from an excessively burdensome reporting mandate, the IRS on February 13th (2015) issued revised procedures that modify the "final" regulations that were only months old. These now are, of course, "final" again and apply to all individual taxpayers who file Schedule C's (small business and disregarded LLCs), Schedule E's (rental property owners) and Schedule F's (farmers), as well as all business entities (partnerships, S-Corps, C-Corps, trusts and estates). A detailed explanation of the rules is available here.


23. Should I lend money to a family member?
Should I lend money to a family member?

No. Mixing business and family may be a bad idea, especially since family transactions are often frowned upon by the IRS and almost always scrutinized or even recharacterized. In the event that you wish to lend money to a family member, you must be sure to do so in a business-like manner. Here are some things to consider:

You, as the lender should have a legally enforceable note that shows: (1) fixed loan amount, (2) definite payment date, (3) stated rate of interest and (4) collateral or security. It is best to charge your family member interest at the market rate (or higher) because the IRS may otherwise treat an interest-free loan as a gift or presume that the market rate of interest was charged. On loans between related parties, the IRS establishes minimum loan rates (AFR) that change on a monthly basis (see Applicable Federal Rates). Gift tax may be owed if the difference between the interest charged and the interest that would be charged using the AFR combined with other gifts exceeds the annual gift tax exclusion amount ($14,000 in 2015).

In a recent Tax Court ruling (DeFrancis v Comm, TCS 2013-88), borrowers were denied a deduction for mortgage interest on a family loan that properly established the rate of interest and payment terms but failed to establish that the loan was secured by the residence as required under IRC §163(h)(3)(B)(i)(II) and because the mortgage was not recorded with the county. It is, therefore, advisable that all contractual agreements are drafted or at least reviewed by a competent attorney.

While the borrower may hope to claim a deduction for interest paid, the lender must include that amount as taxable income whether or not a corresponding deduction can be claimed. In fact, the borrower will be required to issue Form 1099-INT to the lender reporting the amount of interest paid.


24. May I exclude some or all of the gain on the sale of my personal residence?
May I exclude some or all of the gain on the sale of my personal residence?

Yes. Taxpayers who have owned and used a home as a personal residence for at least two out of the five years prior to the sale may exclude up to $250,000 ($500,000 if married) of the realized gain as per IRC §121. This exclusion applies to only one sale every two years. To satisfy the Ownership Test, the residence must be owned by the taxpayer directly or through a living trust if the taxpayer was the grantor of the trust. To satisfy the Use Test, the residence must be the taxpayer's principal home. If a taxpayer alternates between two homes, the home that is used for a majority of the time during the year will ordinarily be considered the principal residence

If a taxpayer cannot satisfy the two-year Ownership and Use Tests, he may qualify for a reduced exclusion if the primary reason he sold his main home was due to a change in:

  • his place of employment;
  • his health if the primary reason for the sale is to obtain, provide or facilitate the diagnosis, cure, mitigation or treatment of disease, illness or injury of a qualified family member; or
  • unforeseen circumstances such as divorce, death, unemployment or natural disaster.

Employment includes the start of work with a new employer or a new location of the same employer, as well as the start or continuation of self-employment.  Under the Safe Harbor Rule, a change in place of employment is considered to be the primary reason the taxpayer sold the home if the change occurred during the period the taxpayer owned and used the property as a main home and the new place of employment is at least 50 miles farther from the taxpayer's home than the former place of employment was. If there was no former place of employment, the new place of employment must be at least 50 miles from the home sold.  The IRS relies on facts and circumstances to establish eligibility for the reduced exclusion; the burden of proof rests with the taxpayer.

To calculate the reduced exclusion, the maximum dollar limitation ($250,000 or 500,000) is multiplied by a fraction. The numerator of the fraction is the shortest of either (1) the time the home was owned or (2) the time the home was used. The numerator and denominator may be expressed in either days or months. If the measure is days, the denominator is 730 days (365 days X 2 years). If the measure is months, the denominator is 24 months. Therefore, for single taxpayers the monthly amount of the exclusion will equate to $10,416.67 ($20,833.33 if married); the daily amount will total $342,47 ($684.93 if married).


25. I just inherited an Individual Retirement Account (IRA) – do I have to take a distribution this year?
I just inherited an Individual Retirement Account (IRA) – do I have to take a distribution this year?

