income taxes

What Freelancers and Side Giggers Need to Know About Income Taxes

Damian Davila — Fri, 20 Jan 2017 11:00:08 +0000

The freelance lifestyle has numerous advantages — among them, freedom and flexibility. Even so, you can't escape your tax obligation to Uncle Sam, and being a freelancer poses its own challenges at tax time. Consider these factors that might impact your income taxes: (See also: 8 Tax Return Mistakes Even Smart People Make)

1. Track All Forms 1099-MISC

Every client from whom you earn $600 or more in payments for services performed must file Form 1099-MISC, Miscellaneous Income with the IRS. Like employer-issued W-2s, every time that a client issues you a 1099-MISC, the IRS receives a notification. They're essential in order to prove your income, so make sure to keep track of all of them. Generally, form 1099-MISC needs to be issued by January 31st. If you haven't received your form by February 15, request a duplicate from your client for your own records.

2. Include Income From All Sources

While a client isn't obligated to file a 1099-MISC when their total payments in the same year to you are under $600, you're still responsible to report those payments as taxable income in your return. The IRS charges a 25% inaccuracy penalty on top of applicable taxes and interest for late payments, including income from all sources, even when not reported on a 1099-MISC.

(As a side note, we keep on specifically referring to a 1099-MISC by its full name because there are several types of 1099s, including 1099-DIV, 1099-G, 1099-H, and 1099-INT.)

3. Separate Individual and Business Finances

To help you track cash flows directly related to your business, open a separate business bank account and credit card. (See also: The 5 Best Credit Cards for Small Businesses)

The monthly statements of those business bank accounts and credit cards will allow you to reconcile your monthly income statement and will be very handy in case of an IRS audit. When shopping around for a business checking account, consider one that keeps copies of used checks. The reason is that bank statements and canceled checks are acceptable documents in case you receive a Form 4564, Information Document Request from the IRS.

4. Hire an Accountant if Using Schedule C

Schedule C from Form 1040 is one the most useful tax forms for freelancers and side giggers because it allows them to deduct all applicable business expenses, ranging from cost of promotion in local media to use of home space for business purposes. (See also: 101 Tax Deductions for Bloggers and Freelancers)

However, individuals using Schedule C often make mistakes on this form. Whether those errors are intentional or unintentional, the IRS has noticed the higher number of mistakes and has set the policy of auditing individuals using Schedule C three times more often than it does corporations. Hire an accountant to file your taxes and they will make sure to cross your t's and dot your i's throughout your return, including the pesky Schedule C. Not to mention, their fee is an eligible expense on your Schedule C, too!

5. Calculate Your Withholding

Unless you're a full-time freelancer, keeping track of your estimated tax liability can be hard. When you're receiving income from both an employer and portfolio clients, you'll have more sources of income. In that case, the IRS Withholding Calculator is a useful tool to avoid having too much or too little federal income tax withheld throughout the year.

Analyzing data from your most recent pay stubs, invoices from your clients, and copies of past tax returns (they will help you estimate applicable deductions), this calculator will provide you suggestions on how to update your Form W-4 with your employer. Adjusting your W-4 throughout the year is a smart way to increase the take-home portion of paychecks from your employer when you're withholding more than you really need to.

6. Make Estimated Tax Payments

Due to the nature of freelancing, you may receive some last minute assignments that will make your bank account happy in the short term. Prevent those lucky breaks from turning into an unexpected large tax liability by the time you file your return next year. Whenever you expect a very large payment or an end-of-year assignment, use the IRS Withholding Calculator to estimate your necessary withholding.

An alternative to adjusting your W-4 is to make a lump-sum payment using Form 1040-ES, Estimated Tax for Individuals, which allows you to pay estimated tax payments on April, June, and September of the current year and January of the next year. Form 1040-ES can be a lifesaver to compensate for extreme low withholding throughout the year. For example, you can submit a payment for tax year 2016 on January 17, 2017.

7. Don't Forget About State Income Tax

On top of federal income taxes, you're also liable for applicable state and local income taxes. Depending on the legal structure of your business, you may file business income taxes on a separate form. Sole proprietors report their personal and business income taxes on the same form.

Spreading out your state tax liability is a better idea than trying to come up with a large lump sum in very few days. If you have an employer, you can also adjust your withholding of state taxes throughout the year. Most states allow freelancers and side giggers to submit estimated state tax payments on a quarterly basis. To learn more about your applicable state tax obligations, find the appropriate office in your state or territory.

8. Get Health Coverage

Under the Affordable Care Act (ACA), better known as Obamacare, you're subject to a penalty when you go more than two months without health coverage. In 2016 and 2017, the penalty fee is 1/12 per month of 2.5% of your household income or $695 per adult, whichever is higher. If you didn't meet the minimum essential coverage during 2016, use the IRS tool to estimate your individual responsibility payment.

When you're a full-time freelancer, you're responsible for getting qualifying coverage on your own. January 31, 2017 is the last day to enroll or change a 2017 health plan. After that date, you can enroll or change plans only if you qualify for a special enrollment period. To learn more about available plans in your ZIP code, visit the health insurance marketplace at HealthCare.gov.

9. Save for Retirement

Freelancers and side giggers with no employees can open a solo 401K to build or give their nest eggs a major boost. With a solo or Roth 401K, an independent contractor could save up to $53,000 ($59,000 if age 50 or over) in 2016 and $54,000 ($69,000 if age 50 or over) in 2017. By the way, married couples and legal partners receiving income from the same business practice can double those contribution limits. This means a couple under age 50 could potentially contribute up to $108,000 to a solo 401K in 2017!

If you're one of the estimated 54 million of U.S. independent workers or freelancers, consider a solo 401K to lower your taxable income and get closer to the target amount of your retirement fund.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Would You Move to One of These States to Avoid Taxes?

Andrea Cannon — Fri, 06 Jan 2017 10:00:16 +0000

Some states have no state income tax — but at what expense?

If you're thinking of moving to one of the seven states with no income tax, consider that you may not actually be saving much money in the end, due to higher sales taxes, higher property taxes, and other additional costs. After all, these states can't just forego taxes altogether as a source of revenue; they simply make up the money somewhere else.

So how do you assess how much you're really saving, if anything at all?

The States With No Income Taxes

Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax. Residents of New Hampshire and Tennessee are also spared from state income tax, but have to pay taxes on dividends and income from investments. Other states (such as Kansas, Louisiana, Michigan, Nebraska, Ohio, and Wisconsin) have considered forgoing state income tax, as well, because it tends to result in economic and population growth throughout the state.

These states argue that cutting the state income tax can help to create jobs and prevent workers from leaving the state.

How Much Are You Really Saving?

For this example, let's compare living and working in California to Washington. Let's say your personal income is $60,000 per year. California's marginal income tax rate at this income is 9.3%, while Washington’s is 0%. The effective rate at this income is 4.47%, which will result in $2,680 in state taxes.

