Top Personal Finance Blogs
Tuesday September 26th 2017

Never Miss Mileage Deductions Again

If you own a small business or are an employee with business mileage, you know that the mileage deduction can save you money on your taxes. The rate is going up in 2011 to 51¢ per mile, making it an even more lucrative deduction. However, keeping track of mileage can be a hassle; forgetting to record trips, having to guess at mileage and keeping up with written logs can be time consuming and stressful. There’s a handy little gadget that can take those problems off your hands; it’s called CarCheckup, and it makes keeping up with mileage virtually painless.

CarCheckup

The device is very small and lightweight; all you do is plug it into the onboard diagnostic port in your vehicle and it automatically records your trips. Any car made in 1996 or later will be equipped with the port. It tells the date, the start and stop time of each trip and miles driven. You download the data into your computer using Excel or the CarCheckup software; from there you can enter a purpose for each trip, whether business or pleasure, and record notes about each trip if you desire. It even allows you to create customized reports. It takes the stress out of providing documentation for the IRS as well; Jennifer Funkhouser, co-founder of CarCheckup, points out that it provides all the documentation necessary.

Other Uses

Besides tracking business mileage, the CarCheckup has other useful features as well – it can be used to monitor teen driving since it tracks time idling, time spent at different speeds, acceleration, hard breaking, etc. It also reads trouble codes in your car’s computer and provides an explanation if your car’s engine light comes on. The $150 price tag for the device seems more than fair for the time and effort you will save and should even pay for itself over time since you will not miss mileage deductions anymore.

Write Offs May Not Last Forever

Take advantage of this and other deductions while you can, though. If the Obama administration has its way, many tax deductions may be reduced or phased out in an effort to reduce the nation’s spiraling deficits. President Obama recently announced that he wants to limit itemized deductions for the wealthiest 2% of Americans; he also wants to reform the tax code. He wants tax reform, both individual and corporate, “that closes loopholes and produces a system which is simpler, fairer and not rigged in favor of those who can afford lawyers and accountants to game it.”

The president supports his Fiscal Commission’s recommendations, one of which would eliminate all deductions and credits. Another option being tossed around is setting a trigger to limit popular tax deductions until Congress can get legislation enacted to reform the code. The administration has stated that everything is on the table with regards to fiscal reform, so it’s likely that we could see reductions or eliminations of such deductions in the future. Until then, continue to take advantage of every tax break available before they disappear.


Can I Deduct the Cost of My Diet Program?

In this tough economy, everyone wants to minimize taxes by finding more deductions. One category of deductions for those that itemize is medical expenses. Medical expenses are entered in the first section of Schedule A of Form 1040. Along with other items like mortgage interest, real estate taxes and charitable contributions, medical expenses can reduce your taxable income. And lower taxable income means lower taxes.

So what are qualified medical expenses? The IRS defines them as expenses for the prevention or treatment of physical or mental defects or illnesses. Generally, things like doctor and dentist fees, hospital services, prescription drugs, transportation for medical care, treatment for drug and alcohol addiction, as well as various items like eyeglasses, hearing aids, wheelchairs, etc. are deductible as medical expenses.

When Weight Loss is Deductible

In some cases, costs of weight-loss programs can even be deductible. However, before writing off the costs of those Weight Watchers or Nutrisystem meals, be aware that there are some pretty strict requirements. If you are just looking to improve your health or appearance or even if a doctor recommends a weight-loss program for your overall well-being, the costs will not be deductible.

The IRS only allows deductions for these programs if they are treating a specific medical condition, such as hypertension or obesity, that has been diagnosed by a physician. This would include membership fees and meeting fees in a weight-loss program. However, gym, health club and spa dues are not deductible expenses, though separate fees for weight-loss activities can be deducted. Generally, the cost of diet foods and beverages will not be deductible because they are substituted for foods that meet normal nutritional needs.

