The *hypothetical* income tax thread

[Owensdad]

Tis the season...

Teh BARF:

If you have a theoretical income tax question, *general* guidance will be suggested. Keep in mind this is a public forum.

Nothing in this thread constitues tax advice within the meaning of IRS Circular 230. Nothing in this thread is intended to be used, nor may be used to avoid any penalties imposed by the IRC.

My interpretation of your question may be wrong, so consult your tax advisor for guidance with respect to your specific fact pattern.

NO PROJECTIONS. There are simply way too many facts that need to be considered to offer a useful estimate of anybody's tax liability over teh interwebs.

Now, fire away!

 

[DucatiHoney]

I really don't want to pay my taxes. How do I achieve this with impunity?

Thanks in advance,
the duc'hon

 

[two wheel tramp]

No, make tax season go away.... :cry I handed our company's stuff off to my accountant. It's his problem now. :x

(I fugging :love our company accountant. He is TEH awesome and he likes Henry Rollins.)

 

[Owensdad]

I really don't want to pay my taxes. How do I achieve this with impunity?

Thanks in advance,
the duc'hon

You're self employed, no? Dump everything you can into a retirement plan. Defined contribution limits are somewhat constraining. Consider a defined benefit plan (a traditional pension) if you are certain you will be cash flow positive and can meet the funding requirements.

The tried and true method to pay no tax is to have no taxable income, but that tends to have negative livestyle consequences for individuals. (No Ducs :thumbdown )

 

[gnahc79]

Gas mileage deduction is straightforward right? Wife has a business and drives out to clients' homes. We have the date and address of all appts. First time doing this and it looks fairly painless.

 

[Owensdad]

Gas mileage deduction is straightforward right? Wife has a business and drives out to clients' homes. We have the date and address of all appts. First time doing this and it looks fairly painless.

You have two options: take the standard mileage deduction, or the actual business percentage of the cost to operate the mixed use (personal/business) vehicle. Once you chose a method you generally have to stick with it.

Almost always the standard mileage deduction is easier (and more beneficial). Exceptions to this general rule would include vehicles that are very expensive to operate and vehicles that are almost exclusively used for business purposes.

Recordkeeping is critical to support business use of any mixed use asset: keep a mileage log, print maps to show distance, etc.

 

[DucatiHoney]

(No Ducs :thumbdown )

This is unacceptable. The Ducs are not negotiable. :x

 

[Owensdad]

No, make tax season go away.... :cry I handed our company's stuff off to my accountant. It's his problem now. :x

(I fugging :love our company accountant. He is TEH awesome and he likes Henry Rollins.)

Actually, it's still your problem.

Stay involved. Expect follow up questions. If you get none, ask what assumptions he made. No set of financial data is without ambiguity.

Are you a cash basis tax payer? Did your financials indicate accounts receivable and payable? Inventory? How did he handle those balances?

If you send him a trial balance and you get a tax return back with no questions that would make me wonder.

 

[mikev]

at what point does it become beneficial to drop a couple hundred bucks on a professional rather than go buy turbotax or the like? Is it an income amount, or various other stuff?

 

[Owensdad]

at what point does it become beneficial to drop a couple hundred bucks on a professional rather than go buy turbotax or the like? Is it an income amount, or various other stuff?

That's a tough question...

If your tax preparer would only charge a couple of hundred bucks you can probably get by with self preparing using software (I like TaxAct, FWIW).

Things to consider: Self employed? Lots of capital gains/losses? Stock based compensation? Passive income (rental properties)? A lifestyle change (marriage/divorce)? Beneficiary or trustee of a trust/estate? Make any large gifts?

If your answer to any of those is yes, I'd seriously consider a qualified, licensed tax preparer (EA, CPA, Attorney). My personal opinion is that you'll get the most value out of a tax preparer if you use him/her for many years.

 

[Ducky_Fresh]

Can i write off a car lease?