California and Washington have similar costs of living, depending on where you live. For instance, Los Angeles and Seattle have very similar costs of living, while San Francisco’s cost of living is 24% higher than Seattle’s. On the other hand, California's sales tax rate is 7.5%–10%, while Washington’s sales tax ranges from 7%–9.9%, depending on where you live.

Consider how much you’d be saving after you factor in your moving costs. According to the American Moving & Storage Association, the average move costs $3,868–$5,415 for the average two or three bedroom home from California to Washington. However, this depends on your personal move and how much you are able to save. In fact, Worldwide ERC estimates the average moving cost from one state to another to be closer to $12,935.

No Income Tax Usually Means Higher Sales Taxes

By forgoing a state income tax, the state needs to make up for their budget in other ways. For instance, the sales tax on your clothing, food, gasoline, and other purchases may be higher in the new state. There are also other fees to consider, such as property taxes, tuition costs, and cost of living expenses, which should be factored into your state-by-state comparisons.

For example, Tennessee has the highest average state and local sales tax rate in the country, which the Tax Foundation estimates at around 9.45%. Nevada also has above-average sales taxes. Texas and Florida also have above-average sales tax and effective property tax rates. Meanwhile, Washington has the highest gasoline prices due to a high gasoline tax of around $0.37 per gallon.

And Higher Property Taxes

It’s also important to consider the property tax rate in the state-by-state comparison, which is 1% of assessed property value in California and 1.025% in Washington, as well as the vehicle tax rate, which is 7.5% in California and 6.8% in Washington.

Property tax can make a big difference, depending on where you live and how much your home is worth — and how long you've owned it. For instance, Warren Buffett pays property taxes of $14,410 (at a 2.9% tax rate) on his $500,000 home in Nebraska and only $2,264 (at a 0.056% tax rate) on his $4M home in California. (California's Proposition 13 essentially "locked in" Buffett's property tax rate at 1970s levels.)

And a Bunch of Other Fees and Taxes

Along with potentially higher sales taxes and property taxes, each state can also employ its own unique fees and taxes. New Hampshire has some of the highest effective property taxes in the country, as well as the highest average in-state tuition. By contrast, Wyoming and Alaska derive high tax revenues from coal mining and oil drilling operations. In fact, nearly 70% of Alaska's income comes from nontax revenue. Nevada receives taxes and fees on gambling, which totals nearly $1B each year, as well as a modified business tax rate of 1.17%.

While South Dakota has a below average sales tax rate, the state charges a range of other fees and taxes to make up for it, including a cigarette excise tax, bank franchise and alcoholic beverage taxes, high motor fuel tax, and licensing fees on coin-operated laundries. Texas charges more than 60 separate taxes, fees, and assessmentsto make up for the lack of income taxes.

Before You Go, Compare All Expenses

According to the Center for Regional Economic Competitiveness, Alaska, Florida, New Hampshire, South Dakota, and Washington all have above average cost of living. Each state is unique in its taxation systems, so it’s important to research your new state’s tax code and alternative revenue streams before factoring in what you would save in state income taxes. Make sure to also use a cost of living comparison tool for a better idea of how much you will save overall (if anything at all) by making the big move.

How to Reduce Your Income Tax Without Moving

Before you decide to move to a state with no income taxes, consider the alternatives. You can contribute more to your 401K, donate more, and take advantage of tax deductions. There are various ways to save money on your taxes each year, so speak with your tax pro to ensure you are taking advantage of every possible deduction.

This article is from Andrea Cannon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

35 Bizarre Things You Can Be Taxed On

Carrie Kirby — Mon, 19 Dec 2016 10:00:08 +0000

Once the Yuletide log burns out and the New Year's ball drops, it's soon time for a less-joyful annual tradition: Calculating how much money you owe the Internal Revenue Service.

We all know that Uncle Sam takes a share of our earnings, but have you considered other events in the past year that you may owe taxes on? You might be surprised at all the ways Uncle Sam can lighten your wallet.

Note: I'm not an accountant. Consult a tax professional for advice on your personal situation.

1. You Caught a Baseball

You are the lucky fan who catches a historic home run ball from the outfield bleachers. The not-so-lucky part? The IRS could hold you responsible for the resale value of the ball as soon as it hits your glove — even if you weren't planning to sell it.

2. You Found a Pot of Gold

You finally found the cache at the end of the rainbow. Or maybe you found a stash of rare baseball cards hidden in the wall of your home during a remodel, or a treasure chest while scuba diving in a shipwreck. Under the same regulation that applies to the baseball, the treasure trove rule, that windfall is taxable to you the first year that you find it. Sadly, this means that you may be forced to sell all or part of your find even if you wanted to keep it.

3. You Held Up a Liquor Store

It doesn't matter if you got it illegally: Stolen money or property should be reported, lest a tax evasion charge be added to your legal woes when you get caught. Says the IRS, "If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner."

4. You Accepted Hush Money

The IRS is blunt on this one: "If you receive a bribe, include it in your income."

5. You Dealt in Illegal Goods

If you made money dealing drugs or by any other illegal form of self employment, the IRS requires you to report it on Schedule C.

6. You Hit the Jackpot

Yes, you have to pay taxes on your lottery prize. Yes, if you have been buying lottery tickets all year, you can also deduct the expenses. But you have to keep a diary of wins and losses, and the IRS has specific instructions on how to do that.

7. You Stuck the Landing and Won Gold

It's estimated that Michael Phelps will owe $55,000 to the IRS on his Rio winnings — the medals and the cash prizes that come with each are taxable. Many other Rio champions will get off scot free, however. That's because Congress recently passed a law to exempt Olympians from "victory taxes" — but only for athletes who earn a million dollars a year or less. Phelps earned an estimated $12 million in endorsements alone in 2016, so he doesn't get that break.

8. You Got a McArthur Genius Grant

It would feel great to win this $625,000 no-strings stipend, or the approximately $1 million that comes with the Nobel Prize. That good feeling won't protect you from the tax bite, though. You're required to pay taxes on all such awards — unless you have them directly transferred to a recognized charity. That's what President Obama did with his 2009 Nobel Peace Prize winnings.

9. You Are Gifted

Usually, the presents you unwrap over the holidays come to you tax-free, but there are some exceptions. Cash or a gift card from your boss is taxable as a fringe benefit. A hostess gift you receive as a thank-you for having a sales party in your home is taxed as miscellaneous income. Personal gifts, though, are generally safe from the tax man.

10. You Airbnb'd Your Pad

Just like regular rent payments, money you earn by hosting Airbnb guests is counted as part of your gross income. The exception: You don't have to pay if you live in the home and rent it out for two weeks or less per year.

11. You Got Your Social Security Check

It may seem nonsensical that the government pays people and then collects tax money on those payments, but that's how it goes. However, SSI, or disability benefits, are not taxable.