Many Restrictions Apply

Occasionally, special foods can be deductible expenses; however, they must meet three criteria. First, they must not satisfy normal nutritional needs. Secondly, they must alleviate or treat an illness. Third, a doctor must substantiate the need for the special food. Even if foods meet all three criteria, only the cost that exceeds the cost of a normal diet is deductible.

You Must Meet the Medical Threshold First

Further, medical expenses must meet a threshold before they can be included on Schedule A; they must exceed 7.5% of a taxpayer’s adjusted gross income (AGI). So, for example, if a taxpayer’s AGI is $50,000, total medical expenses must exceed $3,750 before they can be included as itemized deductions. With the strict rules on deducting the cost of weight-loss programs and the relatively high threshold for medical expense deductions, in most cases, diet and weight-loss program expenses will not be deductible against federal income taxes. Still, for a taxpayer with relatively high medical bills who meets the IRS requirements for weight-loss program expenses, it might be worth calculating the possible deduction. Every little bit helps.


The End of Tax Return Loans

Each person who has had their taxes prepared by H & R Block or Jackson Hewitt has heard of refund anticipation loans, also referred to as RAL. Regulation changes for this tax season has taken H & R Block out of the race on these. However, in the future they will no longer be offered at all.

What is a refund anticipation loan? It is basically a loan against the tax refund you are expecting at an outrageous interest rate. For some people, their refunds are available in days, making the rate even higher. People request these loans because they need the money right now, not in a few days. However, the FDIC considers these to be unsound as well as unsafe, taking millions of dollars away from people that need it the most.

With the increasing number of people filing their federal taxes electronically, the time which it takes to receive your refund is greatly reduced. For this reason, a refund anticipation loan may only be in effect for up to 15 days. If there were no loans available, people would learn to wait for the deposit from the Federal Government.

The history behind refund anticipation loans goes back many years. When they were first initiated, tax refund payments could take weeks to receive, even months. This was a time when almost no one had the ability to file their taxes on their own, online. Today, everyone has the ability to file their own taxes online or have them done for them at a low cost or at no cost.

Because of the recent changes in the financial sector and regulatory changes, this type of loan will soon be discontinued. As it stands today, only one bank will continue these loans if they win their case against the FDIC which is pending. All of the three banks that are still offering this type of loan for the current tax season were told that they will have to discontinue them. Only one has chosen to dispute this.

People today need the cash fast, but they need to not throw away hundreds of dollars to get their cash fast. The fact is that filing online and using direct deposit will provide them with their refund quickly. Depending on the timing of the filing it can take as little as eight days to get the deposit into your account. This process will not cost any additional fees.

It is believed that as the ability to process returns and send deposits is improved by the Federal Government, the need for this type of service will be greatly diminished. Improvements in technology and screening software allow for many returns to be processed and approved without ever being looked at by a person. Computerized processing accounts for the majority of the speed that has been added to the time for processing. As further improvements are made, it is expected that the time that is now required will be further reduced.


What Would Happen if the Government Really Shut Down?

A last minute piece of legislation may extend the budget negotiations in congress and put off the need for shutting down the government. Unfortunately, lawmakers from both sides of the aisle are still widely divided on many issues related to the budget. The longer both sides argue over budget line items, the higher the risk of the government shutdown because it will run out of funding for this year. The current extension should buy lawmakers another two weeks to work things out before a shutdown would be necessary.

Key Disagreements over Budget Items

Republicans have presented up to $100 billion dollars in spending cuts for this year’s budget. Their representatives have agreed to lower that number to $61 billion in order to get the budget passed to avoid a government shutdown. The democrats feel that the proposed cuts would be incredibly harmful to the fragile economic recovery that has just begun. In fact, the president has said he would veto a budget that included some of the planned massive cuts. If someone doesn’t come up with a new idea soon, a shutdown may become inevitable.

Previous Government Shutdown Statistics

The United States has gone through government shut downs 15 times in the last 40 years. The longest shut down lasted for 21 days, while the shortest was just three days. During each shutdown, hundreds of thousands of government employees took furloughs until the budget was passed. Since the government doesn’t keep track of independent contractors working for them, there are no statistics to show how many independent contractors were out of work during the shut downs. Government agencies that provide national security and health services remain open during a shut down.

