BEFORE ACTING ON ANY OF THESE TOPICS, 
CONSULT WITH YOUR PROFESSIONAL ADVISOR

Educator’s deduction - does home schooling qualify?

Teachers who work more than 900 hours in a school year are entitled to take a tax deduction directly against their total income for education expenses.  The deduction is limited to $250. This special deduction is set to expire with year 2009 income tax returns.  However, it is expected that the deduction will be not only be extended to subsequent years, but the $250 limit will be increased.  

In INFO 2003-0204, the IRS took the position that home schooling does not qualify for the eduator's deduction.  The rationale behind the IRS decision is the fact that the "educator deduction" only applies to individuals who are paid teachers and principals.  While the home schooling "educator" could be considered a teacher, he or she is not paid for the services.

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Same-sex domestic partners - any special tax breaks?

You may be able to cover your parner under the group medical insurance plan of your employer, even if you cannot claim your parner as a tax exemption on your Federal income tax return.

In a private letter ruling (PLR 9850011) the IRS held that a same-sex domestic partner is not a spouse, but could be considered a dependent for purposes of health benefits.  The IRS held that a domestic partner qualifies  as a dependent under Code Section 152, if he or she meets all of the following:  

• First, he or she receives more than half of their support from the other partner.
• Second, he or she lives in the other partner’s household for the entire year.
• Third, the relationship does not violate local law.
  

I have never seen the third issue raised by the IRS for domestic partners living in Illinois or Indiana.  Furthermore, the fact that the dependent could not be claimed as a dependent because he or she has income is not a relevant factor.  (

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 Student loan interest deduction  

Interest paid on student loans is deductible on your tax return.  This will be true whether you take the standard deduction or you itemize. The maximum deduction claim on your tax return is $2,500.  If you arre filing a joint income tax return, the maximum deduction is only $2,500.

If your income exceeds certain levels, your maximum $2,500 student loan interest deduction will be phased out.

For 2009 and 2010 and subsequent years, the phaseouts ranges are the  following income levels:

$60,000 to $75,000 for persons filing as single or head of household. And
$120,000 to $150,000  for married persons filing jointly.

If your income falls below the above levels,  you are entitled to a full deduction for the student loan interest you paid during the year.  Above the above income levels, no deduction is allowed.  And finally, in between there is a ratable reduction in your student loan deduction.

If your filing status is married filing separately, you are not entitled to any deduction for student loan interest, regardless of your income level.

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Job search expenses - are they deductible?

If you itemize, your job search expenses may be deductible.  It depends on whether or not the expenses relate to a search in the same line of work.  If the seach is in the same line of work that you are (or previously were) in, the expenses are deductible as a miscellaneous deduction. If the job search involves a new line of work or if you never had a job, the expenses are not deductible.  

"Job search" deductions fall into the same category as investment expenses, employee business expenses, and tax preparation expenses;  all of these are classified as "miscellaneous deductions". Generally, miscellaneous deductions can be deducted on your tax return to the extent that the sum of your miscellaneous deductions exceed 2% of your total income.  Also, this type of expense is not deductible to the extent of any reimbursements that you receive.

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Starting in March of 2009, your employer can provide you with up to $220 per month in transit passes as a tax-free fringe benefit.  Prior to March, 2009 the maximum exclusion is $120.  The exclusion also applies to expenses relating to transportation to and from work in certain cases involving a employer provided commuter highway vehicle.

The exclusion for transit passes (and employer highway commuter vehicles) applies to social security payroll taxes along with income taxes.  Therefore, not only are the cost of the transit passes (up to the maximum exclusion) tax-free to you, the employer will save on payroll taxes. 

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Starting with the year 2000, Illinois allows an earned income tax credit.  The credit is equal to 5% of the earned income tax credit claimed on the Federal income tax return.  The credit can only be taken against the Illinois tax for that year.  If the credit exceeds the Illinois tax, the excess is lost.

Part-year and non-residents are also entitled to the credit.  However, the credit (5% of the Federal credit) is limited based upon the percentage of income allocated to the Illinois return.

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If you drive downtown to work, you may be able to get the cost of your parking reimbursed by your employer-- tax-free.  For 2009 and 2010 employers can offer most employees the option of up to $230 a month in tax-free parking benefits or taking the money as taxable salary. If the employee chooses the tax-free parking, he/she will also save on Social Security and Medicare taxes. The employer will also save since the benefit is exempt from payroll taxes.

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If you are an employee, you may be entitled to deductions for expenses relating to your job. This category of expenses is usually called employee business expenses. The expenses are deductible as  miscellaneous itemized deductions. These expenses are grouped with other miscellaneous deductions (e.g. investment expenses, tax preparation fees) and are deductible to the extent that the total expenses exceed 2% of your gross income. Examples of employee business expenses are un-reimbursed job related automobile, travel and entertainment expenses. In some cases home office expenses and even computer expenses may be deductible as employee business expenses. 