Yes. The required minimum distribution (RMD) in the year of death is calculated as if the owner had lived through the year. The beneficiary must take the owner's RMD by year-end if the owner died before taking his own distribution. On the other hand, if the owner died before reaching his required beginning date for distributions, no distribution is required in the year of death.

The balance of the account must be distributed to the IRA beneficiary as a lump-sum by the end of the year following the year of death, unless the beneficiary elects to take distributions under the five-year rule. This requires that the entire account balance is distributed by the end of the calendar year five years after the year of death. Nevertheless, some plans may mandate a lump-sum payment even though the five-year rule is authorized under tax law. In that case, the beneficiary may choose to roll the assets into an inherited IRA and a different financial institution, thereby benefitting from a longer distribution period. Non-spouse beneficiaries may make a trustee-to-trustee transfer of the decedent's account and establish a new "inherited IRA"; that is, an IRA in the decedent's name but payable to the named beneficiary.


26. Should I use my IRA to pay for my education?
Should I use my IRA to pay for my education?

No.  If you are under age 59½, I would recommend exploring alternative financing options.  Premature distributions are generally subject to the IRS’ Early Withdrawal Penalty (10%), in addition to federal and state income taxes.  Depending on your state of residency, you may also be subject to a state-imposed penalty, ultimately forfeiting almost half of the total distribution you hope to take.  The penalty – not the tax – may be waived for certain limited exceptions, including distributions made:

  • to a deceased IRA owner’s beneficiary,
  • because the IRA owner is totally and permanently disabled,
  • as part of a series of substantially equal lifetime payments,
  • by qualified first-time homebuyers,
  • to fund qualified higher education expenses,
  • to pay for a portion of certain medical insurance premiums paid while unemployed,
  • for unreimbursed medical expenses in excess of 10% of adjusted gross income,
  • due to an IRS levy, or
  • by a qualified reservist.

Qualified education expenses include amounts paid for tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, reduced by any tax-free educational assistance received such as grants, scholarships and Coverdell education account distributions.  The distribution may be used to pay for costs incurred by the taxpayer, his spouse or child.   An eligible educational institution is any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit and proprietary (privately owned profit-making) postsecondary institutions.

Indeed, the education exception is rather liberal but only serves to eliminate the Early Withdrawal Penalty imposed on pre-retirement distributions.  Taxpayers should not under-estimate the tax liability that remains; even without imposition of the penalty, many taxpayers may be required to “share” up to 40% of their IRA distribution depending on the federal and state marginal tax brackets to which they are subject.

Instead, you might wish to explore and consider the following alternative financing options:

  1. Student Loans – apply through your school’s financial aid office.  The interest rates are generally reasonable, the repayment terms usually liberal, and these loans do not require the borrower to satisfy the usual qualifications imposed by lenders on all other types of loans.

  2. Grants & scholarships – it never hurts to ask to see if you might be eligible for one or the other.  Once again, you should inquire with the financial aid office but you may also do a bit of research online as there are innumerable sources of grants for which you might be perfectly suited.

  3. Home equity loan – if you haven’t already explored this option, it may be worth a try.  Unfortunately, loan interest will not be tax deductible if the loan proceeds are used for a purpose other than home improvements but the tax consequences would still be cheaper than an IRA withdrawal.

  4. Selling company stock – always a possibility but be aware that you will be taxed at capital gains rates on the difference between the sales price and your basis.  If you did not originally pay for the stock, your basis is zero and the entire sale will be subject to tax at slightly lower rates (and no penalty) than the ordinary income tax rates at which the IRA distribution would be taxed.

  5. Borrow from your 401(k) plan – you’ll have to check with your employer about the terms and conditions.  Note that this should be considered a loan which must be repaid to avoid becoming subject to tax and penalties (just as if you made a withdrawal from your IRA).  Further, you are “violating” the purpose for which the account was initially established which was to save for retirement not ongoing expenses – even if they are educational expenses.

27. I have a small business; is forming an LLC is right for me?
I have a small business; is forming an LLC is right for me?

Many of my clients have been “advised” by friends and associates to form a limited liability company (LLC) to protect themselves and their assets. But often, these concerns can be more easily addressed with insurance. You should be aware that the liability protection provided by an LLC is truly limited and that there are annual taxes and fees that must be considered.  Additionally, California’s tax authority has been aggressively pursuing even non-resident LLC members.

