Employee Expenses

In case you've forgotten, Mr. DDA is a policeman.

And he comes home with wild stories of tax preparation from the department.

You didn't know that police officers also double as tax preparers?  No?  Just ask them.  They'll gladly tell you all the deductions they're "allowed" to take.

All I can say is that there is a reason you go to your local police department for car seat checks and NOT tax preparation...that pretty much sums up my opinion of their tax advice.

The reason for our contention is the Employee Business Expense deduction.

Many of us are not self-employed and are not entitled to deduct all of our business expenses.  However, the IRC (Internal Revenue Code) does not exclude you entirely.  If you have expenses for your job that are required and not reimbursed, they are deductible...to an extent.  (As is everything, right?)
Pay parking?  It's deductible.
Mileage/Travel?  It's deductible.
Union dues?  It's deductible.
Uniforms?  It's deductible.
Equipment?  It's deductible...maybe.

Basically, anything you buy for your business that you are deducting, has to be 100% for your business.  Parking - typically is at an office building so obviously is for business.  Mileage travel - if it's not reimbursed and your business does not reimburse, then yes.  (You cannot choose.  If your employer reimburses, even if you don't take it, it's not deductible.  Ever.  Period.)  Union dues - self explanatory. 

Clothing/Uniforms - if it's something you cannot wear anywhere else, it's deductible.  Think scrubs, mechanic jumpsuits, steel-toed boots.  Not suits & ties; you can wear those somewhere else.  (Even if you don't, if it could be worn somewhere else, then no.)

Equipment - Here's the catch-all category.  The thorn in my flesh.  See, policemen have this idea that they can deduct ANYTHING!!!  Like a gun - not their duty gun - just a new gun.  Umm...no.  This is my favorite.  Hear it every year. 

Side story:  Mr. DDA actually came home to me and said, "So-n-so said police officers can deduct one new gun a year under the tax law."  And he actually questioned me when I laughed and said no.  (I think I'm going to start telling him traffic statutes.)

See to deduct the equipment, it has to be REQUIRED for your employment and not provided by your employer.  (If you know of a police department that requires you to have anything they do not furnish, I'd like to hear it...cause in almost 30 years of being a law enforcement family member, I've never heard of it.) 

Another biggie that I hear of is computers.  If your business requires you to have a computer and they do not furnish it, it better be used for the business 100% and you should be able to prove it.

I don't have a tax prep business, so I'm not peddling for business.  But if this situation applies to you, seek the help of a professional. 



And no, a police officer is not a professional!!!

Is $250,000 Enough?

Despite what the President thinks, more taxes are not going to solve the financial problems of this country.  This is an interesting article about the "rich," aka those making over $250,000.  And although I'm sure if any of us were given the chance to live off $250,000, it does make the point that it still wouldn't be enough for the average family to live care-free.

This article was reported by Karen Hube for The Fiscal Times.

In the ongoing debate over whether to use tax policy to help resolve the nation's massive deficit, a single number has emerged from the crossfire: $250,000. It's the annual income that President Barack Obama and others have used to define what it means to be "rich" in America today. And while the Bush-era tax cuts were temporarily extended to 2012, when their deadline comes around for the second time, $250,000 will be etched in the minds of policymakers and pundits as the number that separates the middle class from the wealthy.

By most measures, a $250,000 household income is substantial. It is six times the national average, and just 2.9% of couples earn that much or more. "For the average person in this country, a $250,000 household income is an unattainably high annual sum -- they'll never see it," says Roberton Williams, an analyst at the Tax Policy Center, a nonpartisan think tank in Washington, D.C.

But just how flush is a family of four with a $250,000 income? Are they really "rich"? To find the answer, The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public schools, using national data on spending.

The analysis assumes that this hypothetical couple -- let's call them Mr. and Mrs. Jones -- both have professional positions at their companies. They take advantage of all tax benefits available to them, such as pretax contributions to 401k plans and flexible spending accounts for medical care, child care and transportation. They have no credit card debt, but Mr. Jones racked up $40,208 in student loan debt in undergraduate and graduate school, and Mrs. Jones borrowed $22,650 to get her undergraduate degree (both amounts are equal to the national averages for their levels of education). They also have a car loan on one of two cars, and a mortgage for 80% of the value of a typical home in their communities for a family of four, which includes one toddler and one school-age child.

