Tax Info Blog

SEP Fallout on Amended Returns

Q: Tax Playa, I have to amend some old returns to claim depreciation on a home office for my sole proprietorship.  As a result, my net income from self-employment will decline.  I contributed the max to my SEP-IRA given that higher level of net income, so this will result in my having contributed too much.  What do I do?  Is there any penalty involved?
D.B., Somewhere USA

A: This is an excellent question, and an example of the nitty gritty of tax prep that I love.  The basic answer is that you will have to pay an excise tax of 10% for the extra contribution.  However, you will be able to roll the extra contribution into a future year's SEP-IRA limit...

Is Depreciation Optional?

Q: Tax Playa, I own a rental property, but don't want to worry about taking depreciation deductions.  Can I opt out of them?
Bill, Huntington VA

A: Depreciation is technically optional, as is any deduction.  However, you are required to "recapture" depreciation claimed or that could have been claimed.  Therefore, not taking depreciation when you are entitled to is a costly mistake...

Married Filing Jointly or Married Filing Separately?

Q: Tax Playa, we're poor actors in LA.  Should we file as married filing jointly or married filing separately?
Mike and Julia, Los Angeles CA

A: There are almost no scenarios in which it is more advantageous to file as "married filing separately."  Indeed, doing so disqualifies you from most of the breaks tucked into the tax code...

Is Taking a Home Office Deduction Always a Good Idea?

Q: Tax Playa, my spouse is active duty military. I work from home. We are new home owners. (2 yrs).  If I deduct my home office this year, what are the drawbacks for doing so?  I have always deducted a home office when renting a home, but never when owning it. Last year I skipped the whole topic because I didn't understand it. This year I don't want to throw away the deduction if it won't potentially hurt us. We are due to transfer in the next one to two years and may have to sell the home. What do you suggest?

A: Taking a home office deduction is usually one of the best things you can do, but there are narrow circumstances in which it doesn't make sense: if you plan on selling the home in a short period, or have a home office separate from the structure...

Treasury "Blue Book" Released

The Bush Administration's Treasury Department recently released their "blue book" of revenue measures for the year.  This is a rather dense document, but I thought I would take the time to update it for you.  If you want to get into any technical details, be sure to pour into the document.  If you have any questions on provisions, let me know and I will answer them.

Disaster Areas: When Even the President Says You're Screwed

Q: Tax Playa, what are the rules on disaster areas?
Carrie, Naples FL

A: There are some particular tax advantages for disaster areas, particularly those affected by hurricanes Katrina and Rita.  Most of the areas of help include casualty and theft losses, but there are also others...

Contractor Travel Expenses

Q: Tax Playa, I work as a contractor. I bill the company for my wages and they pay me a "per diem" of $110 a day to cover travel expenses. However, my 1099 includes all money received. Do I have to show it all as income? Shouldn't it only show my "wages"?
Tracy, Somewhere USA

A: This comes up more than one might think.  People who are contractors often have some expenses reimbursed by their payers.  In this case, the payer can either deduct the expenses from their own taxes, or (as more often happens) simply add the expenses to the 1099-MISC at the end of the year...

Schedule C-EZ: The Sole Proprietor Short-Form

Q: Tax Playa, what are the rules for using the shorter business form?  Is there a "standard deduction"?
Chris, Arlington VA

A: Unincorporated single-owner businesses (including LLCs) account for their taxes owed on their 1040s by attaching a Schedule C, Business Income or Loss.  Under certain conditions, a much shorter form can be used: Schedule C-EZ, Net Profit from Business.  This form is much easier to use, but can only be used by a limited scope of taxpayers...

1099-MISC Means Anything But Ordinary

Q: Tax Playa, I hired a kid to do $1000 of research for me and need to deduct it off my taxes.  How do I account for this properly?
Chris, Providence RI

Q: Tax Playa, I did some work for a researcher last year, and got $1000 for my efforts.  He just sent me a 1099-MISC.  What do I do with it, and how do I pay taxes on it?
Henry, Washington DC

A: Anyone hiring a person or unincorporated business for more than $600 in a year must issue a 1099-MISC, which reports that money to the IRS.  Recipients of 1099-MISC income must pay both income and self-employment tax on this money...