Dear Tax-pert:
I am a small business owner and I use my car quite a bit for business, but I don’t like to keep track of my miles. The 10 year old kid down the street says I can just make up some mileage numbers and the IRS will never know. Is this true?
Dr. Mike, Austin, TX
Dear Dr. Mike:
Expect the IRS to be a much more aggressive in the near future. Whereas in recent years, you may have “gotten away with” making up mileage numbers, don’t count on it anymore. The IRS requires that you keep a detailed log of your business mileage, documenting the number of business miles, where you went, who you saw, the date of the trip and the nature of the trip. If you are a QuickBooks user, there is a feature that will help you document this information. And no more visits from Aunt Saly (Same As Last Year). She is no longer welcome. Business auto mileage is a highly audited item, so if you are claiming this deduction, you must have substantiation.
Dear Tax-pert
I was having dinner with one of my friends the other night and we got to talking about taxes. She said her tax preparer took a deduction for the drop in value of her 401(k). Am I allowed this deduction?
GF, Austin, TX
Dear GF:
Simply answered, NO. Every one of the returns that that tax practitioner prepared may be subject to examination by the IRS. Taking a deduction for the drop in value of a 401(k) is illogical on so many levels. When an employee contributes to a 401(k), that employee is already taking a deduction from taxable income. And what happens when the 401(k) goes up in value? Is the taxpayer going to somehow declare additional income? No way! If it sounds too good to be true, then it is probably too good to be true. Stay away from tax practitioners that make up their own tax laws… you will only get into trouble.
Dear Tax-pert:
I paid my neighbor’s kid $30 to mow my lawn. I’ve heard about the nanny tax and household employees. Do I have to make this kid a household employee?
Marty H, Austin, TX
Dear Marty:
No need to panic. There are a few loopholes that will exempt you from having to treat this individual as a household employee:
- If you paid the individual less than $1,600 for all of 2010, you do not have to treat him as a household employee.
- If the individual is under 18 and his principal occupation is not household employment, you do not have to treat him as a household employee.
- Agency provided workers are generally not treated as household employees. So, if the neighbor’s kid is an employee of a yard service company, or is self-employed in the yard service business, you do not need to make him a household employee.
Dear Tax-pert:
My realtor told me that when someone lives in a property as a primary residence for two years, the income they receive when they sell is tax-free. If they live in the property for more than 1 year before they sell, the tax rate is 10% and if they sell within the first 12 months, the tax rate is 20%. Is this true?
Jeff E., Austin, TX
Dear Jeff:
Tax laws are very complicated and it is very important that you consult a tax professional before making any major decisions that could have an impact on your taxes. Your neighbors, spouse, best friends, co-workers and hair stylist have good intentions, but most likely, they don’t know the intricacies of the tax law. With that said, let me answer your question:
As a general rule, if you have lived in your primary residence two of the last five years preceding the sale of the home, you can exclude up to $250,000 of gain from your income, $500,000 if you are married filing a joint return. If you do not qualify for this exclusion, you will pay capital gains tax on the profit. If the home was owned for more than one year, the maximum capital gains rate is 15%; if you owned your home less than one year, the capital gains rate is whatever incremental tax bracket you happen to be in. With just about every tax law, there are exceptions to the law and exceptions to the exceptions. Please consult a tax professional in matters of taxation.