12. You Divorced Well

Alimony you receive from your ex is taxable income, but child support payments are not. For this reason, it's important to know how payments are categorized in your divorce settlement.

13. You Won a Scholarship

If you win a grant that covers your tuition and books, that's tax-free. But if it pays for room and board or travel, pay up.

14. Your Fantasy Football Team Won the Super Bowl

If you win at least $600 worth of cash and prizes from a business operating a fantasy sports league, they'll file a 1099-MISC with the IRS. But even if you win less or your league is informal, you are still supposed to pay on your winnings.

15. Triple 7s Came Up

Just like with the lottery, the IRS gets a cut of your casino winnings once they surpass the amount you document losing. Usually it's a flat 25%.

16. You Spun the Wheel of Fortune

It's simple enough to pay the tax if you win a cash prize, but if you win a car or vacation, you still owe tax on its value — which can be tough to pay if you didn't also win cash. Because of this, it's often wise to take the cash equivalent of a prize if offered.

17. Your Debt Was Forgiven

The IRS is very specific about this: If a debt is cancelled as a gift to you — for example, if Grandpa says, "Merry Christmas, you no longer owe me for that time I bailed you out!" — you don't have to pay taxes. Otherwise, you do.

18. You Traded a Haircut for Cigarettes

This may surprise you, but if you receive goods or services in exchange for services you render, the IRS expects you to include the value of those in your gross taxable income.

19. The Boss Lets You Take the Ice Cream Truck Camping

If you drive your company car to work and home, or use it on weekends, this is a taxable fringe benefit and you should be tracking and reporting your personal miles.

20. Your Bitcoins Doubled in Value

Bitcoin is a virtual currency that is represented by computer code, but it can be used to buy real goods and services. So of course, the IRS considers gains in this or any other virtual currency taxable. It's considered a capital asset like stocks and bonds, so if you buy Bitcoins low and sell them high, the difference is your profit. But it can be even more complicated than that: If you create new Bitcoins by mining, you have to count those as income, too.

21. You Got a Blogger Freebie

If a widget maker sends you their SuperWidget 2000 to review and you get to keep it, you just received a taxable payment. However, you don't owe taxes on the market value of the product — just what the company agrees it's worth. Make sure to put an agreed-upon value in your contract.

22. You Sold Stuff on eBay

If you occasionally sell your kids' outgrown clothes on eBay, you won't owe taxes because you most likely took a loss on the items. But if you create a resale business on eBay, you better believe you have to report your profits.

23. You Had a Yard Sale

Like eBay, most yard sale transactions are not income producers, but if you're one of those people who holds a sale every weekend and resells stuff at a profit, do the right thing.

24. You're a Child Entrepreneur

Starting a small business, whether it's dog walking or selling handmade items, can be a great activity for a tween or teen. But don't expect them to be IRS-exempt just because they're kids. If the business earns more than $400, file a tax return.

25. You Set Up a GoFundMe Campaign

This is one of those tricky gray areas. If you start a crowdfunding benefit for someone in need, the donations should be considered personal gifts. But if the gifts run into the large numbers, the crowdfunding site may file a 1099, reporting the transaction to the IRS. A word to the wise: If you are setting up a crowdfunding campaign for a needy friend, make sure it's in their name so you don't end up wondering if you need to pay taxes on money you handed over to them. And consult an accountant before going down this route.

26. You Asked for Spare Change

There are differing opinions out there over whether quarters dropped in a panhandler's cup are considered earned income or a gift. Since panhandlers tend to live below the poverty line, they probably wouldn't owe any income taxes, either way. A more pressing issue for many would be whether the panhandling counts as earned income, qualifying recipients for the earned income tax credit, which could lead to a cash payment from the IRS even if the panhandler pays no taxes.

27. You Received Punitive Damages

Court settlements vary in their tax treatment. If you get a settlement in court to compensate you for a physical injury or emotional distress stemming from an injury, the money isn't taxable. But if you get paid for emotional distress not tied to an injury, or you receive punitive damages, you have to pay.

28. You Cashed in Your Life Insurance Policy

If you die, your beneficiaries probably won't be taxed on your life insurance payout. But if you cash it in while you're alive? Any profit you made on the policy — that is, the value in excess of premiums paid — is taxable.

29. Your Champion Pug Had a Litter

Whether you breed your dog as a business or a hobby, money made selling puppies is taxable income. However, it's also not cheap to breed and raise puppies, so once you deduct stud fees and all those vet bills, you may not actually show a taxable profit for your prize pups.

30. You Put on the Red Light

Just like dealing drugs, if you sell your body in a jurisdiction where that's illegal, you still have to report the income on Schedule C. In fact, smart high-earning prostitutes declare their income to put themselves into the position to buy a house or get credit.

31. You Couldn't Get Out of Jury Duty

If you got $15 for sitting on a jury, that's taxable income, even if you turn it over to your employer. However, if you did turn it over to your employer, you also put in a deduction for the same amount on your tax form so your gross income will remain the same.

32. You Got a Tax Refund

Last year's state and federal refunds are taxable in some situations.

33. You Exercised Stock Options

This is one that has gotten a lot of tech workers into financial hot water. If your company gives you stock options, that's not a taxable event. But when you exercise the option by purchasing stock in your employer at a discount, that is a taxable event even if you don't sell the stock right away. This can go bad if the stock declines in value after you exercise the option, because now you may owe the IRS more money than you can raise by selling the stock.

34. Your Landlord Is Paying You to Get Out

In rent-controlled areas with high demand, such as San Francisco, it's common for landlords to buy tenants out. This is often referred to as a relocation assistance. This is taxable, but whether to treat it as regular income or a capital gain is dicey, so you may need professional help with that one.

35. You Are an Undocumented Worker

Despite a common belief that undocumented immigrants don't contribute to society with tax dollars, anyone working in the U.S. is legally required to pay taxes, papers or not. And they do pay. Studies show about half of people working illegally are paying income tax, resulting in about $12 billion per year in state and local revenue.

This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Ways More Money Does Truly Lead to More Problems

Dan Rafter — Thu, 17 Mar 2016 11:00:05 +0000

If you're struggling to pay the bills each month, you probably don't have much sympathy for your wealthier neighbor or for the millionaire who complains about paying too much in taxes. But here's the truth: Even those blessed with a lot of dollars can have money problems.

The rich just have different kinds of money problems. They might not worry about having enough money to make their car payment, but they do worry about sending too much to Uncle Sam every tax day.

Planning to get rich yourself someday? Here's a list of some of the problems that you might face when you have more money to worry about.

1. Higher Taxes

Income tax rates jump steeply the more money you earn, which means that unless you and your accountant get creative, you'll be sending more of the money you earn each year to the federal government.

