Job Hunting Expenses Deductible?

In case you have been sleeping the last couple of years, times are tough. Unemployment is in the 10% range (depending on where you live) and under-employed rates are estimated closer to 16 or 17%. Face it - a lot of people are looking for work.

In certain cases your expenses you incur hunting for that new job just might be deductible to lower your income taxes. Of course there are a few rules....

• Same occupation - you must be looking for a job in the same occupation that you were working in. If you are looking for a change in the work you do, then no deductions. That makes it pretty difficult for those coming from an occupation with excess capacity (e.g., home building). By the way, the same rule applies to educational costs - if the education is to permit you to work in a different occupation (with very narrow definitions for education) then the expense is not deductible.t
• Not your first job - expenses you incur to obtain your first job are not deductible. If you think about it, this is a repeat of the previous bullet. After all, your previous occupation was probably a student - high school, college, whatever. Or maybe homemaker - same thing.
• Travel expenses - these might work, but you must be careful on this one. Spending half a day looking for a job during a week stay in Hawaii won't cut it. To deduct these expenses your personal time on the trip (i.e., time not looking for a job) should be minimal.
• Minimum break in the action - if you take very much time off you will disqualify the deduction. That does not mean you must find that replacement job soon, but you must start looking pretty soon.

So what kind of things are deductible? It includes items such as resumes, referrals, job counseling including interview training, fees to employment or placement agencies, and as indicated above sometimes travel expenses.

These expenses are potentially deductions from income, not tax credits. This means you must be itemizing your taxes to take advantage of it.

While this sounds great, remember that all such issues in taxes are always subject to the facts and circumstances in each case. You would be best to discuss this with a tax professional, and I'd suggest an Enrolled Agent (and that name will likely change later this year). But when you discuss this with your tax preparer, remember when they discourage the deduction it is not because they are trying to maximize your taxes. Their job is to help you avoid being on the wrong end of an examination by the IRS or state authority. Lay out the facts, and take their advice.

Asset Expensing for Small Businesses

When a business purchases some asset (e.g., computer, desk, truck, shelving, etc.) the business cannot necessarily write that purchase off as an expense. The tax rules dictate that if the asset is projected to last longer than a year, then the expensing must be spread out over multiple years. This process is called "depreciating" and it can cause the eyes to roll backwards for business owners and some tax preparers as well.

There is a provision, however, that allows small businesses to expense these items in the year that the asset begins to be used (not the year it is purchased). The code section is 179 and you will hear accountants and tax preparers talk about "179ing it."

Currently this provision is limited to small businesses. The way that is done is by setting a phase out based on total purchases. Currently a business can "179" or expense up to $250,000 in purchases providing total assets purchased are not excessive. By the time total purchases reach $800,000 the maximum expensing allowed is reduced to zero.

Both Democrats and Republicans agree that this provision is good for a sputtering economy and are interested in raising those limits to reach more businesses. Currently the target levels are up to $500,000 in purchases expensed being phased out to zero when total purchases reach $2,000,000.

This is worth watching if you are a business owner. While passage is likely, it isn't the law until it becomes the law. We'll watch Congress to see what they do.

Stock Dividends Taxable - At What Rate?

Under current tax law qualified dividends are taxed at the lower capital gain rates. For taxpayers in the lower two brackets (10% and 15%) those are taxed at a whopping 0%! For other individual taxpayers the rate is 15%. Unfortunately, that will end after 2010 unless Congress changes the rules. Unless changed, the current law will return those rates to ordinary income beginning January 1, 2011. That means the rate could be as high as 39.6% - more than double the current tax rate. Beginning in 2013 there will be an additional tax on the higher income taxpayers raising it 2.8% more.

What are qualified dividends? It is the dividends paid on stock you own for 60 days before and after the dividend date. More importantly, it generally applies to mutual funds, where most casual (and many savvy) investors invest their money.

Senate Finance Committee Chairman Max Baucus (D-Mont) has stated that Congress must address this dividend rate. Without action, the tax increase will hit most income levels in our country. Most in Congress seem to agree. The question is do they make a short-term change of two years, for example, to give Congress time to develop a comprehensive plan? Or make it permanent? And how to manage the offsets?

I think it is fairly safe to expect a change, at least affecting taxpayers with total income of $200,000 or below. But for now we do not know what it will look like.

And of course, Congress has failed to act before when everyone agreed that action was needed. Look at our current Estate Tax situation....