 

[UDRider]

This is unacceptable. The Ducs are not negotiable. :x

Then move to Russia become friends with Putin.

 

[silverbelt]

Are there going to be any deductions for home improvements to improve energy efficiency? E.g. water heater, furnace, insulation, etc?

 

[bluenoser]

Based on tax law changes, am I going to need more lube, less lube, or about the same amount of lube as last year?

Now for de serious question: Last year's refund check is listed as this year's income. What's the best way to handle this payout?

 

[Marlowe]

Foreign Income:

As a contractor, I had a hypothetical client in 2011 that might been overseas.

Being an overseas company, they don't provide a 1099. I, of course, hypothetically tracked all my income (and hypothetical reimbursed business expenses.) -- I'd assume someone would just report this as additional income on their 1040 and not worry about it too much?

Likely to get audited for same?

Also, likely to get audited for counting bank fees associated with such a payment (say, international wire fees) as an expense?

My hypothetical taxpayer thanks you in advance.

 

[Owensdad]

Can i write off a car lease?

You can if you are self-employed and you use it for business. You cannot deduct amounts that reach into the class of "luxury automobile".

Be prepared to be shocked at what the IRC defines as a luxury automobile. The bar is low.

There may be certain tax benefits to leasing hybrids not used in a trade or business, but I'm not current on those.

 

[Owensdad]

Based on tax law changes, am I going to need more lube, less lube, or about the same amount of lube as last year?

Now for de serious question: Last year's refund check is listed as this year's income. What's the best way to handle this payout?

If you itemized your deductions in a year where you took a benefit for your state taxes that subsequently generated a refund, that refund is taxable.

If you did not benefit (ie deduct) your state taxes in the year that generated the refund it is not taxable.

Federal income taxes produce no benefit (they are never deductible) and when refunded they are not taxable.

 

[Owensdad]

Foreign Income:

As a contractor, I had a hypothetical client in 2011 that might been overseas.

Being an overseas company, they don't provide a 1099. I, of course, hypothetically tracked all my income (and hypothetical reimbursed business expenses.) -- I'd assume someone would just report this as additional income on their 1040 and not worry about it too much?

Likely to get audited for same?

Also, likely to get audited for counting bank fees associated with such a payment (say, international wire fees) as an expense?

My hypothetical taxpayer thanks you in advance.

I don't think you have much to worry about. Keep good records and report all of your income.

If you happened to pay foreign taxes on that income you probably will receive a US tax credit for those foreign taxes, and your effective tax rate will normalize as though that income was only subject to US tax.

Couple of points to highlight:

Be sure to answer accurately on any tax form that asks about "foreign source income" (if you performed these services in the US this is probably NOT foreign source, if you performed these services abroad it probably is foreign source).

If you have foreign financial accounts (bank, investment) you may have to comply with additional reporting requirements and disclose those accounts even though it will not result in additional taxes (only stiff penalties if you do not report them, like really stiff).

 

[Owensdad]

Are there going to be any deductions for home improvements to improve energy efficiency? E.g. water heater, furnace, insulation, etc?

In the past there was a tax credit for home energy improvements... (lemme do some quick research)...

Yes, this has been renewed for 2011. I'm sure there are myriad limits and restriction, however.

Report these creditable improvements on Form 5695 (and be sure to read the instructions).

 

[two wheel tramp]

Actually, it's still your problem.

Stay involved. Expect follow up questions. If you get none, ask what assumptions he made. No set of financial data is without ambiguity.

Are you a cash basis tax payer? Did your financials indicate accounts receivable and payable? Inventory? How did he handle those balances?

If you send him a trial balance and you get a tax return back with no questions that would make me wonder.

Oh hell no. I printed out our 200+ pages p&l for him, which he'll go over line by line. He asks a million questions. I had our old, no questions asked accountant fired. I'm responsible for getting our information 100% correct. I talk to our accountant about once a month and we meet quarterly. :love