Say you earned $514,000 in 2015. When you pay your taxes on April 18 of this year, you'll be taxed 10% for the first $9,225 of your earnings, and 15% on every dollar from $9,226 to $37,450. This rate goes up until you hit the maximum. You'll be taxed at this maximum rate of 39.6% for every dollar you earn from $413,201 and up.

The upshot? The more money you make, the more taxes you pay. At least that's the theory. It is possible through deductions for the wealthy to dramatically lower the actual dollars that they send to the government each year. Trying to lower your tax bills is definitely one problem that grows the more money you earn.

2. Lifestyle Creep

When you get a big raise, do you boost the amount of money you save each year in your 401K plan or IRA? Or do you buy a nicer car?

It's all too tempting to improve your lifestyle when your annual income rises. This is known as lifestyle creep. And it's a problem that the wealthy have to work hard to avoid.

The rich might feel pressure, for instance, to invest in a larger home once their income swells. The better financial move might be for them to stay in their current home and instead invest their extra income. The allure of all those extra bedrooms and baths, though, can overwhelm the good sense of even the most fiscally conservative of consumers.

3. The Arrival of "Long-Lost" Relatives

There's a reason why lottery winners often joke about changing their phone numbers. They're worried that their relatives — especially long-lost ones with whom they've had little contact — will start hitting them up for money.

The same thing can happen when you've built up your wealth over the decades. Your relatives who are struggling with their finances will expect your monetary help. If you don't cough up some bucks? You can bet those relatives will resent you. That can lead to strained familial relationships.

4. What Does Your Spouse Really Love?

Getting married after you've become fabulously wealthy can be tricky. How will you know if your future spouse loves you or your money?

The stereotype of the gold-digging spouse might actually be a myth, at least according to this recent story in the Guardian, which argues that couples are more likely to get married when they have something in common than because they're seeking partners with great wealth. But it's not surprising that some wealthy people wonder if that future spouse wants to marry them because of their overflowing bank account and not their wit or charm.

5. You Might Need an Army of Advisers

Once you've become wealthy, you'll undoubtedly need help to manage all those dollars. After all, you can't just stash those big bucks in a savings account. You want your riches to continue to grow. To master that feat, you'll need the help of financial advisers and accountants. And if you've invested in a larger home or a luxury boat? You'll need staffers to clean and maintain these investments. That isn't free, and finding the right help can prove challenging.

6. You're Even More of a Target

Think of how many scams fill your email box every morning — and you're not wealthy at all. Now imagine the target you'll become for fraudsters and scammers once you become rich.

Wealthy people have to be especially careful to avoid scams, both online and traditional ones such as fake charities seeking donations. Nothing entices scammers like rich people who aren't especially careful with their wealth.

Are you burdened with too much money? Share some in comments!

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Signs You Probably Need an Accountant

Dan Rafter — Tue, 13 Oct 2015 13:00:32 +0000

Do you dread filing your income taxes each year? Does preparing your taxes take weeks of your time? And once you've sent your papers to the IRS, do you have the sneaking suspicion that you might not have taken all the deductions to which you are entitled?

You might need to hire an accountant.

"Hiring an accountant depends on whether your knowledge, time, and money are best spent on bookkeeping, loan application, and tax preparation, or whether you have higher priorities," says Valrie Chambers, associate professor of taxation and accounting at Stetson University in Celebration, Florida. "A business owner who excels at sales should probably use her time increasing sales rather than learning and doing accounting. That strategy is just more profitable for the business."

Here are five signs that you need to hire an accountant.

1. You Owe the Government a Lot of Money Each Year

Taxes become complicated when you work for yourself or run your own business. Depending upon how much you earn, you'll have to pay estimated quarterly tax payments four times every calendar year — January 15, April 15, June 15, and September 15. These payments are supposed to guarantee that you won't owe the federal and state governments thousands of dollars each year in taxes.

But if you find that when you file your income taxes each April 15 you do owe the state and federal government $3,000, $4,000, $6,000, or more, you're doing something wrong. An accountant can help you determine the quarterly tax payments you should be making to ensure that you're not hit with a huge tax bill every April 15.

2. You're Worried That You're Missing Big Deductions

Yes, hiring an accountant takes money. But doing so can also save you money. An accountant can prepare your annual income tax returns to make sure that you're not missing out on any important deductions for your household or your business. Missed deductions can cost you thousands of dollars each year in taxes.

3. It Takes You Days to Complete Your Taxes

Filing your income taxes isn't necessarily easy. But it shouldn't be a draining chore, either. If your life has gotten complicated — maybe you've started your own consulting business on the side, perhaps you've adopted and are struggling to understand how the adoption tax credit works, maybe you're not sure how to deduct the bills for a serious medical procedure — you can bet that your income taxes have, too.

If it is taking you a full week to complete your taxes, it might be time to think about hiring an accountant. You just have to determine how important your time is: Would you rather spend your time earning more money or poring over your tax forms?

4. You Own Rental Real Estate

Renting an apartment or two is a great way to earn passive income. But doing so can also complicate your finances. That's why it makes sense to hire an accountant to make sure that you don't miss any important tax deductions related to rental income, and that you file all the paperwork necessary when working as a landlord.

"There comes a point when personal tax software is not sophisticated enough to take into account the complexities of real estate investments," says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School in New York City. "If a taxpayer has multiple properties that have both a personal and investment component, tax software may not be able to accept all of the relevant inputs and generate the correct output."

5. You've Never Been Able to Balance Your Checkbook

If you're struggled for years to balance your own checkbook — if overdraft charges from your bank aren't a rare enough occurrence — it might be time to invest in an accountant, especially if you've started your own business. It's bad enough to struggle with your personal finances, and you don't want to operate a business that doesn't have its books balanced.

Chambers recommends that you meet with several accountants — she recommends that you only work with Certified Public Accountants (CPAs) — before hiring one. Ask accountants how long they've been in business, whether they've worked with clients at your income level, how much they charge, and what services they'll provide. Ask, too, for referrals from accountants' current clients.

"Meet with the CPA to see if you are comfortable sharing your information with this firm," Chambers says. "CPAs should be forthcoming about their fees. When they are hired, they normally spell out what they will do for those fees in an engagement letter. Finding an accountant who is right for you is part research, part comfort level."

When did you realize that you needed an accountant?

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Forgiven Mortgage Debt May Lead to Huge Tax Bills

Xin Lu — Thu, 26 Apr 2012 09:48:12 +0000

Congress passed the Mortgage Forgiveness Debt Relief Act during the national housing crisis. This little-publicized law protected those who lost their principal residences to a foreclosure or short sale from a big tax bill, and it is expiring at the end of 2012. This means that those who lose their homes or receive a partial loan reduction next year may be facing a huge tax bill. (See also: How Foreclosure, Deed in Lieu, and Short Sale Affect Credit Scores)

Most people are not aware that most debt forgiven by a lender is taxed as ordinary income by the IRS. In the case of a foreclosure or short sale, the lender usually issues a 1099-C to the borrower for the balance still owed, minus whatever the bank sold the house for. Issuing a 1099-C means that the lender will no longer go after the borrower for the loan, and hence, the debt is forgiven or canceled. In cases where homeowners walked away from their houses, it is very easy to get an "income" of thousands of dollars, and the IRS will once again tax that income at the borrowers' highest marginal rates.