Typically, members of an LLC are not personally liable for company debts but they remain responsible for tortious or malpractice acts.  Non-LLC assets may be attached if (1) the member caused the event, (2) the member was negligent in hiring the person who caused the problem, or (3) the member was responsible for supervising the wrongful activity.  While an LLC may serve as a barrier between your business operations and your personal finances, certain errors you make can allow the legal system to break through that barrier; thus “piercing the corporate veil”.

Insurance coverage can protect LLC members against various eventualities:

  • General liability can be used to cover medical expenses, legal defense costs, and judgements/settlements in the event that a customer is injured while on your property or you’re accused of slander.
  • Product liability will protect you if your product causes injury or property damage.
  • Professional liability (a.k.a. errors and omissions insurance) is a form of malpractice insurance for LLCs which provide professional services.
  • Directors’ and officers’ liability protects your company in the event that legal action is brought against the directors or officers due to accusations of negligence or wrongdoing.

This is but a partial list; many other types of coverage are available as well but not all are appropriate for every entity.  Costs for the insurance package you need to protect your company will vary widely based on factors such as the type of business you run and the specific types of coverages you need. Additionally, your specific LLC insurance costs will depend on how many employees you have and whether you work in a litigation-prone industry.  In some instances, you may be able to purchase an additional $1 million of insurance for as little as $250.

You should note that an LLC in California is liable for an $800 tax annually until the LLC formally dissolves. (LLCs which have gross receipts attributable of $250,000 or more must also pay an LLC fee.)  So, the choice to form an LLC may boil down to paying the $800 LLC annual tax plus the cost to prepare the return, or pay $250 for $1 million of additional coverage.

Of course, the business decision regarding the choice of entity may be more complex and may involve more than a simplistic comparison between the cost of insurance and the costs of tax and tax preparation.  Every situation is unique; legal complexities abound which should be explored with a competent business attorney.  Then, if you are still considering the formation of an LLC, contact me so we can address the issues together.


28. Are there different tax consequences if I keep my shares of company stock held in my 401(k) or sell them now to diversify my plan portfolio?
Are there different tax consequences if I keep my shares of company stock held in my 401(k) or sell them now to diversify my plan portfolio?

Yes.  If, when you retire, you take a distribution of company stock from your 401(k) plan, you will be required to pay tax at ordinary income tax rates on the cost basis (acquisition price) of the stock.  Say you have 1,000 shares at a cost basis of $15.  If the market price of the stock is $40/share when you withdraw the shares, you will pay tax on only $15,000 rather than $40,000 under special NUA rules:

  • Net Unrealized Appreciation (NUA)
    To be eligible for the NUA rules described above, you must have a triggering event such as separating from service with your employer, being age 59 1/2, total disability or death. You had to buy the stock with pretax contributions.  Your entire vested balance in the plan must be distributed in a lump sum within one tax year, so if you withdraw some money for personal needs, you may disqualify yourself from NUA treatment. Also, you must distribute all assets from all qualified plans at your former employer, not just the one that held the shares of stock.

If you later choose to sell the shares that you previously withdrew, you will pay capital gains tax on the difference between the cost basis ($15) and the future sales price.

On the other hand, if you keep the shares throughout the lifetime of the 401(k) plan and eventually roll them into an IRA, you won't pay any tax when you make the rollover but when you later sell the stock, you will be required to pay tax at ordinary rates on the full value of the stock.  Using the example above, if you were to make a rollover when the market price was at $40/share and then promptly sold the stock at the price, you would pay tax on $40,000.

In this scenario, your choices are (1) pay ordinary income tax on $15K now and capital gains tax on the NUA later or (2) pay ordinary income tax on the entire balance later.  While Choice # 1 sounds preferable, you should consider:

  • Whether you are, in fact, eligible for the NUA rules as described in the limitation above
  • Whether you have liquidity outside of plan dollars to pay the tax that would result from selling stock within the plan
  • Whether you intend to continue to hold the stock to benefit further from NUA treatment
  • Whether you intend to postpone distribution of assets – along with the attendant tax – from your IRA rollover to benefit from ongoing tax deferral

You'll find a good analysis of pros and cons in this article here.


29. My employer just offered me restricted stock; should I make an 83(b) election?
My employer just offered me restricted stock; should I make an 83(b) election?

