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Can I Deduct the Cost of My Work Shoes? And More Tax Q&A – Ask the Tax Pros 11/8/12

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On Thursdays, CPA and Vice President of Corporate Tax Network, Gary Milkwick and his team, answer tax questions for free on the LegalZoom Facebook Page. Did you miss the last Ask the Tax Pro? Don’t worry. We’ve got it all right here.

James: As an employee at a hospital, I wear athletic shoes as a part of my uniform. Things get messy and I sometimes need to buy another pair. How many pairs of shoes would I be able to claim as a work related expense?

Corporate Tax Network: James, In order to deduct the cost of work clothes, the items need to be specific to your job and not normally used for everyday use. For example, steel toes shoes used by a construction worker would be deductible, or if you wear a blazer with the name of your company on it. Athletic shoes would be considered normal clothing, and though they get messy, purchasing them would not be a tax deduction.

Wally: me and my wife have been at our house for 2 years can we get tax credit when we file our taxes this year

Corporate Tax Network: Hello Wally, I’m not sure which credits you might be talking about. If you are talking about energy credits, they are available for large-scale energy saving programs such as solar panels, but there are no federal general credits because you are a home owner. Could you be more specific?

Sondra: What are all the tax percentages that a self employed, independent contractor, pays at years end?

Corporate Tax Network: Hi Sondra, For 2012, the self employment tax is 13.3% up to $110,100 and 2.9% on any amounts in excess of $110,100. It is expected that the 13.3% will increase to 15.3% in 2013 since the 2% reduction will expire at the end of 2012.

The income taxes range from 10% to 35%, based on your taxable income.

Scotty: I work and live in a apartment community and get a percentage off my rent. But the company adds over $200 onto my check every pay period to be taxed then they take the monies added right back out therefore making it look like I make a lot more than I do. Is this legal? And will it hurt me on my tax return?

Corporate Tax Network: Hi Scotty, It sounds like you are providing services to the community and getting a reduction in the rent because of those services. If that is the case, then the rent reduction may be shown as additional income.

Chadwick: Is it legal to start multiple S Corporations and split income among them to keep earnings below $250k each in order to avoid the tax hike?

Corporate Tax Network: Chadwick, You can start multiple companies, but since an S-corp is a “pass-through” entity, your taxable income will be the total of the income from those companies and will be reflected on the shareholder’s tax return. Splitting up the income among various S-corporations will not achieve the outcome you are looking for.

Bobby: In light of the depressed housing market that appears that it will be down for years to come, and with the volatility of investments in our current economic state, would it be beneficial to pay down rental property at higher interest rates or keep the mortgages for the tax incentives and cash liquidity?

Corporate Tax Network: Hello Bobby, You should compare your after-tax rate in your investments, to the after-tax rate you are paying on the mortgages. For example, if you are paying 6% on mortgages and you are in the 25% tax bracket, you are effectively paying 4.5%, after taxes ( 6% times 1-.25). If you think your personal investments will do better than 4.5%, you should keep the mortgages. Otherwise, you would be better of paying down the mortgages.

Daniel: Created biz with LegalZoom a year ago. Haven’t actively pursued any business as was working overseas for the whole year. Question: Where would I find out if I have to pay any taxes or any other paperwork for a business that has had zero activities in the State of Nevada?

Corporate Tax Network: Hello Daniel, Every corporation and partnership has an annual filing requirement with the IRS. Although Nevada does not have a state income tax, it does have an Annual Report with a minimum fee of $100. There is a filing penalty if you do not file your returns. You can check your compliance status in Nevada by going to http://nvsos.gov/sosentitysearch/

Jennifer: Is there a true “capitol gain” tax if you sell your home before 2 years? And after the 2 years, will there be a tax inforced that’s higher due to the elected president?

Corporate Tax Network: Hi Jennifer, If you live in your primary residence for 2 years or more during the 5 year period ending on the date of the sale, you can exclude $250,000 ($500,000 if married) of gain from the sale of the home. If you do not meet that time limit but have a gain on the sale, you would report the gain as a capital gain, long or short term, depending on the holding period. You can not take a capital loss when you sell your primary residence since it is treated as a personal asset.

Beginning in 2013, there will be additional tax of 3.8% on net investment income, if your gross income exceeds $250,000, for married, or $200,000 if single. Net investment income would include interest, dividends, and capital gains.

The tax is based on the lower of 1) your net investment income for the year; or 2) the excess of your income above the dollar limits mentioned above.
So, if your investment income is $10,000 and your gross income is $280,000 and you are married, the 3.8% tax would be on the $10,000, for a tax of $380.

Kay: For tax purposes, which LLC classification is better S corp or C corp? Its a sole prop small business that just recently transitioned to LLC.

