Today TaxMama® hears from Susan in the TaxQuips Forum with a well-reasoned question. “This concerns a mentally disabled 20-year-old living at home. She just started receiving money from her father’s pension, instead of Social Security Disability. At what point does contributing to the household become income. I contend that as long as you are the SS representative payee and can show that the funds are for their benefit or household expenses then it is not income.

Let me be clear on your question.

Are you talking about a member of the household (the young disabled girl) contributing her share of living costs to the household? And you are asking if the parents should pick it up as income?

You’re right.

Of course not.

She’s not a tenant or a roommate.

She is their daughter.

She is not paying rent, per se, she is paying her share of the groceries, utilities, and, perhaps, the special costs of her own care.

And remember, you can find answers to all kinds of questions about families and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Elisa in the TaxQuips Forum with this question. “I purchased a home in 2009 getting a first-time homebuyers credit. I lived in it for 1 year. I moved to be closer to work and am renting an apartment. I have been renting my house out since July 2010. How will me renting out my house impact my taxes? Am I required to repay the monies received from the first-time homebuyer credit?

Ouch! I truly wish you had asked this question last year. When you rented out your home in 2010, you terminated your right to the First Time Homebuyers Credit. (You had to live in the house for three years.) You needed to include the full repayment on your 2010 tax return. You will need to amend your 2010 tax return and pay it back, with penalties and interest.

I don’t know of any way around this. But, you might get the penalties waived, because the rules were complicated and confusing. If you are very persausive. (I truly hope you mis-typed the year and you actually started to rent it out in 2011 – so you wouldn’t have to amend your tax return!)

As to the impact on your tax return due to the rental? Well, you should already know this. Did you include your rental income on your 2010 tax return?

Regardless, how will it impact you this year? Odds are, you will show a loss. You will report the rental income on Schedule E, page 1. You will deduct the mortgage, property taxes, insurance, and depreciation. If you’re paying any other expenses related to the property, you can deduct those, as well. Most likely, your rent is not high enough to cover them all.

As long you are earning less than $100,000, you will be able to deduct up to $25,000 worth of rental loss in any given year. If your loss is greater than that (you should sell the house), the rest of the loss can be used in future years.

For more information, please read IRS Publication 527 - Residential Rental Property.

And remember, you can find answers to all kinds of questions about rentals, homebuyers’ credits, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from our friend Kristi who is starting a new job. “My new job requires me to wear brown pants and either a certain green or blue shirt. I would only wear these clothes for work. Does that qualify as a uniform?”

Dear Kristi,

Good try, but, Sorry, No.

UNIFORMS are deductible.
Uniforms have the company’s logo on them.
They are generally obnoxious, unpleasant, ill-fitting garments, unless you are Ponch on CHIPS – who tailored his uniforms.

Street clothes of a specific color are not uniforms.

Here is how IRS defines Uniforms:

• You must wear them as a condition of your employment.


• The clothes are not suitable for everyday wear.

Incidentally, IRS doesn’t spell it out, but if you show up for an audit in your uniform, to prove it IS a uniform, IRS has been known to disallow the uniform deduction. Why? Because, since you wore it into the IRS office, clearly, it’s suitable for street wear. I swear. Kind of a Catch-22. They really did that to someone I know!

And remember, you can find answers to all kinds of questions about businesswear and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Trina in the Tax Quips Forum who wasn’t an employee. “I started working for a newspaper company over the summer of 2011, delivering papers to homes using my own vehicle. The company did give me company checks, but they did not take any taxes out. I believe they called their employees “independent contractors.” How do I file my taxes, since there has not been anything taken out?”

Hi Trina,

Yes, I remember seeing those ads in the newspaper about making SO MUCH money per month, early in the morning, delivering newspapers. It does sound tempting, doesn’t it? You get your work out of the way early – then have the whole day to do a regular job, or your studies, or take care of your children. Sigh…it doesn’t really work out that way, does it?

Did you also have to collect the subscription fees? My husband used to have to do that as a young boy. It is common in the newspaper industry to hire delivery folks as independent contractors.

OK, here’s how you report the income.

1) Report the amount on that 1099-MISC on Schedule C, on the long version of the Form 1040.

2) If you tracked the mileage, total up the miles from January – June 30; and from July 1 – December 31, 2011, or the corresponding time period when you worked this job.

a. The miles before June 30 are worth 51 cents per mile x the miles you drove.

b. The miles from July 1st onward are worth 55.5 cents per mile x the miles you drove.

c. Report the total mileage expense on line 9 of the Schedule C.

