IRS Updates 2011 Standard Mileage Rates – July 1, 2011

The IRS updated the Standard Mileage Rates for business, medical and moving miles driven after July 1, 2011 :

  • 55 1/2 cents per mile for business miles driven
  • 23 1/2 cents per mile driven for medical or moving purposes

Charitable miles remained unchanged at:

  • 14 cents per mile driven in service of charitable organizations

Remember to keep a written record or log of the buisness, medical or charitable miles driven.  You can get free logs here.

 I also have clients who  have writen their miles in their day planner. 

It is also a good idea (from a non tax perspective as well) to get regular oil changes / servicing close to year end and keep the paperwork.  It will show the date and odometer reading.

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Foreign Earned Income Exclusion (IRC Section 911) and When to File

Section 911 of the Internal Revenue Code allows US taxpayers to exclude foreign earned income under certain circumstances.  Just a note and observation, Section 911 was enacted many many years before 9/11 and I find it a bit chilling now to be helping clients claim the foreign earned income exclusion from income they are earning in Afghanistan.  My wife would say that there are no coincidences but I will leave that for other blogs.

To claim the foreign earned income exclusion the taxpayer must:

  1. Have foreign earned income
  2. Have a tax home in a foreign country
  3. Meet one of two tests: the bona fide resident test or the physical presence test

To have foreign earned income simply means you were outside the US in a foreign country, did some work and got paid.  The most common form of earned income is W-2 wages.

Tax home is best described by the IRS in Publication 54:

Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. Having a “tax home” in a given location does not necessarily mean that the given location is your residence or domicile for tax purposes.
If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live. If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work.
You are not considered to have a tax home in a foreign country for any period in which your abode is in the United States. However, your abode is not necessarily in the United States while you are temporarily in the United States. Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling.
“Abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling. It does not mean your principal place of business. “Abode” has a domestic rather than a vocational meaning and does not mean the same as “tax home.” The location of your abode often will depend on where you maintain your economic, family, and personal ties.

The bona fide resident test is: have you established a bona fide residence in the foreign country?

The physical presence test is: have you been in the foreign country or countries for 330 full days out of a 12 month consecutive period?

 Now an example.  You arrived in Europe on July 1st 2010 and began working at a permanent assignment.  You completed IRS Form 673 and your employed did not withhold US income tax from your wages.  You do intend to stay in Europe and expect to meet the 330 day requirement.  You are under the exclusion limit of $92,900 for 2010.  It is not January 28, 2011 and you want to know if you can file your US income tax return now and claim the exclusion.

If you file your US income tax return before the twelve month period starting July 1, 2010 is past, you will not claim the foreign earned income exclusion.  The income earned in this example would be subject to US income tax on the return filed before the 12 month period is over.  Then to claim the exclusion (and make that income excluded from US income tax) you would file an amended return after July 1, 2011 (assuming you qualified for the exclusion – in this case you were in Europe 330 days) and claim the foreign earned income exclusion.  See the Treasury Regulation link below.

The other option is to put your US income tax return on extension and wait until the twelve month period is over and then file and claim the exclusion. (After July 1st, 2011 in this example).

Useful Links:

Internal Revenue Code Section 911

Publication 54

Form 673

Form 2555

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Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

The last tax act signed into law at the very end of 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 has provisions that affect businesses, families,  payroll tax and estate tax. 

Personally I was glad that this tax act did not / will not require me to take another 24 hours of continuing education to try and understand what happened. (That is what was needed for all the other tax law changes we saw over the past year).

I have received many calls and e-mails regarding this act so I am posting my client bulletin: Extender Tax Act I sent out that explains the highlights of the act.

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SE Health Insurance a Deduction for SE Tax!

Finally – Self Employed Can Deduct Health Insurance Premiums Paid when Computing Self Employment Tax

It is about time.  I am heading now into my 13th tax season and it has finally happened: the self employed may deduct the cost of health insurance premiums they paid for themselves for both income tax and self employment tax purposes.  (The Small Business Jobs Acto of 2010 allows it)  The self employed may do this on 2010 income tax returns.

Up to this point the self employed were not allowed a deduction on their Schedule C for health insurance premiums paid on coverage for themselves.  These health insurance premiums were an adjustment for income tax purposes but not a deduction for self employment tax purposes.

For instance, you are self employed and paid $800 a month for health insurance in 2010.  This change could save you up to $1,356 in self employment tax.

Before we all get too excited: this change is for 2010 only.  It goes back to the way it was for 2011.  Namely the self employed can use health insurance premiums they pay for themselves as an adjustment to income and “pay” self employment tax on them.

The IRS did not change Schedule C.  The change is made on Line 3 of Schedule SE.

The deduction for self employed health insurance includes premiums pad for the self employed taxpayer and the taxpayer’s spouse, dependents and, effective March 30, 2010 any child of the taxpayer who at the end of the tax year is 26 or less.

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Vehicle Expense – the First Step is to Keep Track

The IRS allows us a deduction for the business use of our car.  The deduction is based on either a published Standard Mileage Rate or the actual expenses incurred to operate the vehicle.  Since many times the vehicle is used for both business and off hours personal use, the IRS wants us to maintain a log of the business miles driven to either apply the business miles driven to the Standard Mileage Rate or to allocate the total expenses incurred to operate the vehicle between business and non business use.

The question always arises: which method is better?  It all depends on many factors such as do you own or lease, is it an expensive vehicle to operate with gas, oil and maintenance, and do you drive substantially more business miles per year that personal, substantially less or about the same?