Maybe. Restricted stock is often given to an employee at no cost, albeit subject to restrictions such as forfeiture if the employee fails to remain with his employer for a certain number of years. Normally, the employee does not recognize taxable income until vesting occurs and the stock is no longer restricted. The amount included in income and subject to payroll tax withholdings will be the excess of the stock's value when the restriction lapses over any amount paid for the stock by the employee.

Alternatively, the employee may elect under IRC §83(b) to recognize the income on the date of the stock's receipt rather than on the date of its vesting. There will be no further tax consequences when the stock vests. Instead, tax on any appreciation between the transfer and vesting dates is deferred until the stock is eventually sold. In the interim, dividends earned from the stock are treated as dividend income rather than compensation subject to payroll tax withholdings. While tax deferral is always tempting, the 83(b) election requires immediate income recognition even though the employee has received no cash with which to pay the resulting tax. If the stock is subsequently forfeited, the employee cannot claim a deduction for the previously recognized income; however, any amount paid for the stock may be deducted as a capital loss.

The 83(b) election is best made when:

  • the shares given to the employee have nominal value on the date of transfer, or
  • the employee pays full or substantial value for the stock, or
  • significant appreciation between the date of receipt and the time that the stock vests is anticipated.

The election is best avoided if the employee would be required to recognize substantial income upon receipt of the stock, or the employee expects to be unable to satisfy the conditions imposed on him by his employer, thereby creating a substantial risk of forfeiture.


30. I invested in a company a few years ago that is no longer operating – is it possible to just give back the shares and claim a tax loss?
I invested in a company a few years ago that is no longer operating – is it possible to just give back the shares and claim a tax loss?

Yes. But to claim a loss on your investment, you will need proof that the company, or at least your shares are indeed worthless. Securities—defined as corporate stock, stock rights, or bonds—which have no value may be reported as capital losses upon the occurrence of an identifiable event that establishes their worthlessness, such as the bankruptcy of the issuing corporation [IRC § 165(g)].

However, if a security retains even a minute value, a loss deduction is not allowed.  In that case, a taxpayer has two choices:

  1. He can sell the securities for the nominal value that they have retained and thereby fix the dates and amounts of the attendant losses, or
  2. He can abandon the assets.

While the first option indeed allows the taxpayer to claim the difference between his minimal sales price and his original purchase price as a capital loss, he may be unable to find a buyer for what is essentially a “worthless” security.  On the other hand, by relinquishing title to his security, permanently surrendering his rights, and receiving no consideration in exchange, he can abandon the asset.  While aggressive taxpayers have argued that abandonment should be eligible for ordinary loss treatment, the IRS has proposed a regulation [Prop.  Treas. Reg. §1.165-5, Fed. Reg.1001-05 (September 4, 2007)] requiring that abandoned securities be treated in the same manner as worthless securities and are, therefore, eligible for capital loss treatment only.

In any case, worthless securities are deemed to have become worthless on the last day of the year in which the identifying event occurs – it is this date that determines whether the attendant loss is long- or short-term.  Note that your loss can only be used to offset capital gains incurred in the same year.  You may use an additional $3K of any excess capital loss as a deduction against other ordinary income but the remainder must be carried-forward into future years.


31. Do I have tax reporting obligations if I hire a nanny for my son or a caretaker for my mother?
Do I have tax reporting obligations if I hire a nanny for my son or a caretaker for my mother?

Yes.  Household workers hired within a private home may include cooks, housekeepers, maids, baby-sitters, nannies, caretakers, home health care workers, handymen, gardeners and chauffeurs.  The California Employment Development Department (EDD) states that those who hire and have paid at least $750 (by cash or check) to one or more household workers in any calendar quarter are “household employers” required to register with the EDD and subject to quarterly payroll reporting.  Taxpayers who hire household employees through approved employment agencies are generally not liable for the reporting and payment of payroll taxes.  NOTE:  Repairmen, plumbers, contractors and other business people, who provide their services as independent contractors, are not your employees. Household workers are your employees if you can control not only the work they do but how they do it.

California employers are required to pay State Disability Insurance (SDI) on behalf of their employees.  The rate changes annually and is currently (in 2013) set at 1% of an employee’s annual wage up to $100,880.  Employers are additionally responsible for paying Unemployment Insurance (UI) and Employment Training Tax (ETT), also adjusted annually and currently set to 3.4% (for new employers) and 0.1%, respectively, on the first $7,000 of employee wages.  California household employers are not required to withhold income tax from their employee’s wages but some employers may choose voluntarily to do so.