3) If you have other expenses, like office supplies, other supplies, postage, telephone, etc. you can deduct those as well.

4) Since you were working from home, it’s possible that you may be entitled to office in home deductions. Maybe not, if you didn’t have a specific area where you were working.

5) Once you arrive a net profit, you will be paying self-employment taxes on that profit at 13.3% (only for 2011, it’s usually 15.3% in other years). IRS Publication 334 will provide more information about business expenses.

If you’ve never done this before, perhaps, for this year, you should have a tax pro help you. There are a lot of deductions you might be entitled to use – perhaps even to wipe out your profits.

And remember, you can find answers to all kinds of questions about being in business and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Danny in the Tax Quips Forum with this question. “My kids stay with their mother from Sunday noon until Thursday noon; then stay with me from Thursday noon until Sunday noon. I pay $140 monthly in child support. Can I claim them in my taxes?”

What did you arrange with your ex-wife? Or in the divorce documents? Technically, the children are with her for more than half the year. So she is the custodial parent.

The next question is, who pays more than half their support? I don’t know where you live, but $140 a month doesn’t even pay half the support for one child where I live, much less “children.” (You don’t say how many.) So you’re not paying more than half the support.

It truly does boil down to what you two agreed upon. If your wife signed a Form 8332 relinquishing her right to one or both children, then you can claim one or more of your children. Without that, you’ll have a battle on your hands – and will most likely lose.

I’m sorry to give you the bad news.

But…if you do have more than one child, consider having each of you take at least one child. You will both be head of household and get some nice benefits.

And remember, you can find answers to all kinds of questions about children, exemptions, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Bill in the Tax Quips Forum who raises a good question. “I have a lot of independent distributors asking about deducting their autoship of product for personal use. They say that their tax person said you can claim the deduction because you have to “be a product of the product” or because that is one of the ways to be commission qualified. I say no, because it is for personal use. I know on cost of goods sold that you pull out ‘items for personal use”; but haven’t yet found anyplace that says that you can’t use it anyplace else as a deduction. Does anyone have a ready reference on this?”

Dear Bill,

You’re absolutely right.

And IRS does pursue chains of multi-level marketing organization members once they find one of their ilk taking fraudulent deductions. They also have a tendency to audit all the tax returns prepared by preparers who engage in these practices – and to prosecute – and to publicize those prosecutions.

So you’re making a good call here. Please point your distributors to IRS’s Audit Guide for Direct Sellers. If you look at the INVENTORY section of the audit guide, you will see IRS’s specific statement about personal use. Point that out to them.

• Starter Kit – How does the direct seller account for the cost of the kit and related items?


• Discontinued Display Items – When products become obsolete (discontinued) where do they go? Are they sold at a discount, converted to personal use, or given away as a gift?


• Other Income – For items taken out of the kit and/or inventory and disposed of by sale, where income is reported, and was fair market value or adjusted basis used to calculate income? If converted to personal use or given away as a gift, how is this reported on the books?

And remember, you can find answers to all kinds of questions about direct sellers, MLM, network marketing and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Stephanie in the Tax Quips Forum with a very valid concern. “I’m concerned about this requirement that PayPal report my sales numbers via the 1099-K. The clients I work with will also have to send me a 1099-MISC. Won’t that be income that is double reported? Usually I just enter my total income and ignore any 1099’s I receive since I keep track on my own and claim every last penny I earn. I am Not sure how this is going to work with this new requirement.”

Dear Stephanie,

You are right to be concerned. The new system could very result in double reporting, until people get their accounting systems up to date to separate payments they made via PayPal and credit cards from payments made by check.

There is an easy way around this – and I will show you what to do in a moment. First of all, I applaud you for keeping excellent books. But I must caution you never to ignore the 1099s you receive.

They may be wrong. Or they may report more income than you have received due to timing differences. For instance, a 1099-MISC might include a payment they made on December 31st, that you didn’t receive until the next year. It would be correct from their perspective – but it would too much from your perspective. You must always report ALL the 1099 income you receive, even when it’s too high – to match the number in the IRS computer.

Here’s how – in three easy steps:

1) On the new line for 1099-K income, report all the 1099-Ks you receive.

2) On the line for other income report two sets of numbers:

a) All the income from all the 1099-MISCs you receive.

b) All the other income shown on your tax return, that is higher than all the 1099s you’ve gotten.

3) What’s if the total of the 1099s are too high? Easy. Report the excess income on one of the blank lines on page 2 of your Schedule C (or among the Other Expenses on your corporate or partnership return). Call it “Duplicate 1099 Income.”