For example, suppose that a couple with an annual income of $70,000 owed $500,000 on their loan when their house was foreclosed, and the bank sold their house for $150,000, then they would have a 1099-C with a balance of $350,000. If that foreclosure happened on January 1, 2013, then this couple would have a taxable income of $420,000 for the year 2013 in the eyes of the IRS. This means that this couple would owe over $100,000 to the IRS. To complicate the matter, many states also passed tax laws that conformed to the federal law. So those who have discharged debt on their principal residences in 2013 will also have to pay state income taxes on their loan balance. In California, this would add approximately another $30,000 to this fictional couple's tax bill.

Even if an underwater homeowner manages to get a principal reduction on their loan and keep the house, the loan forgiven will be considered ordinary income starting next year. Not all cancelation of debt is taxable, and you can read about the details of the law. This change will affect those who have money and want to walk away from their loans the most since the IRS will not tax insolvent folks. A person is insolvent if his or her total debt is more than the sum of his or her assets, so those who really have nothing to pay will not be affected.

Since there is no guarantee that Congress will extend this law into 2013 and beyond, if you are underwater on your mortgage, then this year may be the last year to finish up a foreclosure or principal reduction without incurring a tremendous tax bill. For those considering a short sale, it is best to get the process started right now, since it may take many months for a short sale transaction to actually close.

I think the expiration of this law might change the decision-making process of many underwater homeowners if they knew about it.

What do you think? Should this law be extended? If you are underwater on your mortgage, would a potentially huge tax bill prevent you from walking away from your house?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Things To Know About Year-End Bonuses

Barbara Weltman — Fri, 02 Dec 2011 21:50:49 +0000

Link:

http://www.openforum.com/articles/5-things-to-know-about-year-end-bonuses

If your business has had a good year, now is the time to decide how to share your good fortune with your staff. Year-end bonuses are one common way to do this. In giving bonuses, you want to be fair so that they promote continued company loyalty and motivation for outstanding future performance. You also need to adhere to tax rules on how to treat bonuses. Here are five practical points (including tax matters) to keep in mind.

1. You’re Not Alone in Giving Bonuses

According to a survey by American Express OPEN, 29 percent of small business owners are planning to give bonuses to staff. While this is down from 54 percent in 2005, it is by no means an inconsequential percentage. Review with your company’s financial advisor how much you can afford to dedicate to year-end bonuses.

Increasingly, businesses are giving performance-based bonuses. These payments are tied to workers having achieved targets set earlier in the year. Some companies, however, still give bonuses regardless of performance; these are usually a percentage of annual compensation.

2. Bonuses are Subject to Payroll Taxes

Like ordinary pay, year-end bonuses are subject to the same payroll taxes as regular pay. This includes withholding for federal and state income taxes as well as the employee share of FICA.

However, the federal income tax withholding on bonuses is figured at a flat rate of 25 percent. Some states may also have a special withholding rate for supplemental pay, including bonuses; check with your state revenue department.

3. The Deduction for Bonuses Depends on Your Accounting Method

If you report on the cash basis, a bonus check issued before the end of the year is deductible this year. This is so even if the recipient does not cash the check until next year.

For example, you hand out a bonus check on December 30, 2011, the last work day of this year. The employee deposits the check on January 3, 2012. You can deduct the payment on your 2011 return.

If your business reports on an accrual basis, you can authorize bonuses this year that will be paid next year, while still gaining a tax deduction for them now. For example, on December 23, you declare a bonus for staff members. As long as the checks are paid to employees by March 15, 2012, you can deduct the accrued bonuses on your 2011 return.

Caution: Bonuses to employees of C corporations owning more than 50 percent of the stock or to employees of S corporations owning any percentage of stock are not deductible until the checks are actually paid.

4. Bonuses to a Group of Employees

What happens if you determine before the end of the year that a group of employees, such as your sales staff, will receive a certain collective amount, but you don’t set the actual bonuses for each salesperson until next year? The IRS says that you can accrue the total bonus amount this year, allowing you time to parse out individual bonuses after the New Year.

5. Employee Deferral of Bonus Payments

You may wish to give employees (and yourself if you’re an employee of your corporation) the choice of receiving bonuses now or deferring receipt until some future date, such as retirement. Deferring receipt transforms the bonuses into deferred compensation for which special restrictions apply.

Opting for deferral is premised on the notion that tax rates for the recipient will be lower in the future. Unfortunately, there is no way to know for sure what future tax rules and rates will be. Still, deferral can be helpful as forced savings for the future and can ensure a more financially-sound retirement.

Note: FICA taxes apply to bonus payments now even though receipt of the funds is deferred until the future; there is no more FICA when the deferred compensation is later received.

Final Word

Whatever you decide about bonus payments, be sure to add personal thanks. Looking ahead, you may wish to start now in crafting a performance-based bonus plan for next year, so your staff can start the New Year off right.

Like this article? Pin it!

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Estimated Tax Strategies for Business Owners

Barbara Weltman — Sun, 22 May 2011 22:00:10 +0000

Link:

http://www.openforum.com/articles/5-estimated-tax-strategies-for-business-owners

Most business owners don’t have withholding from a paycheck to cover their income tax bill for the year. Even the paychecks of S corporation owner-employees may not be large enough to allow for withholding to cover taxes due on their share of profits. Estimated taxes, which work as a substitute for withholding, usually are necessary for most business owners. With the second estimated tax payment for 2011 due June 15th, you should review your tax payment amounts and procedures to avoid penalties or overpayments as well as to simplify the payment process.

Figure Estimates Properly

The goal of estimated taxes is to approximate the tax liability that will be figured when the 2011 income tax return is completed next year. Pay too little and you’ll owe penalties; pay too much and you’ll have made an interest-free loan to the government.

Estimated taxes must cover:

Income taxes. This includes your share of business profits;
Self-employment taxes. If you’re self-employed, self-employment tax is comprised of Social Security and Medicare taxes on your net earnings from self-employment.

Rely on Safe Harbor Rules

You can avoid any penalties for underpaying estimated taxes by relying on certain safe harbors.

Prior Year Safe Harbor

If you anticipate that your income for 2011 will be the same or greater than it was in 2010, then fix this year’s estimated tax payments based on last year’s tax liability – the amount of tax reported on the 2010 income tax return. This is called the 100% prior year safe harbor. Of course, if you discover that you’re short when you complete your 2011 return next year, you’ll have to come up with the money to pay what you owe, but at least you won’t owe any penalties, no matter how large the shortfall.