The bottom line: It's not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast. Even with an additional $3,000 in investment income, they end up in the red -- after taxes, saving for retirement and their children's education, and a middle-of-the-road cost of living -- in seven out of the eight communities in the analysis. The worst: Huntington, N.Y., and Glendale, Calif., followed by Washington, D.C., Bethesda, Md., Alexandria, Va., Naperville, Ill., and Pinecrest, Fla. In Plano, Texas, the couple's balance sheet would end up positive, but only by $4,963.

Taxes take a hefty toll. Everything from property taxes and the alternative minimum tax to the taxes added to cell phone bills and the cost of gasoline, when combined, takes a massive bite out of earnings -- in some cases even more than the federal income tax. And it's not likely to get better soon. States and municipalities have been steadily raising income tax rates to help close gaping holes in their budgets. Property taxes are also increasing, even though real estate values have cratered. And sales taxes are hitting record levels, in some areas nearing 10%. Gas taxes, alcohol taxes and hidden surcharges on everything from airline flights and ferry rides to vehicle registrations, rental cars and even sodas have also been stealthily rising.

On top of that, additional tax increases for couples with salaries of $250,000 or more (and single people earning $200,000 or more) are scheduled to go into effect in 2013 under the health care bill passed a year ago. Plus, the Democrats, who supported legislation to raise income tax rates for higher earners last year, will probably push for the same measure when the Bush-era tax cuts expire at the end of 2012.

Thinking about tomorrow

Being in the red on a $250,000 annual salary may still seem surprising. But taking responsibility for their retirement and their children's future is costly. The Joneses are maximizing contributions to two 401k's and to all flexible spending accounts available to them, and they are squirreling away $8,000 a year for their kids' college educations. And their spending is conservative, based on national averages for professional couples with two children. Not included are those hefty run-of-the-mill payouts for charitable deductions, life insurance premiums, disability insurance, legal fees -- or monthly sessions at the hair colorist, or membership at a gym.

As educated professionals, the Joneses buy books, newspapers and magazines; they own computers and pay for Internet access. But they don't take lavish vacations, don't belong to a country club, don't play golf, don't drive luxury cars, don't have a swimming pool, don't buy designer clothes, don't own or rent a second home and don't send their kids to private schools. They don't even shop at high-end grocery markets. (They spend what the U.S. Department of Agriculture defines as a "moderate" amount on food for the average family of four.) In short, they're not "wealthy," even if they're in the top 5% of earners.

In reality, to make ends meet, this squeezed couple would have to cut back on discretionary expenses -- take a pass on a new suit, skip an annual vacation and drop some of their children's activities. Unfortunately, the family would also probably have to save less, at the ultimate expense of their retirement or their kids' educations.

Taxes of every kind

Consider the tax profile of the Joneses when they're based in Huntington, a suburb of New York City. Thanks to all their smart pretax contributions and a fat deduction for mortgage interest and state and local taxes, the couple's federal income tax is only $29,344. But what often goes overlooked is the toll taken by state and local taxes. In this case, it exceeds that of the federal income tax bill: $31,066.

State income taxes, taken alone, are just $10,557. But factor in the gas tax ($2,679), property tax ($15,222), phone service taxes and surcharges ($350), and sales tax ($2,258), and the picture looks far different. Their total tax bill, including the AMT and payroll taxes: $78,276.

"When most people think about taxes, they think first about federal income taxes, then maybe about sales taxes, but there are a lot of taxes out there," says Mark Robyn, an economist with the Tax Foundation, a nonprofit tax research group in Washington, D.C. "It's eye-opening to step back and take a look at the whole picture."