As noted elsewhere in this newsletter, there have been significant changes to the rules concerning home office expenses. 

Employee business expenses are generally deductible, if they meet two requirements: 
 

(1) they are not reimbursable by your employer, and

(2) the expenses meet the "convenience of employer test"
 

The "convenience of employer test" may sound easy, but it is not.  This topic is very complex; you need professional guidance on the details.

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Generally, the  cost of your meals is not deductible, because they are personal in nature.  The tax law specifically states that,  unless otherwise provided, you cannot deduct the cost of personal expenses.  A few of the most common specific exceptions are medical expenses and the interest expense on a principal residence.  In a few instances, the courts have carved out exceptions for meals in a few situations.

On-Duty Meals - In a recent Appellate Court decision (Boyd Gaming Corp., et al. v. Commissioner 83 AFTR2d 783) on-premises meals were allowed as a tax deduction to the employer and tax-free income to the employees. In the case, the Casino required the employees to remain on the employer's premises for the entire work day because of security reasons. During the day, the employer provided lunch which could be interrupted if the employees were needed.

In another court decision involving highway patrol officers (Christey v. Commissioner 841 F.2d 809), the officers were able to deduct the cost of their meals while on duty because they were subject to rigid restrictions on how, when, and where they could eat. Also, the officers were required to interrupt their unfinished meal if there was an emergency or traffic problem (which there often was).

There are many facts to consider before it can be determined that the activity or expense will meet the "convenience of employer test."  The closer that you can get your factual situation to fit into an example in the IRS regulations, the better your chances of getting your tax deductions.  You would be wise to seek professional advice in this area. 

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If you claim exemptions for children under age 17, you will be entitled to tax credits of $1,000 per child on your 2009 Federal income tax return.   The credit is a direct offset against income taxes.   However, low income taxpayers may see an additional  refund up to the total child care credit.  The child has to be under 17 years old on December 31st.  For example, if the child's 17th birthday is on December 31st, you lose the credit on that child.

The child tax credits will phase out as annual income exceeds $110,000 for married taxpayers filing a joint income tax return and $55,000 if the filing status is married filing separately. For all other taxpayers, the credit will phase out when annual income exceeds $75,000. 

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Illinois residents are entitled to a 25% credit for the cost of tuition and fees paid to Illinois schools for their childrens' education.  The maximum credit that can be claimed on a tax return is $500.  The credit applies to education starting with grammar school and going through high school.   The credit can be taken against the Illinois taxes after deducting the credit for real estate taxes.  If the filer has no Illinois income taxes, there is no education credit.  Finally, education expenses must related to a child being claimed as a dependent on a parent's income tax return. 

While the credit is aimed mainly at private school tuition, the credit applies to public school tuition (if any) and fees.   However, the credit does not apply to total education and fees below $250. 

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In-home care expenses are deductible as a medical expense if they qualify as maintenance or personal care expenses are for either a chronically ill individual or an individual who has been certified by a licensed health care practitioner and meets any one of the following conditions:

(1) - The individual is unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days without substantial assistance.

(2) - The individual must be disabled as defined by IRS regulations.

(3) - The individual needs substantial supervision due to his or her cognitive impairment.

We feel that the best documentation is a letter from your health care practitioner. 

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If you own your own business, you should be able to deduct the cost related to a home computer. For example, you probably need to keep your income records confidential and physically removed from the inquisitive eyes of your employees. 

If you are an employee, you generally are not entitled to deduct the costs related to a home computer unless your employer requires you to have one. In our experience, very few employees can meet this test. 

If you are taking educational courses needed to improve your job skills, you may be able to deduct the cost of a home computer if your curriculum requires you to have a personal computer at home. 

Assuming that you attempt to deduct your home computer, you can only deduct the business portion. Also, you need to keep records on the business use versus personal use percentages. 

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You should read my web page devoted exclusively to this subject. Press here for the link to this page. I have tried to keep the subject matter very basic.  For more detail, you really need to see a business advisor (like myself).

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Generally, you should keep all of your records for at least seven years. You should keep certain records even longer.
  

Tax returns - you should keep all of your tax returns forever. 

If you are not sure whether or not you should throw your records away, you should probably keep them. 

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You should always try to avoid filing your return late. If you owe money, your penalties could be up to 5 times higher than they would be if you filed on time.  If you owe taxes, the IRS will almost always give you a payment plan. 

If you have a refund coming, you may lose it if you wait too long.   Also, you may be assessed a penalty even if you do not owe any taxes.

