Tax Info Blog

Can Parents Be Dependents?

Q: My wife sends a check back home to Colombia, S.A. to support her retired, disabled parents.  Is it possible to deduct the amount she sends as a dependent exemption?
Patrick

A: Let's broaden the answer to see if parents in general can be dependents of their children.

The answer is yes, under limited circumstances.  For more info, read the post on dependents.  Read more...

Per Diem Rates or Actual Expenses the Better Method?

Q: In your view, is there a benefit from a corporation perspective to use per diem rates (both for lodging and MI&E) instead of actuals for travel expenses?
Sam

A: Companies, when reimbursing employees for travel away from home, are allowed to issue per diems for meals and incidental expenses, as well as lodging.  Click here to see the current rates, which vary by region.  Let's get our hands dirty and take a full treatment of this subject...

SEP-IRA vs. Solo 401(k): Which Is More Flexible?

Q: I have a SEP-IRA.  One of the things I like about it is the flexibiity of contribution. Some years I can make the maximum contribution, some years I am not able to make any contribution.  Is the self employed 401(k) similarly flexible?  Would I be able to make the maximum contribution during one year and not be obligated to make any contribution the next year?
Ripper

A: Since you have an owner-only plan in place, the only real issue here is the form of your business.  If you are a sole proprietor, the flexibility is identical.  You can make the contribution at any point before the filing deadline, including extensions.  This includes both the employer contribution and the deferral.

If you are a corporation or an S-corporation, you must make sure that your elective deferrals are deposited by December 31st.  You still have until the deadline to make the employer match.

The bottom line is that the self-employed 401(k) is like a SEP plus a deferral.  No reason not to have one, in my opinion.

Handy New Rollover Chart Produced

I've linked permanently to a handy "rollover" chart that McKay Hochman Co., Inc. has produced.  Believe it or not, some tax-advantaged accounts don't roll into other tax-advantaged accounts (even those that are tax-advantaged the same way, like Traditional IRAs into SIMPLE plans).  With the passage of the Pension Protection Act in 2006, this isn't as common a problem as it used to be--but it's still an unnecessary pain in the butt.

IRS Publishes "Frivolous Argument" List

Every year, one of the funny precursors to tax season is the publication of the "frivolous" tax argument list.  This list contains the most common crackpot arguments about how people don't really need to pay taxes.  Here's the link--it's worth the ten minutes of reading to see how stupid some people are.

Standard Mileage Plus Interest? Ah, No

Q: We are filing a partnership return this year. We took the standard mileage rate for the partnership. Can I also use the interest on my automobile loan on personal income tax return?
Kim

A: Nope.  Read my post on auto expenses.  If you take the standard mileage rate, this subsumes all actual expenses except business parking and business tolls.  Everything else--including interest--is subsumed within the standard mileage rate.  Secondly, personal interest (with the exception of mortgages and margin loans) is not deductible for individuals.

***Quick Update*** Self-employed taxpayers are allowed to deduct pro-rated car loan interest and property taxes as a business expense, along with taking standard mileage plus parking and tolls

What's interesting is whether or not a general partner is considered "self-employed." 

Can Personal Service Corporations Pay for the Owner's Health Insurance

Q: What about Personal Service Corporation owners?  Is the cost of their health insurance deductible 100% by the corporation?
Craig

A. Absolutely.  Readers should first familiarize themselves with my post on PSCs.  Like all corporations, PSCs can pay for 100% of the insurance costs of their owners.  The big downside of being classified as a PSC is having to pay a flat, 35% corporate income tax rate.

Rental Property Tax Reporting

Q: I own three vacation rental properties which I manage (no personal use). Typical rentals are weekly. Do I report income/losses on Schedule C or E?  If schedule C are they subject to SE taxes?
Scott

A: For those that need a background on rental property issues, read my post here.

The default is for all rental property income and deductions to be reported on the Schedule E.  This is true no matter how many properties you personally own.

The only time you would report rental properties as a business (on the Schedule C), and therefore subject to self-employment tax (but also eligible for retirement plan contributions and the health premium deduction) is quite a narrow one (from IRS Publication 527, Residential Rental Property):

If you provide significant services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ, Net Profit From Business. Significant services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc.

If You Have to Raid the Piggybank: IRA or 401(k)?

Q: I know you're never supposed to raid your retirement assets, but which one is less harmful in a real pinch--your IRA, or your 401(k) plan?
Anonymous

A: You're damned right you're not supposed to.  I can't believe I'm even answering this question, since there are few higher crimes in my mind than robbing your own retirement security.  Nonetheless, it does come up from time to time, so let's dive into all the implications...

Can An Independent Contractor Use a Flexible Spending Account (FSA)?

Q: Can an self-employed independent contractor use a flexible spending account (FSA)?

A: Those who don't know about FSAs should first read my post on the topic.

These use-it-or-lose-it health cost accounts (not to be confused with the highly superior HSAs) are available to employees.  Invariably, they are administered as part of a payroll payment system in what is called a "125" or "cafeteria" plan.  Thus, employees of independent contractors could have FSAs.

The self-employed themselves, though, are denied this perk.  Self-employed people don't pay themselves a salary.  Rather, they pay self-employment tax and income tax combined on their tax form.  No paycheck, no FSA.