If your adjusted gross income (AGI) in 2010 was more than $150,000 ($75,000 if you were married and filed a separate return), then you’ll have to set your 2011 estimates at 110% of your 2010 taxes to avoid penalties. For example, if you’re single and paid $20,000 in taxes on your 2010 return and expect 2011 to be a better year than last year, set your estimated taxes for 2011 at $20,000 (or $22,000 if your AGI in 2010 was more than $150,000).

Current Year Safe Harbor

Instead of basing your payments on last year’s taxes, you’ll avoid penalties if payments for the current year are at least 90% of what you ultimately owe. This method is preferable if you expect this year’s taxes to be lower than last year’s. Thus, if you expect to owe $20,000 in taxes and you pay at least $18,000 in estimated taxes, you’ll escape penalties.

Other Safety Nets

There are other ways in which to figure estimated taxes in order to avoid penalties. These are explained in IRS Publication 505, Tax Withholding and Estimated Tax.

Use Set-Asides to Ensure Sufficient Funds

One of the key reasons some owners fail to pay required estimated taxes is lack of cash. Make sure you have enough money on hand when needed. One way to do this is to set up a separate account for estimated tax purposes. Create a schedule to use for putting money into this account — weekly, monthly, etc — and stick to it.

Make Payments Online

Business owners may be too busy to remember the estimated tax payment dates or may be traveling away from home at these times. To ensure that a payment won’t be late or overlooked, use the Electronic Federal Tax Payment System (EFTPS). You can schedule payments up to a year in advance. There is no charge by the government for using this payment method (check with your bank regarding any fees it may charge for electronic transfers). Using EFTPS.gov does not give the IRS access to the funds in your bank account or any authority to tap them for any reason.

Charge Payments to Your Credit Card

If you lack sufficient funds to pay estimated taxes and want to avoid late payment penalties, consider charging your payment to a major credit card. While the IRS and U.S. Treasury do not charge any fee for paying taxes this way, the IRS-approved card processor charges a “convenience fee” of between 1.95% and 2.35% of the amount charged (there’s a flat dollar amount imposed for using debit cards instead of credit cards).

To charge tax payments, go to:

Final Word

Work with your accountant or other financial advisor to ensure that you meet estimated tax responsibilities. In some situations, it may make sense to incorporate a sole proprietorship or other non-corporate business in order to create wages for owner-employees. These wages, if sufficient, can be used as a withholding source to cover the tax obligations of owner-employees and avoid the need to make any estimated tax payments in the future.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Do I Have to Report This Income?

Daniel Packer — Mon, 14 Mar 2011 11:36:11 +0000

Today we're going to play a game called "Do I Have to Report This Income?" It will teach us a little about tax filing requirements and present some interesting situations about what income is taxable and what can be left off a tax return.

When doing taxes, there are a ton of ways to get around reporting income. How can the IRS track cash transactions? Nobody will report a few items you sell online, right?

While it may be easy to hide some money from the government, there can be serious repercussions. If caught, it could cost you a lot more in the long-term. (See also: Top 10 Red Flags That Trigger IRS Audits)

So if you're one of those trustworthy folks and are trying to file your taxes properly, you should be aware of which income you have to report.

Ready to learn what you need to include as income on your taxes? The questions will get increasingly harder, but I think you will catch on fairly quickly.

1. I just received a W-2 from work. It lists all my earnings for the year. Do I have to report this income?

Definitely! Your employer sends one copy to you and sends another one to the IRS. If the amount of income from your employer that you report doesn't line up with the amount your employer reports, it will raise a red flag and you will be more likely to be audited.

2. I made about $6 in one of my savings accounts this year. I also made another $7 in a separate account. Do I have to report this income?

If you earned over $10 in a bank account, you will likely be issued a 1099-INT. However, even if you aren't issued a tax form, you are still responsible for reporting it, no matter how small. You still earned it and are therefore responsible for reporting the income.

3. I just sold a watch on eBay. They took fees out. Do I have to report this income?

While these transactions are a good way to earn some extra cash, you are still earning some income in the process, so you technically have to report it. The fees that eBay takes out are fees for using their service and have nothing to do with taxes.

4. I love my tutoring job; I get paid in cash! Do I have to report this income?

With no W-2 or 1099, there's no paper trail and that means you can just pocket the cash, right? Wrong! You are responsible for keeping your own records. In fact, you may need to make estimated quarterly tax payments! Suddenly, no paper trail really means more responsibility for you!

5. Yay! I just won a prize on a blog! Just a small gift card, but I'm super pumped! Do I have to report this income?

Congrats on your luck, but guess what? You have to count the value of the prize as income. So while you definitely come out ahead, you still have to pay taxes on that gift card. if it's a big prize, you may want to set aside some cash because you'll likely owe the government money come tax time.

By now, I'm sure you've caught on that you need to report all income you earn in any form. Hopefully I've hit on a few situations that most people don't consider, and now you'll be better prepared when filing your taxes in the coming weeks. Good luck!

This article is from Daniel Packer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

15 Surprising Facts About Income Tax

Paul Michael — Wed, 19 Jan 2011 13:50:11 +0000

Brought to you by TurboTax Federal Free Edition — Free to prepare, Free to print, Free to efile.

With the holidays now out of the way, many of us begin to focus on our finances. What did we spend? What did we save? And of course, when will we start preparing our taxes? The mid-April deadline is looming on the horizon, but do you know why that specific date was chosen? Or how you can actually get rewarded by the IRS? Well, here are some insights on those, and many other, income tax facts.

1. Why is April 15^ththe deadline?

Tax day wasn’t originally in April. When the 16^th Amendment was introduced in 1913, the date was March 1^st. That changed to March 15^th in 1918, and was then moved to April 15^th in 1955.

While the IRS claims the move helps “spread out the peak workload,” tax experts suspect the real reason for pushing back the deadline is that “it gives the government more time to hold on to the money.”

Don't forget that this year's tax deadline was extended to April 18 to avoid conflicts with Emancipation Day. (See also: Important Tax Dates of 2011.)

2. Income tax started because of war.

The American Civil War to be precise. The Revenue Act of 1861 was introduced to gather funds for the expensive conflict that lasted for four years, with the price of war coming in at approximately $2.5 million per day.

3. You can make big money reporting a company for tax evasion.

It’s called the Whistleblower Informant Award. This comes straight from the IRS site:

The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

So if you know something and want a clean conscience, you’ll actually get rewarded for it.

4. The federal tax code has grown to over 70,000 pages.

It started life as 400 pages in 1913. It’s hardly surprising that 82% of taxpayers now turn to a tax accountant or tax software for help.

Intimidated by the 70,000 pages? Be sure to keep a tax term glossary and tax preparation checklist handy to help you navigate through this annual obstacle course.