If you cannot file by the initial due date, you can probably get an automatic 6 month extension of time to file. 

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Automobile expenses are deductible when the automobile is used for business. Unfortunately, most employees do not receive a deduction because their "business" use is either going from home to their business location or vice versa. For tax purposes, this type of driving does not qualify as business use. 

Generally, travel between two business locations (e.g. a daytime and a night job) qualifies for business use. Also, travel to customers and job sites qualify for business travel, if you have a permanent job location that you go to on a regular basis.  If all of your job locations are temporary,  you may not be able to deduct any of your automobile expenses. 

If you drive to and from a temporary location outside of the metropolitan area, the auto mileage is considered business mileage.  However, the IRS considers the Chicagoland ) metropolitan area to cover a very large area (e.g., up into Wisconsin).

If you stop to pick up supplies on your way to work, the subsequent mileage to the job site should be business mileage. Finally, any additional costs that you incur to carry your tools is deductible.

If you are a client, and you want some suggestions on increaseing the business portion of your auto usage, either call me at 708_647-8599 or send me a secured email by pressing here.

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Generally, if you are legally married at year-end, you are considered to be married for the entire tax year. If you are going through a divorce, you are generally still considered to be married for tax purposes. There are two exceptions to this rule: 

1st -You are considered to be unmarried , if a court order for separate maintenance was issued before year-end. 

2nd - If you meet all of the following requirements during the last six months of the calendar year, your filing status is head of household instead of married:

1. Your spouse didn't live with you at any time during the six month period.
2. You maintained the household and one of your children lived with you.
3. You furnished over 50% of the cost of maintaining the household.
4. You file a separate tax return.

If you are considered to be married for tax purposes, your tax filing status will be married filing separately or filing jointly with your spouse (assuming that both of you agree to file together). Generally, a filing status of married filing separately costs more in taxes than the other filing statuses.

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Yes, as long as you would have otherwise been entitled to claim the child as an exemption. The child who either was born or died during the year is considered to live with you the entire year. 

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Generally, inheritances and gifts are not subject to Federal or state income tax. Also, you are generally not taxed on life insurance proceeds you receive as a beneficiary. 

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Gambling winnings have to be reported on your tax return, even if your gambling losses exceed your winnings. Generally, the winnings are reported as other income on your tax return; losses are deducted as an itemized deduction on Schedule A of your return. Gambling losses are not easy to prove to the IRS; our tax newsletter discusses this point. 

If you are lucky enough to win big during a night of gambling, we suggest that you get a check rather than cash. First, taking a check is safer, especially if you will be walking through a deserted parking lot. Second, if your luck suddenly changes and you are robbed, the check can be replaced while the cash cannot. Finally, if over $10,000 is involved, the gambling establishment is required to file a currency report with the IRS if you take cash. By taking a check, you actually create documentation that may be helpful to you, if your gambling winnings and losses are questioned by the IRS. 

If you are a frequent visitor to the casinos, race tracks, etc., you need to keep records of your winnings and losses. You probably need to contact a tax expert. 

This website has a separate page devoted to gambling, to read it press here.

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Generally, flood damage is deductible as a casualty loss. Casualty losses are subject to a number of limitations. First, you must itemize rather than take the standard deduction. Second, the total loss must be reduced by 10% of your income for the year. Third, the loss has to be based upon the cost of cleanup and decrease in the value of the property due to the casualty. For example, if you are claiming a loss of furniture and other personal effects caught in a basement flood, you are probably talking about thrift shop values. Finally, the loss has to be reduced by any insurance proceeds you receive. 

If you are still able to claim a casualty loss on your tax return, you should obtain proof of the amount of the loss. Many times, you will need a written appraisal. 

If the flood damage occurs in a "Federally designated disaster area", the rules are generally much more liberal. Contact your tax advisor for the details.

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Assuming that he or she is not related to you, you can claim the person if three requirements are satisfied: 

1) His or her income for the year is less than $3,750 for 2009. 

2) You maintain a household in which he or she lives during the entire calendar year. And 

3) He or she does not file a joint income tax return for the year. 

Depending upon the circumstances and your locality, the IRS could contend that you are not entitled to an exemption for your "roommate", arguing that the relationship violates local law. However, we have personally seen the IRS take this position only once in over 30 years; furthermore, the IRS conceded the issue on appeal. 

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There are four situations when you can claim a child that is not actually related to you as a dependent, as long as you provide over 50% of his/her support. 

1. Legally adopted children are treated for tax purposes as your own child and qualify for an exemption.  
    
2. A child placed with you for adoption by an authorized agency is treated as your own child. The child does not have to live with you for the entire year.  In either situation, the dependent child will qualify for the $1,000 child credit, assuming that he or she is under age 17 at year end.
    