Location is critical

Moving to a state with no income taxes or low taxes in general would help the Joneses' bottom line. In Pinecrest, Fla., a suburb of Miami, they would owe zero state income tax, and pay an annual $10,976 in property taxes, $1,833 in sales taxes and $350 in phone service taxes, for a total state and local tax burden of $13,476. Because they would have no deduction for state and local taxes on their federal tax return, they would have to pay Uncle Sam more than they did in Huntington: $31,768. Still, the total tax burden would be significantly less: $61,621, versus $78,276 in Huntington and $71,683 in Glendale, a suburb of Los Angeles.

But for most people, moving to a low-tax state in midcareer is difficult, if not impossible. People are generally bound to their high-tax states by their jobs. And often it's tough to find high salaries in low-tax states like Florida.

How far the 'big bucks' really go

The $250,000 threshold was first mentioned in a campaign speech by Barack Obama when he was running for president in 2008. "It's an historical accident," Williams says of the number's importance. "I don't think there was any thought given to why $250,000 -- it became a mantra." Whether or not $250,000 represents affluence "depends a great deal upon where you live," he says.

Consider, for example, the tab for the same assortment of ground beef, tuna, milk, eggs, margarine, potatoes, bananas, bread, orange juice, coffee, sugar and cereal. In Twin Falls, Idaho, the cost would be $23.41. In New York City, you would have to shell out 72% more, $40.29, according to The Council for Community and Economic Research. That higher percentage carries across all expenditures, from child care to haircuts.

Of course, housing costs are among the biggest variables. In Glendale, the Joneses can live reasonably well -- but not extravagantly -- in a three- or four-bedroom home valued around $750,000. In Twin Falls, they would need to spend only about half as much for an equivalent home.

After covering taxes and only essential expenses for housing, groceries, child care, clothing, transportation and their dog, the Joneses would still be in the red by $1,787 in Huntington. In Plano, they would have $27,556 to spare. Factor in common additional expenses for a working couple with two children -- music lessons, day camp costs and after-school sports, entertainment, cleaning services, gifts and an annual weeklong vacation -- and the Joneses get deep in the red in Huntington, to the tune of $23,178. In Plano, the best-case scenario, they would still have money to spare, but just $4,963.

Some of the expenses incurred by couples like the Joneses may seem lavish -- such as $5,000 on a housecleaner, a $1,200 annual tab for dry cleaning and $4,000 on kids' activities. But when both parents are working, it is impossible for them to maintain the home, care for the children and dress for their professional jobs without a big outlay.

And costs assumed by the Joneses could be significantly higher if their circumstances changed. For example, if they worked for themselves, they would have to foot the bill for all their medical insurance premiums, which average $14,043. As it is, they pay 30% of the premiums, and their employers pay the rest.

The bottom line: For folks like the Joneses -- who live in high-tax, high-cost areas, who save for retirement and college, who pay for child care to enable them to earn two incomes and who pay higher prices for housing in top school districts -- $250,000 does not a rich family make.

Tax Tip Tuesday

(I've written these blogs and am just now getting around to posting them.)

I have a couple shows that I watch regularly.

But very few that I will not miss.

One:



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Confession: I have watched new episodes of Top Chef on YouTube at work on my smartphone in 10 minute clips.  Talk about desperation.

Two:

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Another foodie show...but I love Scott Conant.  Almost as much as Richard Blais.

Come to think of it, pretty much all of "my shows" are foodie shows.  The only one that is not is...

Three:



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 I know I've talked about this show before.  But hang with me...it does plan into my tax tip.

During the first season, you fall in love with Dr. Hank Lawson, a lovable ER turned concierge doctor. 

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And you get to know Hank's goofy, bean counter CPA brother, Evan R. Lawson, CFO of HankMed.

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Over the past three seasons, I've fallen out of love with Dr. Hank.  Too perfect; too dependable; too boring.  And am head over heels for Evan.  I know...it's fate.

But I wanted to scream at my TV at the end of last season.

CPA Evan decided to lease a brand new 2011 Toyota Sienna for HankMed.  And then proceeded to talk about why leasing is so much better for your taxes.

This is such a common myth among businesses.

They lease everything.

Yes, when you lease you get to deduct the amount of you monthly lease payment.  But it's a horrible financial decision.  You don't pay the bank 100% to avoid paying the government 25%.  Bad math. 