Typical Impact on the General Public

In general, most government services remain closed during a shut down. Regular citizens will notice that health hotlines are not available. The application process for owning a gun or gaining a liquor license through the Alcohol, Firearms, and Tobacco administration will slow dramatically. Bankruptcy cases going through the system will stall until the new budget is passed. National parks and monuments will closed to the public. Foreigners who are waiting for passport and visa approvals will be put on hold. Military veterans who rely on federal agencies for services will also have their services cut off during the shutdown.


Deductible Losses on a Rental Home

Many people are facing losses on real estate sales, made to get out from under a weighty mortgage. This begs the questions, if you pay tax on real estate gains, do you get a break from real estate losses? The answer is logical, but only after you understand how gains on real estate are taxed.

Capital Gains Tax

The IRS does not always charge you taxes on capital gains. If you profit by $250,000 as a single seller, or $500,000 as a couple, you do not have to pay capital gains tax. You only pay for profits above those amounts.

Therefore, the logic follows that you would not get a break if you lost money on the sale of your home. However, exceptions do exist for those who sell an investment property. What qualifies as such a property? Any real estate that brings income qualifies, such as a rental house or vacation home that you rent out part of the vacation season.

How Much Can You Deduct?

The IRS lets you deduct losses up to specific amounts. Depreciation is also deductible, which can really muddy the waters when figuring your taxes. For this reason, it’s best to talk to a tax professional to figure out exactly how much you can deduct. Claiming losses on investment property requires a completed IRS form 4797.

When selling a second home, you generally pay taxes as long-term capital gains for properties owned over one year or short-term capital gains one homes owned less than one year. If you would pay capital gains on a profit from the sale in these situations, then you would be able to deduct a loss.

Don’t Think of it as a Second Home

When you think of the rental property as a “second home,” you muddy the waters. The IRS allows certain deductions on a second home, but they do not allow deductions on losses for these properties. The difference is the purpose of the property. Is it truly a “second home” or is it an investment? Are you earning income from it?

Dealing with Depreciation

Most people who rent out a property take depreciation every year. When you sell the property, that depreciation counts against the value of the property, reducing your tax-deductible loss. The good news is that the loss is deduct-able as an ordinary loss, deduct-able in full against the income. Limits apply and you must also address the issue of passive losses. This complicated topic definitely requires the help of a tax professional.


Is it Time for a Flat Tax?

Various politicians and political groups have attempted to implement a flat tax numerous times in the past. Ideas on the implementation of a flat tax system that would simplify and equalize the taxes we have to pay each year have been produced recently and will continue to be brought up in future generations to pass. The simple idea of a flat tax sounds like a great idea to a large number of people and is actually a great way of taxation in practice. However, when it comes to actually implementing a flat tax in America, things become much more complicated than they originally seemed.

Getting a Simple Tax System Would be Complicated

Getting rid of the local taxation system and implementing a flat tax each year sounds like a great idea but what would this flat tax include? We pay multiple forms of tax each year. We pay income tax, social security, Medicare, payroll tax, businesses pay their own set of taxes, and the list goes on and on. If we were to implement a flat tax would it include everything or just certain categories?

If you think you have the answer, it would behoove you to realize this is putting it simplistically. There are a large number of factors included in the tax system we have now for each different tax that has to be paid. How much we are actually being taxed now has to be taken into account when trying to implement a flat tax. The government does not want to start bringing in less than it does now and people do not want to start being taxed more. To say finding equal taxation ground is hard is an understatement.

Special Interests

Then there are tax breaks. There are too many special interest groups lobbying to keep their tax breaks. Politicians are not going to just take these away to lose votes. You need to realize that everyone is out for him or herself when it comes to taxes and their finances in general. No one wants to pay more and everyone wants to pay less. Which means, starting a flat tax at all is going to ruffle feathers on someone somewhere? It cannot be avoided.