5. Americans spend 7.6 billion hours every year preparing taxes.

Sound like a lot? Well, there are roughly 312 million people in America according to the U.S. Census Bureau. That means every man, woman, and child spends 24.4 hours getting ready for tax day.

6. New York City has the world’s highest corporate income tax.

The figure, from a 2009 Forbes report, was 46.2%. That’s followed by Illinois (42.3%) and then Japan (41%). Compare that to the lowest, a miserly 10%, paid in Bulgaria, Cyprus, and Macedonia.

7. 89% of you think it’s NOT OK to cheat on your taxes.

What a stand-up crowd you are. In a survey done in 2008 (PDF), the result was overwhelmingly in favor of staying honest. Considering the survey was conducted by the IRS, you’d have to wonder what the other 11% were thinking.

8. Tax evasion is prevalent in the world of babysitting.

It seems that as many as 95% of people who employ babysitters, housekeepers, or other home health aides are not as upfront about it as they should be.

9. Over 700 wealthy Americans donated their 2010 tax breaks.

It’s a project called Responsible Wealth, and it’s supported by rich folks like Bill Gates and Richard Rockefeller.

10. You can earn $10.3 billion and pay zero income tax.

How? Well, it’s not easy, but GE did it 2008. By offsetting losses from another GE division, it was able to pay no taxes on the 10.3 billion pre-tax dollars it earned the year before.

11. Breast implants can be a legitimate tax write-off.

A stripper called Chesty Love was allowed to write-off the cost of her two new assets, claiming they were essential props in her performance. For more strange tax write-offs, there’s a mind-boggling list of 20 outrageous tax deductions.

12. Even the head of the IRS uses a tax preparer.

When Douglas Shulman, the head of the Internal Revenue Service, gets his taxes done by a professional, you know the tax laws are complex.

13. Americans spend $27.7 billion every year on tax preparation.

Using the 312 million figure from fact five, that equates to around $89 for every single person in the United States.

14. There are more IRS employees than troops in Iraq.

Enforcing 70,000 pages of complex tax law takes a lot of work. There are roughly 106,000 IRS employees (as of 2010), and we currently have 45,000 troops in Iraq.

15. The first-ever income tax was collected in 1404 A.D.

The place — England. It was so hated that all records of it were burned. However, in 1798 Prime Minister William Pitt the Younger implemented income taxes to pay for weapons and equipment for the Napoleonic Wars. Taxes have been a part of English life ever since.

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

IRS Delays Start of Tax Filing for Some Taxpayers in 2011

Xin Lu — Wed, 29 Dec 2010 13:00:10 +0000

2010 is coming to a close and soon we will be gathering our documents and filing taxes again. The IRS announced recently that a certain group of taxpayers will have to wait until middle to late February 2011 to turn in their tax returns.

This delay is due to the fact that the IRS had to reprogram their computer systems to comply with recent tax law changes passed on December 17th, 2010. This does not change the fact that the tax deadline is April 15th. However, the affected taxpayers should not expect to get proper refunds until the IRS systems are in sync with the latest laws.

The biggest group of taxpayers that should wait to file are those who itemize their deductions such as state and local taxes, mortgage interest, and charitable contributions. Additionally, this affects those who are taking the $4000 deduction for college tuition and fees and also teachers who are taking a $250 deduction for out of pocket classroom expenses. The majority of taxpayers will not be affected because they take the standard deduction, which is $11,400 for a married couple filing jointly and $5,700 for an individual in 2010.

Personally I always wait until at least February to file my taxes so this does not affect me much. If you are a taxpayer that want to take the deductions mentioned, then hopefully you are not expecting to pay for your holiday purchases with a refund check in January. Your refund will be delayed.

Will you be affected by this delay? When do you usually file your taxes?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Save on Last Year's Taxes Right Now

Julie Rains — Mon, 12 Apr 2010 14:00:02 +0000

Did you know that you can make money moves this year that can help you save on last year’s taxes?It's true.

Linsey’s post on procrastination and tax tips reminded me that procrastination can pay, specifically in the form of a lower tax bill. If you hurry or file an extension, you can reduce your income and your tax liability.

Fund tax-advantaged accounts (HSA, SEP-IRA, IRA)

Health Savings Account

(Form 1040, Line 25; plus Form 8889, Line 2): You’ll need to have a high-deductible health plan that is linked to your HSA. See your plan and IRS info for details, but, generally, you can fund the account up to the amount of your annual deductible.

SEP-IRA

(Form 1040, Line 28; Form 560): As long as you have earned income from your business, self-employment, or freelance work, you can contribute to a self-employment retirement plan, such as a SEP-IRA. First, you’ll need to open an account with your favorite financial institution or brokerage firm. The money doesn’t have to flow directly from your business checking account to the retirement account; any extra cash you happen to have can fund your SEP-IRA. Contribution limits are based on IRS caps and your income.

IRA

(Form 1040, Line 32): If you (or your spouse) have earned income, you can contribute to an IRA. Similar to the SEP-IRA, you’ll need to open an account, you don’t have to fund the account directly from your paycheck (you could actually sell investments in a regular account and fund the IRA with the proceeds), and contribution limits are based on IRS rules and income.

Specify applicable tax years on contribution forms and tax forms. And, if you haven’t yet opened these or similar accounts, check the IRS website and financial services providers for deadlines. Funding may be possible only if the account is already established (see page 3 of Form 560).

If you’ve had a significant drop in income or reduced your income substantially through perfectly legal methods, you may be eligible for tax breaks this year (which you might not have qualified for at higher incomes):

Medical Expenses: If you itemize deductions and you have high medical expenses relative to your income, then you can deduct the amount over 7.5% of your income. For example, if your income is $80,000, then you’ll need to have more than $6,000 in medical expenses to reap a tax benefit. However, if you’ve suffered a job loss mid-year and have income of $40,000, then you’d need just over $3,000 to benefit.
Job Search Expenses: Similar to medical expenses, you need to itemize deductions, and job search expenses must exceed a certain percentage of your income (over 2%) to get a tax benefit. But a lower income will mean a lower threshold and greater likelihood that you'll have qualifying expenses.
Long-term Capital Gains(Schedule D): If you can lower your income enough, you might get a tax rate of 0% on long-term capital gains.

If you can't make these moves by April 15, then you can file an extension. Retirement funding is available for certain accounts up to the due date of your return, which includes the extended date. Just make sure you go ahead and pay taxes due now.

Consult your CPA or tax professional for details on your personal tax situation.

This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

20 amazing, outrageous and just plain weird tax deductions

Paul Michael — Sun, 08 Apr 2007 19:05:57 +0000

Well, it's that time again. The tax deadline is just around the corner. If you're like me, you will have taken care of your taxes months ago and already be enjoying the cash your high-interest savings account is giving you on your return.