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Yesterday TaxMama® started discussing employee reimbursement plans. Today, TaxMama® explains how company reimbursement policies affect tax audits.

Over the years, I have worked on quite a number of audits, often as a consultant to other tax professionals. Sometimes, I have taken over audits of other tax pros’ tax returns because even the tax pros fear IRS.

One of the most important things I’ve learned, when it comes to employee business expenses is – IRS will look at the company’s written reimbursement policy. If the employee is a member of a union, IRS will look at the reimbursement policy dictated by the union contract. Here are some key points that are important to your tax deduction.

1) When the employer’s reimbursement plan says they will reimburse an expense, you must submit the expense to the employer for reimbursement. If you don’t submit the expense, because you think it’s too high, or because the company has an unwritten policy that they won’t reimburse it – you won’t get to take the tax deduction.

2) When you own your own business, as a partner or shareholder, you must have a written reimbursement plan. You must handle your reimbursements based on the written plan.

3) Written plans may have limits. For instance, the employer’s plan may say that they will reimburse all expenses up to $1,000 for the year. Any additional expenses are your responsibility. You may deduct those on your tax return.

4) The written plan must be consistent for all people in the same position or at the same level of the company’s organization chart.

5) When the company’s actual reimbursement practices don’t match the written policy, it’s time to update the written policy to match the practice. If the practice was changed several years ago, update the written plan as of the date the reimbursement practices changed. Memorialize this in the company’s minutes, or other official documents.

It’s important that actions always match the written word. Bring this up with your company’s management. They may be annoyed at first. But in the long-run, they will really appreciate you.

And remember, you can find answers to all kinds of questions about employee business expenses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Josh in the TaxQuips Forum with a complex question about reimbursement plans. So, TaxMama wants to explain the overall concept.

Dear Family,

When you’re an employee, it’s important to understand the difference between the two ways your company can reimburse you for your business expenses – and the different tax costs to you. There are accountable plans and nonaccountable plans.

1) Accountable plans – You turn in all receipts to your employer. You get reimbursed for all your expenses. If you get an advance, you return the difference if your costs are lower. Tax impact? You break even. You do not pay any extra taxes. You do not need to include your business expenses on your tax return.

2) Nonaccountable plan – You get money from your employer, perhaps as a monthly allowance; or perhaps, per trip or event. You use the money cover your expenses and keep any excess. Tax Impact? The full amount of the allowance or advance is included in your wages.

o You pay 7.65% FICA/Medicare and all taxes on those funds, as if they were wages.

o To recoup the income taxes, you must use itemized deductions on your tax return. Often, you cannot, because you don’t have enough other itemized deductions.

o AND even when you do, your expenses are reduced by 2% of your adjusted gross income.

o When it comes to meals and entertainment, you lose 50% of the deduction.

Tomorrow, I will explain more about the company’s written policy and how it impacts a tax audit.

And remember, you can find answers to all kinds of questions about employee business expenses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama hears from Jimmy in the TaxQuips Forum with a distressing problem. “I received a notice from the State of Ohio Tax Bureau that I owe a large sum of taxes for 2004 and 2005. My taxes are taken directly out of my paycheck by my employer and I know that I paid my taxes for those years. However, I filed on my own and cannot find the copies of those returns. The State of Ohio sent this to a collector who sent me a notice that I had 60 days to pay the past due taxes. I have had little success in getting anyone to return my calls. I spoke to a person at the collection law firm who said they would check and get back to me, thinking that maybe the State lost my returns. But no one has called me back. I went onto the Federal Tax site and researched how to get my W-2’s from those years and it is going to cost several hundred dollars per W-2.

My question is this…how can I remedy this is the least costly way? Short of paying a tax attorney for help, is there a way for the “little guy” to prove he has paid his fair taxes?”

Dear Jimmy,

It should not cost you a fortune to get your W-2s. You only need copies of two year’s tax returns with the W-2s – 2004 and 2005. It will cost you $57 per year to get those copies. Use Form 4506 . That’s $114.00 total. (Transcripts of the W-2s are free – but they don’t include state information.)

Since it’s so long ago, it may take a few weeks to get those copies. So, ask the collections folks to put the collections actions on hold until you can prove that you don’t owe this money.

Look what I found for you! The State of Ohio has a problem resolution office. Give them a call and get their help on this. It’s free.

See, this is why I always tell people to keep a copy of all tax returns. Never throw them out! It’s usually the states that do this to you.

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