Despite all the political semantics involved, there is a single nail that currently puts to rest any possibility of a flat tax being implemented in the near future. That nail is called the economy. In all the talk about implementing a flat tax, how many people have thought about the repercussions it would have on the taxation industry?

Economic Damage from a Simpler Tax Code?

The Internal Revenue Service would either be greatly reduced in size or no longer necessary at all. Tax preparers and organizations would no longer be necessary without laws and guidelines to interpret. With a flat tax, figuring your taxes would come down to simple multiplication that a grade school child could do. Thousands of people would lose their jobs. The hit to the economy would be disastrous, especially during the economic times we are currently facing. Implementing a flat tax now would be like shooting ourselves in the foot. Neither the country nor the economy is prepared in the slightest for the implementation of a flat tax at all.


Tips for Settling Back Taxes

If there is one inescapable truth, it is that the IRS will always get what is owed to them. Being in debt to the IRS is no laughing matter. Owing back taxes can ruin your finances for years and even decades. The best way to settle back taxes are to avoid them all together. There are a number of different ways to pay off what you owe to the IRS. The best decision you can make is look at all the advantages and choices at your disposal before choosing a path towards repayment.

Partial Payments

The way most people pay off their back taxes is through monthly partial payments. This choice works in your favor only if you can make the necessary payments on-time each month until the period of time you and the IRS agree upon has ended. In some cases, people have been able to get away with paying less than they originally owed the IRS. However, you could face a great deal of trouble should you miss a payment. Be certain you can handle the amount before agreeing to a payment plan.

Offer-in-Compromise

An Offer-in-Compromise is probably the best way to settle back taxes. You simply offer what you can afford to the IRS and they choose whether to accept or reject your offer. The closer you are to the amount you owe the better chance there is the IRS will accept your offer.

If you can offer at least eighty percent of the original amount then you should be fine. The IRS will review your financial standing and liabilities before accepting your offer. Should the IRS find you could afford the full amount they will likely reject your offer even if it is ninety-nine percent of the original debt owed.

Penalty Abatement

There are two other alternatives for those significantly financially strapped. The first is known as penalty abatement. Penalty abatement is a request you can make to have the IRS completely drop all your tax penalties. The IRS will conduct an in-depth search of your financial standing to see if you are as bad off as you say you are.

After reviewing your financial status, the IRS may eliminate your tax debts altogether. Requesting penalty abatement generally knocks off a good chunk of IRS debt, if it is accepted. If you think you have a case for penalty abatement, you should speak to your tax preparer immediately.

Appeal

Lastly, should your tax problems get bad enough for the IRS to threaten seizure, you should file a Tax Collection Appeal. This will allow you to tell the IRS your financial well is dry and you cannot possibly pay your taxes. The appeal will go to an appeal officer who will look at your financial standing and make a decision in about a week.

Now that you understand what some of your options are you should be better equipped to handle the stressful task of settling your back taxes. Hopefully, you will be able to go back to avoiding back taxes altogether in no time.


Winterizing on any Budget

Winterizing your home not only protects your home from bitter, cold winters, but also allows you to save on energy bills. For those who cannot hire contractors, there are steps individuals can take in winterizing their homes themselves. This does not have to be a costly endeavor, and often times you can spend much less $500 to protect your home from harsh winters.

Man the Cracks

One of the first things you may want to do is seal off any sources of cracks in your home. Cracked areas allow the heat in your home to leak out. You are essentially throwing money away if you do not take this step. Instead of hiring some to do this for you, you can do it yourself by buying some caulk, a basic caulk gun from a hardware store, and sealing off the cracks. The caulk gun will cost you around $20 and a tube of caulk cost around $8 each. It is a sure way to save a few hundred dollars in energy costs.

