Today TaxMama® hears from Blake in the TaxQuips Forum who is upset. “I bought a used car last December for $8,000. The car was owned by an individual who apparently had a business bank account where he deposited the money. The bill of sale just says his name on it, no company. How can the state of Georgia charge me $700 in taxes plus a $115 penalty on a car I bought from an individual? I don’t have the coins laying around for this kind of “surprise” expense. I was fully under the impression the car was bought from an individual and so were the two witnesses who were there when bill of sale was written up.”

Dear Blake

I don’t think this has anything to do with whether the seller was a business or an individual. It has more to do with your registering the car and transferring title to you.

I don’t know specifically about GA, but in most states any purchase of a vehicle triggers either a sales tax (if a dealer sells it) or a use tax (if a private party sells it). When the dealer sells a big ticket item like a car, he collects it from the buyer and sends it to the state. When a private party sells the car, the buyer needs to pay the state himself.

You could certainly try to get the penalties waived. Try talking to the Georgia Taxpayers Advocate office and see if they can help you. Clearly, you didn’t understand that you were responsible. Let’s face it, there are so many tax laws on the books, how is an average citizen supposed to know them all?

You won’t get the taxes waived, but good luck trying to get the penalties waived. Sometimes, asking nicely, politely and patiently, government officials will go out of their way to help you.

And remember, you can find answers to all kinds of questions about use tax issues and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Ada in the TaxQuips Forum with a deceptively difficult question. “My father is a non-resident alien with a non-business U.S. checking account that he opened over 15 years ago. He wants to give me and another sibling (both resident US citizens) the money from that account (split equally to about $20k each). What are the reporting requirements and tax liabilities for him, my sibling and myself?

Dear Ada,

I asked Roger B. Adams, EA, our resident international tax expert, to research this for you. After researching this Mr. Adams’ has determined the following:

According to IRC sec. 2501(a) and Reg Sec. 25.2501-1 a nonresident alien donor is subject to gift tax on the transfer of real or tangible property situated in the US. The question is whether or not a bank account is “tangible” property and the answer seems to be, NO it is not. Cash, on the other hand, is tangible property.

Gifts are not taxable to you since they are not considered income. So you and your sibling are not liable to pay tax on the gift. It seems your father’s best option is to transfer his interest in the account to both of you. Thereafter, you would do with the money as you wished.

Ada responds that the bank won’t allow them to be added to the account. Since they must open a new account, wouldn’t this end up costing Father gift taxes?

TaxMama has way around this problem. Do open the new accounts, if you must. However, set up the new accounts in your FATHER’S name, with you and your sister as co-signers. That way, it’s his account. You’ve now been added to the account – not given cash. You can each use the cash in the account under whatever agreement you sibling and your father decide.

And remember, you can find answers to all kinds of questions about non-resident alien tax issues and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Kelly in the TaxQuips Forum who cares about her friend. “A friend’s home will soon be going into foreclosure. He’s owned the home for 2.5 years and we’re trying to figure out if he’ll have to repay the $8,000 tax credit he received as a first time homebuyer. I’ve read that if the house sells and there’s no gain you’ll owe nothing. If the home is in foreclosure how is a gain calculated? Would it be of any benefit to try to do a short sale on the home versus the foreclosure? He’s planning to file for bankruptcy as well. I’m just wondering if there’s any legal way around the $8,000 repayment?”

Hi Kelly,

Good question.

Let’s see – to avoid paying back the Homebuyers Credit, you must live in the place for three years. So, one of the nice things about filing bankruptcy is – you can stay in your house for quite a while longer. If the BK can keep him in the house until the three years are up

1) No worries about repaying $8,000.
2) Free rent for as long as the BK continues.

However, if they don’t stay in the house for three years and end up owing the repayment, the bankruptcy will not help them since the tax return won’t even have been filed yet.

When it comes to selling and short sales, you need to be SURE there is no profit. Remember, you have two things happening when you run short sales, foreclosure or just signing over the property with a deed in lieu of foreclosure.

1) You have the sale – which may be the amount of the loan, or it may include some accrued interest, depending on whether the lender has modified the loan and added interest at the end. That might result in a profit. The profit would mean that some or all of the $8,000 might have to be repaid.
2) You have cancellation of debt income – (perhaps not, if it’s the original loan) which is subject to ordinary taxation.

