Well actually, it is not the IRS, but individuals representing themselves in e-mails as the IRS.   These must be on the increase as I get more inquiries from clients asking is this legit.  The short answer is NO. 

These phishing scams, to get information from you to be used for fraudulent purposes, start in the form of an e-mail that appears to be from the IRS.  The e-mails can be very official looking with the IRS logo in it, and alert you to some problem with your filings or payments.  Common problems are inability to process your tax return, rejection of your payment, or a delay in processing your refund. 

The remedy in the scam is to go to a website listed in the e-mail that will then try to get you to divulge personal information to fix the nonexistent problem.  These website references may be very official looking and even have the letters IRS in the address.  As you can imagine, if they can trick you into divulging name, address, social security number and maybe some amounts from your tax return, it is a short next step to using your personal information for fraud.   At this time the IRS never sends you an e-mail asking you to go to a website and enter personal information.  So, never go to the websites, just delete the e-mail.

However, to end on a positive note, the IRS does supply a lot of information to taxpayers through the internet.  For a long time IRS.gov has been a very informative and easy to use website.  Use the search feature in the upper right hand corner to find what you are looking for.  You can also get a tweet from Twitter @IRSnews, watch a You Tube video, or get information on your mobile phone with the app IRS2Go.

In a recent Tax Court case a taxpayer was denied a deduction for business use of his automobile for lack of substantiation.  In addition he was charged an accuracy related penalty because he could not prove an absence of negligence or that he acted with reasonable cause.  This reinforces again the need for adequate substantiation required by the Tax Code, which includes

• Amount of the expense
• Time and place
• Business purpose

In this case the taxpayer was self employed and drove to his customers in various states.  The taxpayer did not have one vehicle dedicated to business use, but had multiple vehicles available for business and personal use.  He kept a log that showed beginning and ending mileage each day (so far so good).  However, he omitted the places he stopped and the business purpose.  In order to take a deduction for business use of your personal automobile, you must maintain documents and records that in corroboration support each of the elements of the business use.

Of the three years involved, the taxpayer had lost the first year log and even though he offered a bookkeeping record and sampling of invoices the court ruled that the evidence was not sufficient.  In the second year the log stated different mileage than was used in his tax return.  For the third year the log matched the tax return, but he failed to make any notation of the destination or business purpose of the trip.  The logs of the last two years were inadequate to establish a deduction and the court ruled the taxpayers corroborating testimony was vague and unpersuasive.  

The moral of the story is that if you want to take a business deduction for use of your vehicle, take a little extra effort with a log by date that document the mileage, destination and business nature.

The Tax Relief /Job Creation Act passed December 2010, extends to 2010 & 2011 certain tax incentives that had expired at the end of 2009.  Although this is welcome news for most taxpayers, it means the IRS now has to make programming changes to be able to process 2010 tax returns.  If your tax return includes any of the following three

1. Schedule A Itemized Deductions
2. Teachers deduction for class room supplies
3. Deduction for Higher Education Tuition

then you will not be able to file your tax return until the IRS completes changes to the forms and processing software, which they expect to complete by mid to late February.  This presents a couple of problems.  If you are due a refund, this will delay getting your refund.  If you use a tax professional to prepare your return this will compress an already busy time of year for him or her.   My suggestion is to not delay in getting your information together so that you can file as soon as the IRS gives the word.  Your  tax professional can prepare your return and have it ready to e-file as soon as the changes are made.  This will assure that you are in the queue and will not be left out. 

This is another example of the problem of passing temporary tax law scheduled to expire at some time in the future, but then maybe extended.  In addition to the 2009 provisions that are now extended, we now have additional tax provisions for 2011 that will sunset in future years unless extended or made permanent. 

I am old enough to remember when income tax law was enacted and the provisions did not expire at some future date.  Of course it was always susceptible to being changed by a new tax law sometime down the road, but at least you could plan based on current law that was in effect.  In recent years politicians find it easier to pass income tax reductions that will only be in effect for a few years so that they can minimize the negative impact on the budget, at least on paper.  The income tax cuts enacted in 2001 and 2003 will be expiring at the end of 2010 unless congress extends the provisions.  It’s possible that the existing tax cuts will continue as is, or if congress does nothing they will expire at the end of 2010. I don’t pretend to know what the outcome will be but most expect some, or most, of the tax breaks will be extended except for so called “wealthy” taxpayers with income over $250,000 or some similar amount.  By the way, that’s not my definition of wealthy; maybe “well off”, “comfortable” or some such description but not “wealthy”.  Of course the group is easier and more politically correct to describe as wealthy.