Dispense with Drafts

Replacing drafty windows in a home can be expensive. A cheaper alternative is to buy a plastic film window insulating kit. The kit will cost around $20. It is designed to go on the inside of your home, and not the outside. The plastic is very easy to apply and can be completed within a day. Door threshold strips can be purchased for around $25 each. They are used to fill air leaks beneath doors.

Tune Ups

Changing the furnace and air conditioning filter is also a great, inexpensive way to winterize your home. This should be done at least every three months. Heating and cooling is reduced when a filter is clogged, and it may shorten the useful life of the appliance. Replacing a filter is a very easy process. A filter will cost around $10.

Thermostat

You can install a programmable thermostat, which will automatically set temperatures to what you desire, at the time you want them set. You can avoid blasting your heater at high temperatures in an effort to quickly heat up your home when you return from work. A programmable thermostat will cost $35 to $100.

Chimney Balloon

Many people lose heat from their home through the chimney. A Chimney Balloon is used to keep heat from escaping and prevents drafts from blowing through your chimney. It will cost around $55.

Audit

For around $250 or less, your utility company can come and perform a home energy audit. An inspector will visit your home and check your furnace, air conditioning system, gaps and leaks, and your water heater and pipes.

Free Ways to Winterize

If you find these things outside of your budget, you still have options that are virtually free. You can roll up a towel to close the gaps between all of the exterior doors, and clean your filters and your gutters.

Claim Your Deductions

New tax laws allow a variety of home improvements to be tax-deductible. Check online to see which home improvements qualify. Winterizing your home is essential to saving money during the winter months.


529 Plan Funds Won’t Pay Your Student Loans

One of the many expenses parents take into consideration when raising children is the future cost of sending that child to college. Various savings options allow families to begin a nest egg for that very endeavor. The government, in cooperation with investment firms, developed the high yielding 529-college savings plan. While the plan provides substantial growth and returns (5% or more annually), the option also contains many drawbacks…one of which is that 529 plan funds don’t pay for student loans.

Expenses Covered Under 529 Plans

Contributions and earnings from 529 plans are only tax exempt when used for qualified higher education expenses or QHEE. Specifically, these expenses include books, equipment, mandatory fees, supplies and tuition. The plans also cover room and board, as long as the child enrolls at a minimum of a ½-time student, and under certain circumstances, there may be a cap on housing allowances.

The money may also pay for the expenses of special needs students. The money cannot be used for paying off student loans or for any other purpose, including food, personal expenses or travel, otherwise plan owners must pay federal and state income tax in addition to a 10% penalty on earnings.

Non-covered 529 Plan Costs

While the monies from 529 plans are transferable from state to state, certain schools in states may be ineligible for these funds. Parents having a 529 plan in Wisconsin can use the money for college in Florida. Though most schools qualify, some do not.

In addition to possible taxation for improperly used money from 529 plans, the accounts are subject to application fees, management fees and annual maintenance fees, that in total, range from $300 to $2000. These charges vary with individual states and with the type of plan acquired.

One might argue that student loans are for money that paid for the expenses that 529 plans do cover. Unfortunately, the law does not see it that way. Student loan payments and the interest attached to them is not covered by a 529 plan. This means that parents need to carefully consider which costs they take loans for and which they pay for with 529 plan funds.

Parents considering a 529 plan must either begin the account early enough in the child’s life in order to pay for college from the start of enrollment, or have a backup plan to accommodate student loans and other non-school related expenses. The Coverdell Education Savings Account has similar restrictions, the difference being that until the end of 2010, individuals were also allowed to use the monies for K-12 educations.

How to Get the Most out of Both

The smartest thing to do is to create a list of college expenses that your child will incur. Then pull out those that will be covered under your 529 plan. If the plan has enough to cover all of these costs, great! You can simply pay the non-covered costs by loan, savings or other investments you have set aside for your child’s education. If not, the balance of education expenses should be lumped with the costs not covered by the 529 plan and addressed through whatever means you have set up for these costs. Just don’t get caught with a large 529 account and a school loan when you can’t use those funds to pay the loan. See what you can pay with the 529 account first and then dip into loans if you must.