But hopefully not too many people are getting their tax advice from tv.

Let's hope anyhow.

Back with an Equation

Yes, I am still alive.

I apologize profusely, for my absence.  I have been ridiculously busy (ya’ know, working full time, raising 3 kids, going to MI for my brother’s wedding, to name a few.)

I did manage to write a blog…for my sister…

Lot of good it did on this blog though.

But alas, I am back and full of ideas.

Today is Tuesday, which means is Tax Tip day.

Believe it or not, I’m running out of tax ideas.  But this one hit me as I was walking in this morning, pondering the day that lie before me.

I love food.

No kidding – I have a day on my blog dedicated to food.  Has nothing to do with debt – well, you maybe could tie it together if you eat out a lot.  And you don’t usually get good food while getting out of debt.  (Think Beans & Rice!!!)

I also love the self-employed.

They keep this country going.  I envy their flexibility, but at times, am ever so thankful for the steady paycheck.

I also love algebra.  (Side note – I am a bit of a math geek, but not extreme.  I still had to be tutored weekly through Quantitative Methods.  Just thinking about that class makes me throw up a little bit in my mouth.)

So, here’s an equation.

Food + the Self-Employed = x

Alright, I’ll solve it for you.

X = a heck of tax mess if you’re not careful

Meals & Entertainment is a line on the tax return and those expenses are deductible under current tax law.  (Up to 50% to get technical.)

But too many self employed individuals see this line and think every biscuit, every taco, and fry they grab while “on the clock” goes on this line.

Not so my friend.

This line is for meals for yourself if KEY PHRASE: away from home.  Meaning overnight or out of your general area.  Even if you don’t necessarily stay overnight, this could still apply if you are out of your metropolitan area.

And this is for entertaining.  This could be meals, renting a facility, even golf.  KEY PHRASE: if you engaged in business directly before or after the event. 

My one request is not to go buck-wild with this.  Trust me on this one.

Because this is an area of frequent abuse, the documentation requirements are strict. 

You must maintain

1.                  Who you entertained

2.                  Your business relationship with them

3.                  The purpose of the entertainment

4.                  And the benefit you derived from it

Let’s give an example.  (Purely ficticious.)

Joe is a self employed HVAC installer.  Sam is a self-employed contractor.  They meet a homebuilders convention.  Joe invites Sam to a nice steak dinner in hopes to getting Sam to agree to use him on his future jobs.  Joe must not only keep the receipt from the meal, but then make a note of who was there, the purpose (such as – tried to secure agreement to be used on future jobs), and the benefit (such as secured agreement.)  Even if he didn’t necessarily secure the agreement, the meal would still be deductible. 

But one would not expect Joe to continue to take Sam out weekly if he wasn’t benefiting from it.  So if weekly meals were deducted, one would conclude that this was more of a friendship than a business relationship.

See the logic?

If you have a question, think to yourself, would an employed person be able to get reimbursed from their company for this?  A lot of times that clears it up.

This area is often a confusing area for the self-employed and often unintentionally done incorrectly.  (And sometimes intentionally.)   J

So, you can sleep better tonight knowing you did algebra and taxes all in the same day! 

The$e Darn Kid$

Kids are expensive.  Very expensive.

Don't get me wrong.

They are amazing.

But oh, are they expensive.

Mr. DDA & I just had a conversation yesterday that started with this line: “Can you imagine how much money we’d have if we didn’t have kids?” 

Not that I would ever trade the kids for the money, but the old saying is very true.

“No matter how many kids you have, they cost you everything you’ve got.”

As expensive as they are, having kids does have its advantages.

Adorableness all over your house....

An excuse for Mommy to push a stroller around Wal-mart everytime she goes.

An excuse for Daddy to play with his Optimus Prime toy from 1986 again.

But there are even some financial advantages that come with having the little ones running around your home.

Especially when it comes to your taxes. (Though I wouldn’t recommend having them for that reason alone.) 

And even though it’s a drop in the bucket compared to what you actually spend – it helps.