Even though no one knows where future income tax rates are going, I don’t think I am going out on a limb to say that in general the tax bite will be more, not less, in the future.   Regardless of whether you believe current government spending is necessary for the economy, the fact remains that at some point in the future we will need more revenue to pay for the current actions.  The normal tax planning concept of delaying income to the future and accelerating expenditures where possible may not work for most.  Quite the reverse may be true.  For instance, if you are considering converting a traditional IRA to a Roth IRA, you may want to consider paying the tax in the current year rather than taking advantage of being taxed over two future years.  Another example is  that Section 1031 exchanges that defer capital gains to future years may not be as attractive, as capital gains are almost sure to increase.

In general , I think the income tax laws are broken.  No one would design such a complex and expensive to administer program on purpose.  It has grown that way over the year as it is continually tweaked.  Although, some sort of VAT or national consumption tax would make more sense to me, I don’t see how politically that could be accomplished.  And, if it was, it would only be a matter of time until the politicians morphed it into something complex and expensive to administer.

For anyone who thinks they missed out on tax credit money for buying a home, the tax credit has been extended and expanded.  As discussed earlier, the initial first time home buyer tax credit was an abomination since it required that it be paid back (in essence an interest free loan).  That was wisely amended to be an $8,000 credit that was not repaid, except under certain circumstances.  That law only applied to homes sold before December 1, 2009.  Now effective November 6 there is an extension of that law into 2010 and an expansion of who qualifies.

The basics as the law existed prior to November 6, 2009:

·         Refundable tax credit = to 10% of purchase price of home not to exceed $8,000

·         Only applied to a home purchased for a principal residence

·         Only available to first time home buyers (defined as not owning a home in previous 3 years)

·         Credit phased out once  Modified Adjusted Gross Income reached $75,000 for single and $150,00 for married filing jointly

·         Home had to be purchased (actual closing) prior to December 1, 2009

 Changes effective November 6, 2009:

·         Purchase before May 1, 2010.  However, if there is a contract to purchase before the May 1 date you have until June 30, 2010 to close the contract.

·         The Modified Adjusted Gross Income amount is increased to $125,000 for Single filers and $225,000 for Married filing jointly

·         Taxpayer can elect to treat a qualifying purchase in 2010 as taking place December 31, 2009 and claim it on their 2009 tax return

·         Purchase price of the home is limited to $800,000. No portion of the credit is available for homes over this amount

·         Credit now applies to existing home owners purchasing a home that will be their principal residence, but

o   The credit is capped at $6,500 rather than $8,000

o   The buyer has to have owned their home as their principal residence for 5 consecutive years in the 8 years prior to the purchase of the new residence.

This is just the basics and there are other provisions such as extending the date even further for military personnel and requiring repayment if the home is not used as a principal residence for 3 years.  There have been abuses of this credit and the new law gives the IRS math error authority to disallow the credit during processing.

This is traditionally a slow period for home sales.  Cost of the credit aside, it should help stimulate home purchases and the resultant ripple effect of other parts of the economy. 

In the Austin Texas area, Williamson County  still has a viable real estate market.  Of course it depends on the specific area and price range as to how healthy the market is.  I am convinced that what little real estate downturn we have had is over.  Of course, I have been wrong on occasion in the past, otherwise I would be on a sailboat somewhere in the world.  A lot of the talk about the housing market being depressed is focused on greater inventory of homes for sale and less sold transactions.  Statistics from the Williamson County Board of Realtors also bear this out.  However, the median sold price for May 2009 presented by the Williamson County Board of Realtors, is higher than any May in the past.  

Here is my interpretation of this.  You don’t need to sell your home for a deeply discounted price, and there are still people buying homes.   So why are some homes sitting on the market for a long time while others are selling quickly?   When there are more homes than usual for sale in an area, buyers can be extra picky about buying.  Consequently, if you are selling a home you need to make it as desirable as possible.  There are some things you cannot change or items that would be cost prohibitive to change.  If your home has a small yard, there is little you can do to attract a buyer who is insistent on buying a home with a large yard.  However, you can make the home more desirable by doing some inexpensive landscaping that may make it more appealing.  Everyone can make their home more appealing to buyers in some way.  When there are lots of homes on the market, the one you are selling needs to be the one that looks like the new home builder’s model.  Minor repairs, paint touch up, etc. need to be done so that your home stands out from the rest.  In this market, I think every home needs the service of a professional stager.  Some real estate professionals have staging credentials and others work with someone who has this training.  You may think you can do this yourself, but it is different than decorating your home to live in.  A stager will look at your home with an eye towards the best presentation to a prospective buyer.  Most of the time, this is different than the way you would have the home arranged and decorated for living there.  But, at this point you are concerned about what the buyer wants, not what you like.  There are definitely people buying homes, you just need to make yours appear to be the best choice.

There are a lot of people that have business use of their auto and are entitled to take a deduction on their tax return.  Whether you use the standard mileage amount or deduct the business percent of actual expenses, the tax law requires that you keep records documenting your business use.  Many people are under the impression that they can just estimate how many miles they used their car for business, or estimate what percentage of the total miles driven was for business.    With the current mileage rate at $.55 the deduction can be a sizable amount.  If you have 10,000 miles of business use that amounts to a deduction of $5,500.  Not chump change as they say.  Given the amounts that can be involved, I would suggest it is worth a little effort to keep the required records.