Corporate Tax Network: Hi Kay, if one of the classifications for an LLC would have been better than others in all situations, then we would only have one type of entity. So this really depends on several factors. With a single member LLC your options for tax purposes are either a sole proprietorship, S Corporation or C Corporations. I would not recommend a C Corporation because it is a tax paying entity where you pay taxes, once at the company level, and again on the money you take out as dividends. So your choice really comes down to a sole proprietorship or an S Corporation. Which one of these to take, really depends on the level of income your company generates, and your overall tax situation as reported on your individual tax return. The main differences include self employment tax for sole proprietors, which does not apply to S Corps, but instead, S Corps have payroll filing requirements. I would recommend you discuss your own individual tax situation with your tax advisor to determine pros and cons of these two choices as they pertain to your individual situation.

Chris: If someone were to receive a multi million dollar gift, what would be the first things to do? How much can you give away with out being taxed and how often? What are good investments to make? Last one, where is the safest places to keep your money? I know someone who may be receiving a large gift but doesn’t know what to do.

Corporate Tax Network: Hi Chris, Through 2012, a donor can make lifetime gifts up to $5,120,000 without paying any gift taxes. IRS form 709 would need to be filed by the donor for a gift of that size. If the donor exceeds the lifetime limit, there is a gift tax paid by the donor.

The current gifts tax exemption is scheduled to expire at the end of this year and a lower amount may be set by Congress.

Your friend may want to interview several investment advisors to discuss a suitable strategy that meets his or her goals and risk tolerance based on age and personal situation.

Melanie: I was an 1 person S Corporation. I closed the books in 2011 because there no work and I could not keep it up. I switched to sole proprietor and filed the fed paperwork to become an LLC in august 2012. I have not however paid the 95 dollars to become an LLC in the State of GA. 2013 I will bring in 150k and want to know if I should remain an LLc disregarded entity or LLC treated as an S corporation. Looking for the best tax scenario.

Corporate Tax Network: Melanie, it sounds like you have not organized an LLC with your state and simply obtained and EIN from the IRS. This does not establish a limited liability for your company and you’re simply operating as a sole proprietor. If you would like to have liability protection you are encouraged to organize as an LLC. What you can also do is utilize your S Corporation for your new business activity because it sounds like you have not officially dissolve the coroporation. Depending on whether you have any other earned income personally, you might be able to reduce how much you pay in employment taxes, if you operate as an S Corporation, as opposed to a sole proprietorship. This however depends on your actual business activity and how much the reasonable salaries are in your particular field. Also, if you go ahead and organize as an LLC, you can elect for it to be taxed as an S Corporation for tax purposes while legally remaining an LLC.

Neicy: Can i be held liable for my ex husbands taxes if i filed married but seperate? He ended up owing money back and at the time we were still married.

Corporate Tax Network: Neicy, If you filed separate returns when you were married, you will not be liable for your ex husband’s taxes.
If the back taxes are from returns when you filed jointly in the past, the IRS will keep your refund and put it towards the back taxes.

Amanda: My husband and I usually files taxes together, but with the recent health care changes I am not sure if we still should. He is unemployed with no insurance right now so from my understanding my tax refund will be effected if we file together due to his lack of insurance. Right? Should he just file saying he made nothing or just not file?

Corporate Tax Network: Amanda,

If your husband does not have health insurance you will be imposed an IRS penalty and if you don’t pay the penalty the IRS can withhold your refund, but no other course of action is taken against you. If he does not have income to report then there is no filing requirement, but tax wise it will benefit you to file married filing jointly to be entitled to exclusive credits only available to married couples.

I strongly suggest speaking with your accountant to see which option is better for you. Again, this law will be in effect starting in 2014.

Maggie: YES, MY QUESTION IS … LAST YEAR FILED TAXES WITH THE SAME PERSON . USED SAME PERSON FOR MANY YEARS. WELL WHEN SHE FILED SHE ENTERED WRONG SOCIAL, IRS EMAILED HER AND SAID SOCIAL DIDNT MATCH NAME, AND THAT I HAD TO CALL SOCIAL SECURITY AND VERIFY WHO I WAS, WHICH I DID, SHE RE-FILED. WITH CORRECT SOCIAL NUMBER, THEY SENT HER ANOTHER EMAIL , AND SAID NAME DIDNT MATCH,, WE HAVE NOT GOTTEN OUR REFUND CHECK FOR LAST YEAR. AND ITS ALMOST TIME 2 FILE AGAIN.. WHAT NEEDS 2 B DONE 2 GET LAST YEARS REFUND CHECK????? THANK U,.

Corporate Tax Network: Maggie, sorry for all the trouble you have had. If you have not received any written correspondence on the matter, you will need to contact the IRS directly to see where things stand.

The number is 1-800-829-1040.

If you received a letter from the IRS, there should be a contact number on the letter you can call.
Good Luck!!

LegalZoom: That’s a wrap for today’s tax Q&A with Diana Shaginyan of Corporate Tax Network. The tax pros will be back next week to answer more of your questions. Join us then!

http://zoo.mn/AskTheTaxPro

 

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November 12th, 2012 at 5:44 am