Tax Info Blog

Unemployment Compensation Not Subject to FICA

Q: Will my unemployment compensation be subject to FICA taxation?
Kyle V.

A: No.  Unemployment compensation is not considered wages, so it is not subject to FICA taxation.  You do have to pay full federal income taxes on unemployment compensation (though many states exempt it from state income taxes).  Similarly, unemployment compensation is not considered earned income for purposes of making IRA contributions or receiving the earned income tax credit.

Switching Between Standard Mileage and Actual Expenses

Q: I know the IRS prohibits one from using the standard mileage system unless it's used the first year the vehicle is placed into service.  I claimed actual expenses the first year, but would like to go back and amend that return to claim standard mileage (so that I can use mileage for all future years of the vehicle).  Can I do this?
John E.

A. For those needing to know the basics on this, first read my piece on auto expenses.  According to IRS Publication 469, you're out of luck.  You must elect to use the standard mileage rate by the due date of your return, including extensions.  The choice is also irrevocable, by the way.

IRS Releases Cost of Living Adjustments

The IRS released their annual cost of living adjustments, which can be found here.  This updates everything except for health savings accounts (which can be found here) and Social Security/pension plans (which can be found here).  The brackets are inflation-adjusted every year, so they will be reflected later when the blog is updated.  Some other highlights are below:

Developed Nations' Tax Burdens Reach Record High

The tax burden of OECD nations has reached an historic high, back to the levels last seen in 2000.

Wedding Hiatus

I'm having to take a few days off for my wedding.  For those interested, the wedding website is www.jointfilingceremony.com.

In the meantime, I have gotten a ton of questions on the HSA contribution limits, so I will be doing a post on that.  The IRS also came out with the official inflation adjustments (the big news being that the 401(k) dollar cap is unchanged for 2008 at $15,500). 

Does Married Filing Separately Provide An AMT Escape Hatch?

Q: If my wife and I file as married filing separately, will that make us less likely to get hit by the AMT?  We each make about $150,000 per year in salary and have $55,000 in joint deductions.
Uncle Sam

A: Those that haven't do so yet should first read my posts on the AMT and the married filing separately status.

It almost never makes sense to file as "married filing separately," since you lose out on all the benefits I describe in that piece.  Furthermore, things phase out faster and the bracket widths are more shallow. 

What about AMT?  Assuming Congress indexes AMT exemptions to current law, this won't help you, either.  Both the AMT exemption and AMT brackets for married taxpayers filing separately are half that for joint filers.  I suppose there are some cases where filing separately might help, but that would be a fluke. 

Bottom line: don't let the AMT tail wag the tax dog.  Max out your 401(k), make your charitable contributions, don't tap your home equity, and you'll be fine.

Commuting Expenses Are Never Deductible

Q: I am an independent contractor with one client.  Can I deduct my travel costs to and from work?
Mike

A: Commuting expenses (defined as your first daily trip from your residence to your place of business) is personal and never tax-deductible.  As a contractor, though, you have an easy way to get around this: ensure that you have a qualifying home office.  If you can set this up, your "commute" is from your bedroom to your home office, and any travel after that to another office is deductible. 

One major problem you run into is that you cannot have a home office and another principle place of business.  Therefore, you might want to take another tactic--get in the habit of going to a bona fide business location related to your work (the post office, the office supply store, etc.)  Any travel after that would be deductible.

The basic rule always applies: don't change your life for tax benefits, but construct your activities in such a way that they can become tax-advantaged.

Finding Old Municipal Bonds

Q: How do I find copies of old municipal bonds purchased by a relative?  They don't expire until 2011.

A: These old records (especially when you're dealing with a deceased or infirm family member) are often the trickiest things to find.

In this case, the best thing to do is to contact the state treasurer's office that issued the bonds in the first place.  If you can provide basic contact info, approximate date of purchase, etc. you should be fine.

For tax purposes, remember that any bonds inherited benefit from the step-up in basis rules.  This means that your basis in the bonds is the higher of the original bond purchase price or the fair market value on the date of death.  Of course, municipal bond interest is also free of federal tax (and state tax if you live in the state the bond came from).