Even if it obvious that you used your auto in business (say a person making calls on customers), unless you have the required documentation there is no provision in the law for allowing deduction based on estimations after the fact.  The requirements are that you keep a mileage log at the time the mileage is incurred that shows mileage and the business nature of the auto use.  Some people don’t want to keep a log because it is too much trouble or too time consuming.  Some resort to trying to reconstruct business mileage a month or year later.  This does take a lot of time and trouble (in addition to not being in accordance with the IRS rules).  I am old enough to remember when people didn’t use their seat belt because they didn’t want to take the time and trouble to fasten it.  Now when almost everyone uses their seat belt, that argument seems a little silly.  You can adopt a procedure for keeping a mileage log that is almost as automatic as fastening your seat belt and takes only a little more time. 

If you keep a mileage log handy in your car you can develop a habit of making notes in it when you start your car (just add it to the task of starting the engine and fastening your seat belt).  First, what is a mileage log?  It is simply a record of your mileage with a description of the use.  You can purchase a booklet from an office supply store that will have places to write the pertinent information (date, mileage on the odometer, where you traveled for what business purpose).   Or, you can make your own using MS Excel or some other program.  I keep mine on Excel on my phone.  You can also get apps for your phone to record your mileage but I prefer using Excel so that I can easily customize it to fit my needs.

The basics are the odometer reading, date, business purpose and the calculated miles driven.  You don’t need to write a minute by minute of where you drove, just enough to identify the business use.  In the case of documenting your mileage, more is best but some is better than none.

Well, finally something that makes sense; removing the general requirement to pay back the tax credit for first time home buyers.  For a home purchased between January 1, 2009 and November 30, 2009, the amount of the tax credit is increased to a maximum of $8,000.  It would have been a boon to the housing market to have extended the credit to all home buyers, but I can see that it was probably too big a hit on tax revenues.

If you bought a home prior to January 1, 2009, the previous rules apply, but here are the rules as amended in the stimulus package.

·         The amount is increased to a maximum of $8,000.  10% of the purchase price not to exceed $8,000.

·         Only for first time home buyers.  Defined as anyone who has not owned a home in the last 3 years.

·         The requirement to pay the amount back is eliminated as long as you keep the home as your principal residence for 36 months.

·         The credit starts to phase out for taxpayers with adjusted gross income in excess of $75,000 for single filers and $150,000 for joint filers.

·         The tax credit is a refundable credit, meaning that the full amount you are eligible for is receivable, even if it exceeds your tax liability

·         The credit is claimed on either your 2008 or 2009 tax return.  You have the option of claiming the credit on your 2008 tax return even though the purchase took place in 2009.  If you will be buying a home after April 15, 2009, you may want to consider getting an extension for filing your return so that you can take the deduction in 2008.

Now, since the automatic repayment feature has been eliminated this is a helpful credit for those that qualify.  The ability to buy a house in 2009 and claim it immediately on a 2008 return speeds up getting the benefit to the home buyer.

If you are one of those people that have multiple residence and are thinking of unloading some of them, sooner is better than later.  Maybe with the weaker economy you want to cut back to fewer homes or just tired of travelling about from home to home.

As many people are aware you can sell your primary residence and exclude up to $500,000 in gain when married filing jointly.  One of the requirements of this exclusion is that you must have lived in the residence for two of the five years prior to the sale.  If you had several residences and you wanted to sell one, a common practice was to establish the home you wanted to sell as your primary residence for two years before selling so you could exclude the gain.  If you wanted to sell more than one, you just repeated the process. 

A new law closes this perceived loophole.  Now gain from periods of “nonqualified use” will be taxable.   Nonqualified use is the period of time the residence was not used as your principal residence.   So, the taxable portion of the gain is a percentage determined by dividing the nonqualified use by the total use.  For instance if you owned a home for 10 years but only lived in it as your principal residence for 2 years then the nonqualified use period would be 8 years.  Consequently, 80% (8 / 10) of the gain would be taxable.   But there is some good news.  The nonqualified period only applies starting January 1, 2009.  In the above 10 year ownership example, say you established the home as your principal residence January 1, 2009 and sold it January 1, 2011 (two years as your principal residence).  The maximum excludable gain would apply since there was no unqualified use after January 1, 2009.

 So, if you are planning on selling one of your homes and want to exclude gain, the sooner you establish it as your principal residence, the shorter the nonqualified use period will be, and consequently the more gain that could qualify for exclusion.

Of course this is the nutshell version of the law, and there are other requirements not mentioned above.  Before taking any action you would want to understand how your particular situation fits the actual details of the law.