3. A foster child can be claimed, if he/she lives in your household for the entire calendar year. For this purpose, a "foster child" is a person who you treat as your own child.
    
4. An individaul, regardless of age, who lived with you the entire year in your household.  

A child that meets any of the above definitions, will also be considered to be a qualifying child for purposes of the earned income tax credit.

The person you are claiming as a "child" must meet the same income requirements as a child by blood. In general, the person's gross income for the year can't exceed a specified amount ($3,650 for year 2009).  However, if the person is under 19 at year-end or is under 24 and is a full-time student, the income requirement does not apply; however, if there is a parent or certain other relatives also living in the household, the result may be different.  Thiis last topic can get fairly complex; you will probably need professional help.

Finally, if the child is temporarily placed in your home by a foster care agency and the care of the child remains under the supervision of the agency, the child does not qualify as a dependent.  However, expenses for caring for the person (net of reimbursements) can be deducted as a charitable contribution, Rev.Rul. 77-280, 1977-2 C.B. 14.

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It depends upon who furnished over 50% of the child's support.  If you supplied over 50% of his or her support for the year, you can claim the child for an exemption.  If you did not furnish over 50% of his or her support, you cannot claim the child for an exemption.

If the child is over 18 years old and is not a student, you lose the exemption; if his/her income exceeds $3,650 for the year 2009. 

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Even though you cannot claim your child as an exemption, you can claim head of household filing status as long as you meet the following two requirements: 

• 1st - You pay for more than ˝ of the cost of maintaining the household you live in. And 
• 2nd - Your son or daughter lives in your household for more than ˝ of the year. 

You can still claim head of household status even if your "child" is an adult and earns more than you do.

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You can still file a joint return even though your spouse is incarcerated. However, your spouse must consent to filing jointly.  We suggest that you have him/her sign the return or a power of attorney authorizing you to sign for your spouse. 

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Legal contingent fee – may be part of your income

Generally, proceeds from a lawsuit action have to be included in your taxable income, unless they relate to a physical injury. 

If you live in the Chicagoland area, the amount of income that you will be taxed on will probably much higher than the amount you actually received. You will have to include as your income the contingent fees your attorney receives.  In the 7^th circuit court of Appeals decision in Kenesth V. Comm., No. 00-3705 the court held that the entire award (including the contingent attorney fees that went directly to the attorney) was taxable  to the plaintiff. The award proceeds including the attorney fees were both income to the taxpayer and also a cost of generating the income. 

However, there may not be any tax benefit from the deduction of these same legal fees.   The reasons for this anomaly are the following::

First, the deduction for the attorney fees will be treated as a "miscellaneous itemized deduction".  This treatment always results in a smaller deduction.  The actual deduction for "miscellaneous deductions"  is the sum of all miscellaneous deductions reduced by 2% of total income.

Second, due to the impact of the alternative minimum tax, there may not be any tax benefit from the deduction. 

Finally, the miscellaneous itemized deduction cannot be deducted for the Illinois income tax. 

In the Knows V. Comm., supra decision, the Court held that under Wisconsin law (which governed the case), the plaintiff/taxpayer was always the owner of the lawsuit proceeds; the lawyers merely had a lien against the proceeds of any settlement or judgment.  If Illinois law follows Wisconsin law (and we were told by one attorney that Illinois law does), you will be facing a larger tax bill.  If you are involved in a lawsuit and expecting a settlement or judgment, you may want to discuss the effects of the Kenesth, supra decision with your lawyer.   Possibly, your lawyer can structure the contingent fee arrangement as a joint venture or partnership, to avoid the negative effects of this decision

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Sales tax deduction - it's still here and even better!

Originally, this deduction was scheduled to expire in 2008; however it has been extended through 2009  Assuming that you itemize, you can choose to take a deduction for the sales tax that you paid during the year instead of taking an itemized deduction for income taxes paid.  The deduction is not based upon you're a total of your actual sales taxes paid on purchases for the year.  Instead, you are limited to IRS provided tables.  The only additions to the IRS provided numbers is sales tax on vehicles and building materials.

In addition, if you purchase a new car between November 4, 2009 and year end, you can deduct the sales tax on the vehicle purchase, even if you take a standard deduction.  For the details on this topic, press here.

This  deduction  primarily benefits individuals living in states that do not have a state income tax such as Florida or Texas.  Illinois residents whose income is from IRAs, pensions and social security also benefit;  IRAs,  pensions and social security are exempt from Illinois income tax.

If you have any questions concerning this topic,  you need to talk to your tax professional or you can contact me at (708) 647-1045  Clients can also contact me via my secure email by pressing here.

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