Tax payments are remitted to the EDD using a DE 88 coupon and a listing of wages paid to employees must be submitted quarterly using Forms DE 9 and DE 9c Quarterly Contribution Return and Report of Wages.  Household employers who pay no more than $20,000/year in wages may elect to pay annually by submitting Form DE 89 Employer of Household Worker Election Notice.  If the election is approved, a household employer must still report quarterly using Form DE 3BHW Employers of Household Worker(s) Quarterly Report of Wages and Withholdings but may pay all taxes at year-end when filing Form DE 3HW Employer of Household Worker(s) Annual Payroll Tax Return.  If at any time during the year total wages paid exceed $20,000, the election to pay annually will be terminated and the employer must once again file and pay on a quarterly basis.

Employers must also register with the IRS as an employer using Form SS-4 Application for Employer Identification Number and obtain an Employer Identification Number (EIN) which will be used when filing federal payroll reporting forms.  Household employers who pay a household employee cash wages of more than $1,800 (in 2013), must withhold Social Security and Medicare taxes totaling 7.65% of wages paid.  Beginning January 1st, 2013, employers are responsible for withholding 0.9% additional Medicare Tax on wages in excess of $200,000/year but are not required to withhold federal income tax.  Federal Unemployment Tax (FUTA) must be paid if the employer paid wages in in excess of $1,000 in any quarter during the calendar year.  Household employers may attach Schedule H Household Employment Taxes to their individual tax returns to report and submit all federal payroll taxes due.  At year-end, employers must issue Form W-2 Wage and Tax Statement to each employee and submit a copy along with Form W-3 Transmittal of Wage and Tax Statement to the IRS.

Please contact me if you need help with your payroll tax obligations.


32. May I deduct business expenses if I am a W-2 wage-earner?
May I deduct business expenses if I am a W-2 wage-earner?

Yes, if your employer (1) requires you (2) in writing to incur certain out-of-pocket business expenses which then (3) remain unreimbursed by the employer. Employee business expenses must be reported on Form 2106 Employee Business Expenses and may then be claimed as itemized deductions on Schedule A if the total of your miscellaneous deductions exceed 2% of your Adjusted Gross Income (AGI).

Additionally, please note the following:

  • Entertainment expenses must be directly related to or associated with the active conduct of a trade or business, or for the production or collection of income.  Thus, you must be able to show that the main purpose of the entertainment event was business, that you actually engaged in business during a meal or entertainment activity, and that you had more than a general expectation of receiving income or some other specific business benefit in the future.  If the event is “associated with” a business purpose, you must provide the entertainment or meal directly before or after a substantial business discussion but you are not required to devote more time to business than to entertainment.

  • The deduction for business gifts is limited to $25 per recipient per year.  A gift to a customer’s family member is considered a gift to the customer unless there is a bona fide business relationship with the recipient family member.

  • Expenses for transportation, meals and lodging are deductible for business travel away from your tax home (the entire city or general area where you regularly conduct business).  To deduct travel expenses, you must be away longer than an ordinary work day and long enough that you could not reasonably be expected to complete the trip without sleep or rest.

  • Unless your employer requires you to work from home and doing so is for his convenience (not yours), you may not claim any deductions related to a home office. Should this test be satisfied, you must then meet the usual standards for home office deductions which require that the area in the home used for business must be used regularly and exclusively as well as regularly and continuously. Then, and only then, may you claim a deduction of pro-rated rental expenses and utilities.

  • If claiming a deduction for business expenses, you must maintain an account book, diary, log, trip sheet or similar records, as well as documentary evidence (e.g., receipts and canceled checks) substantiating the amount, time, place and business purpose of your expenditures.  The so-called Cohan rule that allows taxpayers to estimate the amount of certain business expenses may not be used for travel, meals and entertainment expenses.

  • Expenses reimbursed to an employee under an accountable plan are not included in taxable income and, therefore, you may not claim a tax deduction for these expenses.  Reimbursements made under a non-accountable plan are treated as taxable wages and reported on Form W-2; you should claim an off-setting deduction for these business expenses based on the rules outlined above.