That being said, do you want to know how to use those kids to maximum-tax-advantage?

Then, that's what I'm here for....

We all know daycare costs are through the roof these days.

But did you know that you can lower your tax bill by opening a Flexible Spending Account. 

I’ve touched briefly on this before, but if you have a child in daycare and have access to an FSA – you MUST open one. 

Let me explain.  (In my head, I always say that sentence with a Ricky Ricardo accent….  You probably should too.  It'll make both of us feel less crazy.  And, really, isn't that the point?)

Joe & Jane make a combined $70,000 a year.  They have one child, Justine.  They pay $5000 per year in child care for Justine. 

Option 1:  Get a 20% tax credit for child care costs.  (Credit = reduces, dollar for dollar, what you owe in taxes.)  $5000 in costs translates into a $1000 credit, right?  Nope.  It’s actually limited to $3000 in costs, regardless of what you pay, so your maximum credit, aka tax savings, is $600. 

Option 2:  Open an FSA and have up to $5000 deducted from your paycheck.  This money is pretax meaning you never, ever, ever, get taxed on that $5000 you have earned.  Joe & Jane spend $5000 in childcare, which is the maximum you can have deducted, so they elect to have the full $5000 set aside.  Their tax bracket is 25% giving them a tax savings of $1250.  Double Option 1!!!

This is simple math.  $600 in one hand; $1250 in the other.  Simple way to save some cash, but yet many employees don’t take advantage of this benefit. 

Flex Spending Accounts run calendar year, but I know a lot of employers do their benefit packages in July – hence why I am posting this now.

It can be confusing, but it’s worth the trouble.  Talk with your HR Representative as soon as possible to find out if the option is available to you and how to take advantage of it as soon as possible. 

I Know I Paid That

Update - I did not make shrimp provençal for dinner last night, but I did make pan-seared salmon…which I love almost as much as Julia Child. 

Today is Tuesday.  Which means time for a tax tip. 

I get lots and lots of tax questions.  My phone blows up from February through April.

The rest of the year, I seem to get one repetitive tax question.

“I paid my tax bill, but the IRS is still sending me a bill.  How do I find out where that money went?”

Here’s the problem.  99.9999999% of payments to the IRS are paid by credit card or check. These days, most checks don’t have social security numbers.  Neither do credit card payments.  To the Service, you are that number. 

First, if you ever have to send in a payment, if you don’t have a bill, include at least the last four digits of your SSN on the check.  And either pay it online through your bank or mail it **delivery conformation.**  If it gets lost, the IRS doesn’t care.  If you have delivery confirmation, you can prove that it got there, at least.  Then, it’s not your problem; it’s theirs.

But if you did just sent in a random payment and now need to track it down, here’s how:

1.                  Call 1-800-829-1040.

(First, 1040 – clever, right?)  That number is the taxpayer assistance helpline.  You call them and give them your SSN.  They can pull up your account.

2.                  Ask for a transcript of your account.  Key word: transcript.  You’ll need to tell them what years you need.  (Hint:  Ask for the year before & after what you actually need.)  That transcript will tell them & you if there are any payments applied to your account.  They can fax it or mail it to you.

3.                  Hang up!

Do not get into a conversation with this person about your missing payments.  You are wasting your time.  They are just going to tell you the following steps.

4.                  Get a front & back copy of your check (even if you have to pay the extra money for a copy from your bank) or a copy of your credit card statement.

5.                  Make a copy of your transcript & check/credit card statement.  Address any errors that you’ve noted.  Misapplied payments, payments that are missing, etc.  Mail the copies and letter **delivery conformation** it to the address where your return is/should be mailed to.  (You can look it up at http://www.irs.gov/.) 

6.                  If after six weeks, you’ve received no response, you can call to follow up.  Or, better yet, take all this information to your local Taxpayer Assistance Center.  (Again, you can find the local office on the website.)  You can also do this first, but most people don’t have the time.

Anyhow, I hope you never have to use this post, but if so, just keep this filed away in your memory.

Or, if you’re me,  remember that someone once told you…and then, go look it up again!!!