More on Estimating Taxes - This time for the Wealthy

Here is a short note for the wealthy taxpayers in California. To most of us this does not apply.

Many are familiar with the "safe harbor" tactics to avoid penalties for under payment of our estimated taxes. Some are a bit tricky to predict, except for the one that compares our estimated taxes to the total tax liability of the prior year. For most of us that hurdle is 100% of the prior year. For those in the upper class it is 110% of the prior year's tax liability.

But now there is a new group - those with income over $1,000,000. Beginning with 2009 there is no longer a California safe harbor by comparing to last year. If you hope to avoid under payment penalties, you must make payments exceeding 90% of your current year's tax bill (which you do not know yet).

And as always, at all levels of income, you cannot just wait until April to pay last year's taxes and avoid those penalties. It must be paid through out the year at the current required rate (which seems to change each year in California!).

Good luck!

Guessing Your Tax Bill

We're past the half-way mark of 2010. For those whose primary income comes from wages or salary, your tax payments are taken out of your check. But for many they must estimate their future tax bill and make estimated payments. The second one of those is now late - it was due June 15.

Problem is, what will your taxes be? This is not the normal issue of the year not being over. That is easily resolved by making estimated payments for the quarter based on income of the quarter.

No, this is a bigger problem. Many tax provisions are expiring (or expired) and while we expect these to be renewed, Congress has not done that yet. Will they? This year? Next year? Who knows - yet you need to know that for estimating the tax liability.

So what kinds of things are we talking about?

• Tax on dividends
• AMT (typically a yearly adjustment - but how much?)
• Capital gain rates (The President promised no change for incomes below $250k/year. OK, make that $200k/year. Well, maybe $175k/year. But Congress hasn't balanced the books on those provisions yet.)
• Energy credits (not all, but some)
• Direct charitable contributions from your IRA (over 70.5 years of age)
• Estate tax issues
• Property tax deduction with the Standard Deduction (not itemizing)
• Educator income adjustment ($250 for classroom supplies)
• College tuition income adjustment (not the credits - that's different)

These are but a few that impact individuals. Sure, there has been a bill or two introduced to address various sets of these, but none have gone very far, and most get pet project attached that ensure they will not pass without time-consuming changes.

Now Congress is about to take off for the summer, and then there will be the election recess, and, well, it looks like a bunch of stuff might hit in December from the lame duck Congress. That means the IRS will have little time to update all the forms, and the problems will just ripple from there....

One would think those in Congress didn't have to pay taxes or worry about such things. Wait, maybe that's too close to home........

A Cash Business

Ever wonder how many business around you deal primarily in cash? And if they do that to facilitate not reporting their income for tax purposes? This has some interesting ramifications....

Of course we all know that failing to report any income for tax purposes is income tax fraud. (Some people mistakenly think you are not required to report income below some threshold, such as $600.) Sometimes people think about such tax fraud as simply cheating the IRS (or FTB or whatever your state authority is called). In reality, you cannot cheat the IRS - they are just a business office. You can only cheat your neighbors and other citizens who end up paying your share.... But I digress....

Some "cash businesses" have discovered that they hurt themselves more than they helped. Many of these owners are nearing retirement and figured to sell their business in order to finance their retirement. The problem is, their business will not sell for much. Why? Because it has not been reporting much income. Buyers insist on seeing filed tax returns to determine the value of the business. If it was not reported, then it doesn't exist. Otherwise it is taxable.... (And you thought I was heading into the "no credits" area for Social Security.)

But there are other problems too. Over the last 2 months we've watched with horror the problem in our Gulf states due to the oil spill. This is not the place to address whether such drilling is appropriate or not, but we will take the position that a company is responsible for the damage it causes. One of those restitution moves is to compensate the citizens of that area for lost wages, earnings, or however they buy their groceries or pay their rent or whatever. I'm not sure how smooth the mechanism that BP set up is working, but again that's not the issue here. It turns out that a lot of business in that area is done on "cash." That's right, a good part of that is not being reported. Whether that is unreported revenue for a business or unreported wages to the employees, it is not in the system. You guessed it - not recorded? Doesn't exist. And why would you expect BP to pay compensation for what was never lost in the first place?

This of course is making a terrible situation even worse. But frankly, the people in the area did choose to operate outside the law. They have been cheating the citizens of the US, so now do they want us to compensate them for doing that? What a mess!