33. Is it possible for US citizens living abroad to claim an exclusion in excess of the annual threshold set for the Foreign Earned Income Exclusion?
Is it possible for US citizens living abroad to claim an exclusion in excess of the annual threshold set for the Foreign Earned Income Exclusion?

Yes. The Foreign Housing Exclusion (FHE) may be claimed in addition to the Foreign Earned Income Exclusion (FEIE), resulting in a combined exclusion that exceeds the annual threshold. The FEIE is set at $99,200 in 2014 and is indexed annually for inflation.

US citizens who live abroad continue to have a tax reporting requirement in the US but may, if eligible, exclude a portion of their earned income from wages and self-employment from taxable income.  They must satisfy either the Bona Fide Residence (BFR) test or the Physical Presence (PP) test; each mandating that the individual has lived abroad for a requisite period of time.  In the case of the BFR, the taxpayer must have lived in a foreign country for one full calendar year and, therefore, will only become eligible for the exclusion in the second year after his departure from the US, at the earliest.  He may instead qualify under the PP test if he has lived abroad for at least 330 days in any consecutive 12-month period of time.  TIP:  A taxpayer may amend a prior-filed return or file an extension to allow the requisite number of days and months to accrue before submitting his return.  However, if he has amassed fewer than the necessary days in any particular tax year, he must reduce the maximum allowable exclusion on a pro-rata basis.

For example, a taxpayer moved to Germany on August 20, 2013 and plans to remain abroad through the end of 2014. He will have been physically present in Germany for at least 330 full days during the 12-month period ending August 20, 2014 but only 134 days in 2013. As a result, his foreign earned income exclusion for 2013 is limited to $35,831 (134 days ÷ 365 days × $97,600).

Additionally, qualified individuals may also claim an exclusion (or deduction, if self-employed) for reasonable housing costs such as rent, repairs, utilities, insurance, occupancy taxes, furniture rental and parking. The exclusion is limited by a government-calculated base amount as well as a maximum threshold; in 2014, for example, only those housing expenses which exceed $43.48/day but are less than $81.53/day are eligible, resulting in a maximum allowable exclusion of $13,888. The IRS allows a greater threshold for taxpayers living in certain high-cost cities.

Using Form 2555 to claim the various exclusions, the taxpayer will be required to claim the housing exclusion first, then reduce his earned income by the amount of FHE claimed, and finally calculate his allowable FEIE based on the reduced income he just computed. If his foreign earned income is sufficiently high, the taxpayer will be able to benefit from a combined FHE and FEIE that might well exceed $99,200 in 2014.


34. Is it possible to appeal an assessment for increased Medicare premiums?
Is it possible to appeal an assessment for increased Medicare premiums?

Yes. If you disagree with the notice issued by the Social Security Administration (SSA) demanding that you pay a higher premium amount, you have the right to request an appeal in writing by completing Form SSA-561-U2 Request for Reconsideration.

Your appeal will be considered only if you experienced one of these eight life-changing events:

  • Death of Spouse
  • Marriage
  • Divorce or annulment
  • Work reduction
  • Work stoppage
  • Loss of Income Producing Property
  • Loss or reduction of pension income
  • Receipt of employer settlement payment


Professional Help
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35. How do I choose a professional tax preparer?
How do I choose a professional tax preparer?

The IRS offers numerous tips when choosing a return preparer and reminds taxpayers that even if someone else prepares your return, you are legally responsible for what is on it. Therefore, you should make sure to check the preparer's qualifications and verify that he has a Preparer Tax Identification Number (PTIN) which all paid preparers must have. Ask if he belongs to a professional organization and attends continuing educations classes. You may want to check with the Better Business Bureau as well as the state board of accountancy (if he is a CPA), the state bar association (if he is an attorney), or the IRS Office of Enrollment (if he is an Enrolled Agent). Ask about service fees and avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers can. Make sure you will be able to contact the tax preparer after you file your return, even after the April 15th due date and throughout the year.