The first step it to try and keep track of the data needed to make the determination.  That is where I start to hear the moaning and groaning.  In an effort to help alleviate some of that moaning and groaning I did a quick Google search to see what is available for free before you run out and buy a mileage log that you probably won’t use because it makes you do all the math.

Excel and PDF files from SampleWords.com:  Track odometer readings, miles, purpose, total miles.  Can set up a tab for each month.   Pros: simple, straightforward, color coded columns, does the math.  Cons: no area for expenses.  http://www.samplewords.com/vehicle-mileage-expense-log/

PDF file from SampleWords.com:  Tracks date, destination/purpose, odometer reading, business miles, personal miles, total miles.  Pros: easy to print and keep in car. Cons: you do the math, no area for expenses.  http://www.samplewords.com/auto-mileage-log/

Mileage Log and Reimbursement Form from Microsoft in Excel: Tracks dates, starting location, destination, description/notes(could put business purpose here), odometer start & end, total miles and reimbursement (you enter a rate of reimbursement per mile).  Pros: Excel does the math, could be used by employee who gets reimbursed by company, easy to use.  Cons: no vehicle expense tracking.  Found in Microsoft Excel Templates: Forms/Business forms/Mileage log with reimbursement form.Mileage log with reimbursement form1

Vehicle Maintenance Log from Microsoft in Excel: This spreadsheet appears to be for tracking dates and routine maintenance performed on your vehicle.  It could be easily adapted so you enter the expense amount and track totals.  Pros: it could be adapted to track expenses.  Cons: it does not track mileage.  Found in Microsoft Excel Templates: Records/Logs/Vehicle Maintenance Log.TP0130000755

The ones I would suggest trying are: http://www.samplewords.com/vehicle-mileage-expense-log/ to track the miles driven and a customized maintenance log above.  Print one sheet out from each file for the month.  Stick them in a binder and in the car.  Start entering the data for this month.  When you go to print one out for next month make sure create a new tab for the new month in the Excel workbook and  enter the data for the month just finished so Excel does all the math for you.

Make it a monthy habit and it will not take much time at all.

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“Extender” Tax Law may Slow Some 2010 Income Tax Returns

The last minute Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is causing the IRS to revise its processing systems for both paper and electronically filed returns.  The reasons for the delay are certain provisions of the “Bush Tax Cuts” that were set to expire 12/31/2010 are now extended.

Specifically, if your 2010 individual income tax return will include any of the following the IRS is announcing that it will not be ready to process the return until mid to late February:

  • Itemized deductions where you take sales tax as an itemized deduction
  • You will claim amounts on Form 8917: Tuition and Fees Deduction
  • You are a teacher or educator and claim an amount on the face of your 1040/1040A for the Educator Expense Deduction
  • You have a loss to report on Schedule A and Form 4684: Casualties and Thefts
  • You live in DC and want to claim the District of Columbia First Time Home Buyer Credit
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2010 Federal Capital Gains Tax Rates

The table below show the capital gains tax rates for different levels of taxable income using different filing statuses. 

NOTE: the capital gains rates shown are for realized gains from the kind of stocks, bonds or mutual funds you would hold at in investment account or brokerage account. 

The rates are not for realized gains from the sale of collectibles, realized gains from the sale of certain small business stock and unrecaptured gains.  Those rates are listed below the tables.

Single filing status      
       
  Ordinary   Capital Gains Tax Rate
  Income Short Long 
Taxable Income Bracket Tax Rate Term Term
       
$0 – $8,375 10% 10% 0%
$8,375 – $34,000 15% 15% 0%
$34,000 – $82,400 25% 25% 15%
$82,400 – $171,850 28% 28% 15%
$171,850 – $373,650 33% 33% 15%
$373,650 -> 35% 35% 15%
       
Married filing joint or Qualified Widow(er) filing status
       
  Ordinary   Capital Gains Tax Rate
  Income Short Long 
Taxable Income Bracket Tax Rate Term Term
       
$0 – $16,750 10% 10% 0%
$16,750 – $68,000 15% 15% 0%
$68,000 – $137,300 25% 25% 15%
$137,300 – $209,250 28% 28% 15%
$209,250 – $373,650 33% 33% 15%
$373,650 -> 35% 35% 15%
       
Married filing separate filing status    
    Capital Gains Tax Rate
  Ordinary Income Short Long 
Taxable Income Bracket Tax Rate Term Term
       
$0 – $8,375 10% 10% 0%
$8,375 – $34,000 15% 15% 0%
$34,000 – $68,650 25% 25% 15%
$68,650 – $104,625 28% 28% 15%
$104,625 – $186,825 33% 33% 15%
$186,826 -> 35% 35% 15%
       
Head of household filing status    
    Capital Gains Tax Rate
  Ordinary Income Short Long 
Taxable Income Bracket Tax Rate Term Term
       
$0 – $11,950 10% 10% 0%
$11,950 – $45,550 15% 15% 0%
$45,550 – $117,650 25% 25% 15%
$117,650 – $190,550 28% 28% 15%
$190,550 – $373,650 33% 33% 15%
$373,650 -> 35% 35% 15%
       

Other capital gains tax rates are:

Realized gains from the sale of collectibles: 28%

Realized gain from the sale of small business stock less the exclusion allowed under Section 1202: 28%

Unrecaptured Section 1250 gain: 25%

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