Back to the Homebuyers Credit. If the house is sold at a loss, or with no profit at all, there won’t be a repayment of the tax credit. More details -

And remember, you can find answers to all kinds of questions about repaying the homebuyers tax credit and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Saroj in the TaxQuips Forum with a valid concern. “I have been doing taxes for last 20 years or so. I was thinking of taking the EA exam. But I added Financial Advising to the practice (HD Vest) and QuickBooks, also. I am 62 years old; so I don’t know how long I will be doing taxes. With all the regulations and continuing education requirements, what do you think is more beneficial? Should I still get my EA or just pass the Registered Tax Return Preparer Exam (RTRP) and keep doing what I am doing?”

Hi Saroj,

That’s a good question. And the concept applies to any senior who is contemplating a career change or upgrade. So let me give you my perspective on the issue, starting with a key question.

Are you feeling particularly feeble, mortal, or in imminent danger of dementia?

If you are like most 60-year-olds these days, you’re in the prime of your life. You still look great in jeans, and you can hike for miles. You can expect a good, solid healthy 20+ years of lucidity and functionality.

How do you want to spend it?

Yes, you can take the RTRP exam and continue doing what you’re doing – and be just fine.

Or you can add some services to your practice – like being able to get a signed power of attorney from your clients and help them with their tax problems. You won’t have to refer them to others when they face tax audits or collections problems.

So what do you think?

And remember, you can find answers to all kinds of questions about career issues and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Hugh in the TaxQuips Forum with a long question. “To make his story short, he lays out his income and expenses and wants to know what his audit risk is – and what records to retain in case he’s ever audited.”

Hi Hugh,

In an example like yours, there’s no red flag to attract an audit. You’re odds of being audited are quite low.

You also asked about the materiality of a $50 expense. That depends on the whims of the auditor, whether they’ve had their coffee that morning, and their spouse or child/ren or bosses have been unpleasant that day. Also, if they have ever tried your business and failed.

Of course, some of it also depends on how well-organized your presentation is for the audit, and your own demeanor and behavior. But sometimes, even when you do everything right, and you’re low-key, pleasant, polite and delightful – the issues above will override.

You can never go wrong retaining records. Space, these days, is cheap. When I started out – a 640K Radio Shack TRS-80 cost $650. Now, a 500 GIGAbyte drive costs about $100.

And remember, you can find answers to all kinds of questions about audit risk, recordkeeping and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Mazyar in the TaxQuips Forum with a good question. “I am planning for 2012 tax and am trying to find out what would be the maximum long-term capital gain I can have in order to still have it taxed at 0%. I use the Schedule D Tax Worksheet and enter the required information. To make the matter as simple as possible I assume that there is no short-term gain, no dividends and enter zero values for most of the lines. There are only three values I enter: (see the post for details)

Considering the simplified scenario, I think the max is (70700 less taxable income) and should match the value in Line 20 on the worksheet. Am I wrong?”

Dear Mazyar,

That’s a good question. And I am so glad you’re doing your planning early enough in the year to take advantage of this low rate. Odds are, when the 0% and 15% rates expire on 12/31/12, Congress will not extend it. So it IS a good idea for folks to start cashing in on capital gains this year.

Essentially, as long as your income, not including the capital gains, falls into the 15% tax bracket or below, your capital gains should be taxed at zero for 2012.

You don’t say if you’re single or married or head of household – and that determines your tax bracket. However, you can look up the limits on the 15% rate right here, at the SMBIZ site. Of course, if you were looking at $70,700, then I’m going to guess that you are married – and that is the correct limit. You’ve got the right idea.

Just to be sure, DO test the computation in a live tax program. Other things might come into play, like Alternative Minimum Taxes. And there might be an effect on your adjusted gross income that could affect your itemized deductions, if you have any, tax credits, etc.

And remember, you can find answers to all kinds of questions about tax planning, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from John in the TaxQuips Forum with a little problem. “Reviewing my Federal taxes after my tax preparer did them, I discovered she only had 1 W-2 form listed on my return but she sent copies of both with the taxes. Just wondering what is going to happen when the IRS gets the tax return?”

Hi John,

Whether your preparer sent one or both W-2s with your return, sooner or later, IRS will send you a letter telling you that you under-reported your wages. They will compute the correct tax, and deduct the withholding from the 2nd W-2.

You see, before the overall processing season is over, IRS’s computers cross-reference your tax return against all the W-2s and 1099s filed with your Social Security number or employer ID number (if using a Schedule C). If your preparer produced a tax return to file on paper, rather than e-file, the IRS staff person who keys in the data will see that W-2 and will probably enter it. (I would hope.)

One could say that this is an innocent error.

The truth is, it says to me that not only does this tax preparer work alone, without having anyone review her work; but she doesn’t have any procedures in place to review her own work. When working alone, a tax professional must still exercise proper due diligence.