Here are 10 tax preparer red flags to avoid (excerpted from Forbes):

  1. Tax preparers who do not have a PTIN (Preparer Tax Identification Number). If your preparer doesn’t have a valid, current PTIN, he is not allowed to prepare that return.
  2. Tax preparers who do not sign the return. If the preparer doesn’t sign your return (electronic signatures count), he is not allowed to submit the return.
  3. Tax preparers who insist that you mail your own tax return. In some limited circumstances, it may be necessary or desirable to mail in your tax return the old-fashioned way. Most preparers, however, are required to submit prepared returns electronically.
  4. Tax preparers who promise a higher refund than last year when your situation didn’t change. Tax rates didn’t move much from 2013 to 2014. If your refund is much higher than it was last year and your situation didn’t change much, your preparer might have inflated your deductions.
  5. Tax preparers who want you to sign a blank tax return. You are signing the return under penalty of perjury. You need to review it before you sign it.
  6. Tax preparers who want you to direct deposit your refund into an account that doesn’t belong to you.
  7. Tax preparers who base their fees on a percentage of your refund.  Fees may be based on a number of factors from type of return to the number of schedules and complexity, but tax preparers may not “compute their fees using any figure from tax returns” (IRS Publication 1345).
  8. Tax preparers who promise refunds by a certain date. The IRS is emphatic that “[t]here are no guarantees” that refunds will be granted within a specific time. Tax preparers who make definitive claims to the contrary shouldn’t be trusted.
  9. Tax preparers who guarantee a refund (or that you won’t owe) even before seeing your tax documents.
  10. Tax preparers who imply endorsement by the IRS. The IRS doesn’t actually endorse any individual preparer although it does recognize certain credentials such as CPAs, attorneys, Enrolled Actuaries and Enrolled Agents (arguably, EAs are the closest to endorsed preparers as IRS comes since the Enrolled Agent license is actually issued by IRS) and the newest designation, the AFSP, or Annual Filing Season Program; you can refer to the IRS partner page for details about different kinds of credentials.

The IRS further advises taxpayers to willingly provide the preparer with records and receipts and additional data that can help the professional determine your total income and your qualifications for deductions, credits and other items. You should review the completed return and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it. Never sign a blank return. And check that any refund due is sent to you or deposited into an account in your name; never into a preparer's bank account. Make sure the preparer signs your return, includes his PTIN and gives you a copy of the return as required by law.

Lastly, know that you may report abusive tax preparers and suspected tax fraud to the IRS.


36. What is a Registered Tax Return Preparer?
What is a Registered Tax Return Preparer?

[UPDATE (2/21/13): Preston Benoit, Deputy Director of the Return Preparer Office, has just announced that due to a January court ruling, the IRS no longer recognizes nor endorses the RTRP credential.]

With its Return Preparer Initiative in 2010, the IRS attempted to impose standards for return preparers as well as institute testing and continuing education requirements. The initiative required all tax return preparers to register with the IRS and obtain a Preparer Tax Identification Number (PTIN), as well as required preparers who were not already licensed or certified as Certified Public Accountants, attorneys and Enrolled Agents to pass a 120- question competency test on or before December 31st, 2013 and complete 15 hours of continuing education credits annually. Arguing that these requirements would place an unfair burden and cost upon small and part-time practitioners potentially forcing them out of business, a suit was filed to enjoin the IRS from enforcing its mandate. On January 18th, 2013, a judge ruled in favor of the plaintiffs [Loving vs. IRS] forcing the IRS to suspend its testing and certification program indefinitely pending a successful appeal or Congressional intervention. NOTE: The PTIN requirement was not affected by the ruling remains in effect.

Robert Kerr, a senior director of government relations at the National Association of Enrolled Agents and proud defender of the credentialing program, explains that the "IRS was trying to create a world in which a taxpayer that hired somebody to prepare a return… could be reasonably comfortable that the preparer ha[d] some knowledge… fundamental competency and basic understanding of ethics." Kerr interprets the recent judicial ruling as "a victory for preparers who don't know or don't care to demonstrate the minimum amount of competency, who don't care to stay up to date with the ever-changing tax laws and who are comfortable letting their clients shoulder the cost of that."

Stay tuned for news and ongoing developments!>


37. What are the continuing education requirements for tax professionals?
What are the continuing education requirements for tax professionals?

The IRS mandates the following continuing education requirements for different types of tax professionals:

  • Enrolled Agents: 72 hours every three years; including a minimum of 16 hours per year (2 of which must be on ethics)
  • Registered Tax Return Preparers: 15 hours per year, including 2 hours of ethics, 3 hours of federal tax law updates and 10 hours of other federal tax law

Attorneys and CPAs are not subject to these rules, but are required by state and professional licensing boards to take similar courses to maintain their licenses. In addition, non-signing return preparers supervised by Attorneys, CPAs, or Enrolled Agents are exempt from the continuing education requirement as are tax return preparers who do not prepare any Form 1040 series returns.


