TAX TEASERS

Below are miscellaneous questions and answers that individuals have asked about taxes. We can help you answer questions. Complete the form below with your tax question. We know taxes!.

1My Client receives dependent care benefits under a qualified plan. Can she exclude these benefits from her income if she is self-employed?
Normally, taxpayers may be able to exclude dependent care benefits from their income, if an employer provides dependent care benefits under a qualified plan. However, as in your client’s case, a self-employed taxpayer is treated as both employer and employee and does not qualify for the exclusion.

Instead, the self-employed taxpayer can take a deduction on Form 1040, Schedule C, line 14; Schedule E, line 19 or 28; or Schedule F, line 15. Form 2441 must also be filed in order to claim the deduction.

Further, the amount deductible or excludible from wages is limited to the smallest of:

• The total amount of dependent care benefits received during the year,
• The total amount of qualified expenses you incurred during the year,
• Your earned income,
• Your spouse’s earned income, or
• $5,000 ($2,500 if married filing separately).

Inform your client that she will not be able to exclude the amount of the dependent care benefits paid from her wages, but she may deduct the smallest of the five amounts listed above.

Please refer to IRS Publication 907 - Tax Highlights for Persons With Disabilities for additional information on this topic.

2My client asked me about the costs he incurred for a company picnic he provided to his employees and their spouses. Are any of these costs deductible as a business expense?
You should inform your client that, usually, business entertainment and meals offer limited deductions (usually only 50%). But in the instance of a company picnic, the costs associated with providing the entertainment and food can be fully deductible as entertainment costs as long as 1) there is a business purpose for the gathering and 2) the costs are not extravagant.

So, a gathering where you provide a simple meal and some entertainment as a form of team building and socialization for your employees should make the grade. Make certain to inform your client to keep proper records which should include a list of attendees (including non-employee guests) and some notation of the business purpose along with receipts for all costs.

Please refer to IRS Publication 535 - Business Expenses for more information.
3Per my client’s divorce decree, he is required to pay all of the mortgage payments for his ex-wife to live in the jointly-owned home they once shared. Can he deduct these payments as alimony?
Yes, but he will only be able to deduct a portion of the mortgage payments. If your client is required to make all the mortgage payments, and the payments would otherwise qualify as alimony, he can deduct one-half of the total payments. This amount will be reported as alimony paid on line 31 of Form 1040.

Further, if he itemizes deductions, he would be entitled to deduct one-half of the interest paid. This amount will be reported on Form 1040 – Schedule A on line 10.

The former spouse would be required to report one-half of the payments received as alimony received. She would also be entitled to one-half of the interest paid if itemizing deductions.

For more information related to alimony, please refer to IRS Publication 504 - Divorced or Separated Individuals
4My client is eligible for the Premium Tax Credit. Are they required to file a federal income tax return in order to receive this credit?
Yes, a taxpayer must file a federal income tax return if they want to receive the Premium Tax Credit, even if otherwise they are not required to file a return. This goes for any advance credit payments received for any tax year.

The actual amount of the credit that may be claimed may differ from the advance credit payments being made on your client’s behalf. Their return is used to reconcile this.

It is extremely important that a tax return is filed if advance credit payments are made on your client’s behalf or someone in their family. Failure to file a tax return will cause them to be ineligible for future premium assistance.

Please refer to The Premium Tax Credit on the IRS website for more information related to the provisions of the Premium Tax Credit.
5My client informed me that he has recently taken some classes for work. Are there any deductions that are allowed for the costs associated with this education?
Yes, under certain circumstances, the costs are deductible. First, the education must be a qualifying work related education. This means that the education is required by law or your employer to maintain your current position, status or salary; or the education maintains or improves skills necessary in your present work. One of these criteria must be met before any deduction can be allowed.

Even if the education meets one of the above criteria, the education must not qualify you to meet the minimum education required for your position. It also cannot qualify you for a new trade or business. If it does qualify you for either of these, the deduction is not allowable.

If the education costs are for an employee and meet all of the deductibility criteria, the costs are allowed as a miscellaneous itemized deduction subject to the 2% of AGI floor. If the costs are for a self-employed individual, then the deduction would be taken on Schedule C as a business expense.

Please refer to Chapter 12: Business Deduction for Work-Related Education of IRS Pub 970 - Tax Benefits for Education for more information.
6My client is an employer who is not sure how to classify a worker. How can he determine if his worker is an employee or an independent contractor?
There are many factors to consider when determining whether a worker should be classified as an employee or as an independent contractor. The IRS has developed some guidelines to be followed when trying to make this determination as detailed in IRS Publication 1779.

The 3 main factors, known as the Common Law Rules, that need to be considered are:

Behavioral Control – Who has control of when, where and how the work is completed?

Financial Control – Does the worker have unreimbursed expenses? Does the worker have an investment in the company? How is the worker being paid, a guaranteed amount or by the job? Is the worker available to work within the market? Will the worker realize a profit or loss?

Type of Relationship – Is there a signed contract describing the relationship? Are you offering benefits such as insurance, pension plan or vacation and sick pay? Is the relationship expected to be permanent? Are the services being performed by the worker a key aspect of the regular business?

Each individual situation should be considered separately based on the individual set of circumstances.

For more information related to employee or independent contractor classification, please refer to the following IRS Publications:

IRS Publication 1779 - Independent Contractor or Employee?
IRS Publication 15-A - Employer's Supplemental Tax Guide
7My client lost a lot of investment money as a victim of an investment fraud scheme. Is there anything I can do to help them recover the money?
The Internal Revenue Service has a procedure under Revenue Procedure 2009-20 which allows you to claim the theft loss deduction for a Ponzi-type investment scheme.

You will need to file Form 4684 Casualties and Thefts to recover some of your client’s investment losses. You will need to make sure to complete Section C on Form 4684 (Theft Loss Deduction for Ponzi-Type Investment Scheme).

In order to use Section C, you must qualify to use Revenue Procedure 2009-20 (as modified by Revenue Procedure 2011-58) and you must choose to follow the procedures in the guidance. If you fail to meet either of the two preceding qualifications, then you will not be able to utilize Section C of Form 4684 and you will need to refer to the instructions for Section B.

For full details on how to complete the form, please refer to Instructions for Form 4684 - Casualties and Thefts along with the related full Revenue Procedures and Rulings:

Revenue Ruling 2009-09, 2009-14 I.R.B. 735
Revenue Procedure 2009-20, 2009-14 I.R.B. 749
Revenue Procedure 2011-58, 2011-50 I.R.B 849
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