She should be setting her tax returns aside and doing a complete review (with a standard checklist) a day or two later, so she can see the return with fresh eyes. The checklist would have included making sure all W-2s are entered. (If your tax pro needs such a checklist, have her join us here and request it in the Forum. I will send it to her, gratis.)

Did your preparer at least re-compute your tax liability or refund so you know what to expect once both W-2s are taken into account?

On the other hand, YOU should not be signing your tax return without looking it over carefully. That’s why we give our clients PDF copies to review before they sign the efiling documents.

And remember, you can find answers to all kinds of questions about tax return errors, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Dave in the TaxQuips Forum with a quickie little question. “If I retire at 62 or 63 with Social Security and IRA distributions (not Roth) what will my tax liabilities be? For example: Monthly: $1700 from social security and $3,000 from IRA for total of $4,700. Do I pay income tax on both? Will I have to continue to pay Social Security and Medicare? Is there a different tax bracket for retired?”

Dear Dave,

Team TaxMama doesn’t do your computations for you. That’s what tax planners are for – to help you evaluate different alternatives, so you can make informed decisions.

If you’d like to do it yourself, you can play with the online tax calculators at TurboTax or CCH Complete Tax – where you’ll also find a variety of retirement planning tools.

Before I answer your other questions, let me alert you to something you might not realize. When you start collecting Social Security early, at 62 or 63, if you work and earn more than a certain amount, you will have to repay the Social Security Administration (SSA). For 2012, the maximum allowable earnings are $14,160 – anything over that and you repay the SSA $1 for every $2 you earn.

So you get penalized three times – 1) You get the lowest possible monthly benefit.
2) You have to pay back part of your benefits.
3) Your wages/earnings are apt to cause your Social Security income to be taxable.

If you can hold off collecting SS benefits until you reach the retirement age for your age group, you may be better off (for many baby-boomers, it is age 66). Your benefits will be higher – and you won’t have the earnings limit. This affects people retiring early, since they often find themselves either needing the money or needing something to do after a year or so of retirement.

Now to your questions.

1) Do I pay income tax on both?

You must pay taxes on the IRA distributions. The SS income is only taxable when your taxable income plus half your Social Security income exceeds $30,000 ($25,000 if single). IRS explains how it works here.

Since your IRA alone will add up to $36,000, up to 85% of your Social Security benefits will be taxable. Some tax planning can help determine the optimum IRA distribution to avoid taxing your Social Security benefits at all.

2) Will I have to continue to pay Social Security and Medicare?

Only if you work. Not on your SS or IRA earnings.

3) Is there a different tax bracket for retired?

Nope. And you don’t even get a higher standard deduction – until you reach age 65. Consider reading IRS Publication 554 – Tax Guide for Seniors. You’ll learn more about the tax system and how it affects you once you reach age 65.

And remember, you can find answers to all kinds of questions about retirement, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Robert in the TaxQuips Forum who is suspicious. “I am a 1099’ed contract driver. I recently noticed they are taking taxes out of my check. I was told that they take taxes out, then make quarterly payments to federal income tax. I have worked as contract labor before and they didn’t take anything out. Is this normal or does this sound fishy?”

Hi Robert

That’s interesting.

Are you sure they are paying the money quarterly? When they withhold your money, it should be going in right away.

Why are they withholding your money?

Well, did they ask you to provide a Form W-9? They should have asked in January. You should have submitted it immediately. If you don’t provide them with this signed document, they are required to take ‘back-up’ withholding. That means, they must take 28% out of each of your checks.

So, now get in touch with the payables department and find out if the withholding will stop if you provide the Form W-9.

Oh yes, what is another reason they might be taking withholding?

If you owe back taxes to the IRS, they might have notified your client and levied your earnings. Find out if that was the case. You’ll sort this out.

And remember, you can find answers to all kinds of questions about withholding, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Cristie in the TaxQuips Forum with a quick question. “I just wanted to know if my husband needs to report the money he makes from an Internet job which pays $400.00 a month? This is on top of his regular job in which taxes are taken out from every paycheck.”

Dear Christie,

You’re joking, right?

Of course your husband has to pay taxes on his second job, … or third job, or freelance business, or anything he earns. Or you earn.

You already know that, right?

Thanks for making me smile.

Incidentally, if he isn’t having taxes taken out – then this isn’t a job. Then, he’s in business. And he not only has income taxes to pay – but self-employment taxes, as well. In that case, he may need to learn more about his obligations – and the potential tax benefits he can use. See IRS Publication 334 or my book.

And remember, you can find answers to all kinds of questions about paying taxes, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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