38. Can my tax professional provide information to third parties, including mortgage brokers, financial planners or family members?
Can my tax professional provide information to third parties, including mortgage brokers, financial planners or family members?

No. Third parties are responsible for performing their own due diligence rather than relying on a representation or verification of information by a tax professional. This is especially true when the requested representations are outside the scope of the professional's engagement and the requested verification relates to information that comes from the client, for which the professional has no first-hand knowledge. Additionally, the responsibility for underwriting a loan and determining the creditworthiness of the borrower lies with the lender — not the client's CPA.

Protecting the confidentiality of client information is required under professional ethics standards, the Gramm-Leach-Bliley Act, the Internal Revenue Code, state board of accountancy rules or regulations, and federal and state privacy statutes and regulations.


39. Can you help me select a financial planner?
Can you help me select a financial planner?

Yes. Although there are many different types of planners, with different credentials, different areas of expertise and different methods of compensation, your selection will depend ultimately on the trust and rapport that you can establish with any given financial expert. Tax experts tend to focus their advice on tax-related matters, whereas financial planners tend to focus on the investment angle, and attorneys, of course, on the legal issues in question. Most advisors are not equally competent in all areas. Some planners are compensated on a fee basis, for example hourly or a flat rate for a professionally compiled plan. Others are transaction-oriented and will only be compensated if you implement the advice given with them. Although it might seem that one method would be better than another or that one would yield fewer potential conflicts of interest, I tend to believe that a good financial planner seeks to build successful long-term relationships with his clients; therefore, his immediate compensation becomes almost irrelevant as long as his ultimate goal is to do right by the client. That's of course, where your trust comes into play.

Typically, it's best to work with a planner who has been referred by a friend, an associate or another professional upon whom you've come to rely. You have the right to interview the prospective planner—although you should not expect to have a long list of technical questions answered by the planner in your first meeting, you may certainly ask generic questions about his level of expertise, his experiences and his philosophies. If you're comfortable with what you hear, schedule a follow-up meeting.

As my existing client, you have yet another alternative: Me! You know me as your tax advisor who has earned your trust and had the privilege of providing you with tax consulting and preparation services. However, what you may not have known is that I am also a part owner of a registered investment advisory firm and that I offer investment consulting services as well. Able to draw on all my areas of expertise, including tax, finance, and law), I can provide you with comprehensive counseling and assist you with your investment, retirement and estate planning needs.


Read about my credentials and services and then contact me for a free initial consultation.

Satisfied clients have said:
"My affairs are in 'good hands' with you."

"Monica Haven has been preparing my family's taxes for roughly 10 years, and she does a great job. My husband and I work in entertainment and computer graphics. We sometimes have pretty complex and detailed taxes. She always does a great job and often catches things we have forgotten or overlooked. She really knows her area, and she's fun and friendly to boot. We wholeheartedly recommend her."

"Thanks SO much, as always, for your help with all this. What would I do without you?!"

This Office Promises You:
  • Professional expertise
  • Personal attention
  • Year-round service
  • Confidentiality


I'm often asked questions and always happy to address each one. Frequent inquiries or those that would seem to be pertinent for everyone are listed here. If you do not find your issue addressed here, feel free to call or e-mail. I will respond promptly.

Disclaimer: The information contained herein should not be used in any actual transaction without the advice and guidance of a professional tax advisor who is familiar with all of the relevant facts of your personal situation since the information is general in nature and not intended as legal, tax or investment advice but is merely educational. Furthermore, the information contained herein may not be applicable to or suitable for an individual's specific circumstances or needs and may require consideration of other matters. To ensure compliance with certain U.S. Treasury Regulations note that, unless expressly indicated otherwise, any advice in this website relating to any federal or state tax issue is not intended or written to be used and cannot be used by any person for the purpose of avoiding any federal tax penalties. Monica Haven assumes no obligation to inform any person of any changes in the tax law or other factors that could affect the information contained herein. And Monica Haven does not offer legal advice or services in any jurisdiction in which she is not licensed; nothing herein should be interpreted as the creation of a fiduciary or client/attorney relationship. This website is not intended for use by viewers in any state in which the site may fail to comply with the regulatory and ethical restrictions imposed by that state.