If you're smarter than me, you won't have any tax return at all. It's best to come out owing nothing and getting nothing. Evens is best here. But if you still haven't done your return, take a look at the top 20 funky, strange and outrageous deductions that folks have tried, and sometimes failed, to get away with.

It's ironic that I was sweating over the deduction of office supplies for my home business, when some folks out there are deducting breast implants and beer. As I'm often told, God Bless America.

1 - Free beer - YES
Strange but true. A gas station owner gave his customers free beer (brand unknown…I doubt it was Stella Artois though) in lieu of trading stamps. And the Tax Courts said yes, this is a legitimate business expense and tax deductible. Which makes the next entry even stranger…

2 - Free whisky – NO
How ironic. A cunning fella thought a case or two of whisky would make nice client gifts, and thus tried to deduct them on his annual tax return. The category he chose was client entertainment. However, not only was it not allowed, it was a gift that violated state laws. Ouch.

3 - Cost of hiring an arsonist – NO
Hard to believe, right? A man with a failing furniture business decided to hire someone to burn it down. The store-owner's plan was not only to collect the $500,000 insurance money, but also to deduct the $10,000 expenses of hiring the arsonist! He was denied. I’m sure it wasn’t too long before the police were also looking carefully at his return. Not a smart man.

4 - Fake Boobs - YES
This one is infamous. A stripper going by the name of CHESTY LOVE used her hard-earned savings to boost the size of her boobs, to the eye-popping size of 56-FF (do they even make bras in that size?) She figured it would get her more tips. And the write-off was allowed, being considered a stage prop essential to her act. Ha!

5 - Prostitution expenses – NO
Maybe in Amsterdam or at the Bunny Ranch in Nevada, but you can’t deduct expenses of illegal professions. Trying to deduct 4000 condoms or push-up bras are no good if you put down “prostitute” as your career. Similarly, drug dealers can’t deduct the cost of baggies or soil for Marijuana plants.

6 - Cat food - YES
Junkyard owners set out bowls of pet food nightly to attract wild cats. The wild cats also took care of their nasty snake and rat problem, making the junkyard safer for customers and providing a useful business service. Yep, you guessed it…the pet food is a business expense, it was allowed. I need to get the number of their tax attorney.

7 -Your own racehorse – NO
I can see how this would be a business expense to some people. But if you just go out and buy your own prize-winning horse, name it after yourself (the ego on some folks) and then take clients out to see your horse run, you cannot deduct this. It’s not a business expense, it’s a personal expense. But hey, if you can afford a racehorse and stables, why are you worried about the deduction in the first place?

8 - A fabulous African Safari - YES
If the IRS considers a business trip "ordinary and necessary", you can take it as a deduction. For the owners of a dairy business, this included a wonderful African Safari, because many of the activities on the trip were focused on wild animals. Please note – going to see adult shows in Vegas would not count as viewing exotic wildlife.

9 - The costs of moving…the family pet - YES
Whether you’ve got a Great Dane or a Great White Shark, your pet is considered a personal effect. And that’s great news for you. When it comes to any expenses relating to any kind move associated with a job, the tax man says yes. But I suspect hiring a Hummer Limo to move your gerbil across the state may not be looked upon favorably.

10 - A Trip to Bermuda – YES, YES, YES
I love this one. I have to find a way to do it. ANY business convention held in Bermuda can be written off without even showing there was a special reason to hold your business meeting in paradise. And it’s not the only place. Barbados, Costa Rica, Dominica, the Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia, Trinidad and Tobago, Canada, Mexico and all U.S. possessions also fall into this special tax treatment. But outside the U.S. is a different story. I guess I can’t hold a board meeting in England so I can go see my folks then :-(

11 - Body Oil - YES
If you’re a regular Joe, body oil is a once in a blue-moon splurge. Maybe something to spice up an evening with your partner, but certainly not a write-off. However, if you’re a pro bodybuilder and need gallons of body oil to make your muscles glisten, then it is a genuine tax write-off. Just don’t turn up at a client meeting covered in oil, wearing nothing but a thong and a smile. It won’t be considered “ordinary and necessary.”

12 - A trip to the Super bowl – NO
I’d like to put this one in the ‘nice try’ category. Someone decided to take clients and their spouses to the Super bowl, but just could not prove that the shindig was in any way related to business. And even if it was, it’s an extravagant expense for a meeting and would have been disallowed anyway. Sorry bud.

13 - A Private Airplane - YES
A couple with a rental condo didn’t fancy the hassle of driving up to 7 hours to check on it. They didn’t want to be stuck to the schedule of the only daily flight available. So, they did what you ore I would do. They bought their own jet! They were allowed to deduct all expenses on the jet relating to the condo, including the high costs of fuel. That must have been some

14 - A Mink Coat - NO
And thank goodness, because I hate fur. Claiming that the Mink coat was a conversation piece when visiting clients with his wife (what was the topic…blood on the runway?) a man tried to deduct the garment. Fortunately, he was denied.

15 - Babysitting costs - YES
Believe it or not, you can deduct the cost of a babysitter as a charitable deduction, if the mother of the child is leaving the house to do volunteer work for a charity. Which, of course, we all do on a daily basis.

16 - A ‘Playmate' Party - YES!
How he got away with this one is beyond me. The owner of a nightclub promotions firm decided that a regular party wasn’t good enough for his clients. So, he brought in a bunch of scantily clad “bunnies” as decoration. The tax man said sure, it’s a valid expense. Whether or not pictures of the bunnies were attached to the return is unknown at this time.

17 - A Nuclear Fallout Shelter – NO
This one bombed (ouch, sorry…bad pun). Yup, way back in the days of the cold war and the threat of nuclear meltdown, one clever chap built a nuclear fallout shelter on his property and then decided to list it as “preventative medicine.” The IRS gave that one a big thumbs down. But who’ll be laughing if Word War 3 does happen?

18 - A beautiful swimming pool - YES
This one’s a great example of lateral thinking. After being told by his doctor that he needed to exercise (after developing emphysema), the smart fella put in a swimming pool. The deduction was put down as a necessary MEDICAL EXPENSE and was allowed, along with the various chemicals, heating, cleaning and general upkeep of the pool. Now that’s using your head.

19 - Dancing lessons – NO
Dancing With The Stars may be popular, but it’s not going down well with the IRS as the subject of a deduction. You CANNOT take dancing as a deduction for medical expenses, and the following reason are outlawed – dancing to relive varicose veins, dancing to cure arthritis and finally, dancing to alleviate nervous disorders. Try any of these and you’ll be dancing all the way to the tax courts.

20 – Sperm donation as a loss – NO
It’s one thing to make a little extra cash as a sperm donor. It’s quite another to try and claim a depletion loss on the aforementioned sperm. Unless you’re an oil well, that kind of depletion is not really going to make much of an impact.

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: