It's "ill-eagle"

Today’s New York Times, in between some serious news stories, carries the tale of an IRS enforcement action that would be funny if it were not true.  The heirs of art dealer Ileana Sonnabend paid quite an estate tax bill when they got the $1 billion or so art collection that she left behind.  However, they did not pay taxes on a sculptural piece by Robert Rauchenberg, because it contains a stuffed bald eagle.  As it is illegal to sell a stuffed bald eagle art appraisers valued the piece at $0 because it has no market value.  (The restriction on the sale is no joke.  In fact, the heirs can’t have custody of the piece as the former owner had to agree to keep it on exhibit in a museum as part of complying with the law around the conservation issue.)

The IRS does assess taxes on artwork based on “market value”.  In fact they even have an Art Advisory Panel that helps determine the true value of the piece.  This panel came up with a figure of about $65 million for the piece, not knowing that it couldn’t be sold.  The IRS is aware of the restriction, but has decided to assess tax because the heirs could choose to sell the piece illegally.  Which while they could do this, they actually haven’t.

The good news is this is an unprecedented case.  Lawyers interviewed for the article couldn’t cite anything that showed the IRS using a hypothetical black market value to compute a tax liability.  An example of this distinction is Al Capone.  He was sent to jail for not paying taxes on ill-gotten gains, but he had in fact gotten said gains.  The bad news is when you fight the IRS without paying up front; they keep piling on the penalties and interest. At this point the heirs’ tax bill is up an additional almost $12 million on that amount alone.  There has to be better way.

More Easily Missed Tax Breaks

The good news is that I found so many examples of often overlooked deductions that this turned into a 3 part post.  The bad news is those at the bottom of the list are less compelling.  Still, they may come in handy for a game of Trivial Pursuit.  Or you could answer a question on Quora.

If you are one of the lucky folks who did a refi in the past few years and you paid points, you are eligible for more than just a lower mortgage payment.  You can take the points divided by the term of the loan.  So if it’s a 15 year loan, that’s 1/15^th of the points each year.  Not much, but not nothing either.  Also if you pay off the loan, you get to take the remainder.

Most employers continue to pay your salary if you go on jury duty, but many of them also take the “pay” you get from going.  If you fall into that particular pool, you can take the jury compensation you didn’t get as a deduction.  This is another “above the line” chance to reduce adjusted gross income. One reason this gets overlooked is there’s no line on your 1040 marked jury duty pay.  You take it at the end of the section for deductions before you calculate adjusted gross income.

My next tip isn’t actually a deduction, but in the year where enhanced brokerage reporting starts to kick in it’s worth noting.  You pay taxes on reinvested dividend income, but many people forget to add this to their basis cost when stock is sold.  Adding that little bit extra either reduces taxes owed for gains or increases the loss you can put towards gains on your tax return.

Finally, don’t overlook that Uncle Sam is giving you a little extra time this year.  Individual and partnership returns aren’t due until April 17^th.  Corporations don’t get a break  -- they’re still due on the ides of March.  Remember if you file an extension it gives you more time to finish the return, but you still have to pay taxes you owe by the initial deadline. 

Taxidermy for Performing Artists?

This week I’m scheduled to speak at Point Park University on the subject of tax issues for artists.  Teachers there asked the PICPA to find someone to talk about the topic.  Let’s face it, artists have an uphill climb economically to start with, and yes it turns out their typical tax situation is more complex than most of us will face.

There are three areas where artists stand out from the crowd from a tax perspective.  Artists are more likely than not to:

• ·         have multiple income streams,
• ·         be both an employee and an independent contractor, and
• ·         be taxed in multiple jurisdictions.

 And you thought the threat of chronic poverty was enough to keep someone from wanting to be the next American Idol.

The discussion at the University will focus on income taxes.  Performers get income like most of us from employers or contracts, but they also can be compensated through barter arrangements (I’ll play at your wedding if you’ll cater my party) or get free products for appearances or endorsements.  All of that counts as compensation, and the IRS knows this better than most performers.

Then there’s the issue of what is deductible.  If an artist works as an independent contractor they can deduct the costs associated with the “business”.  Typically this will focus on supplies, research, travel and entertainment and rehearsal / work space in the home.  All of these are favorite topics for IRS auditors, who unlike the artists are doing tax stuff for a living.  So guess who usually knows more.

Another potential trap for artists is related to income fluctuations and paying enough taxes in the current year.  You’re supposed to pay taxes as you go.  For an employee that means your employer holds the taxes from your paycheck and for contractors you pay estimates of your taxes every quarter.  While this seems straightforward notice I used the word estimate as to what you pay.  Our Federal tax system is progressive, which means the more money you make, the higher tax rate you pay.  (This is not a time to get into Warren Buffet’s and Mitt Romney’s tax returns!)  If your employer withholds at the wrong rate because you have multiple jobs, you pay the penalties and interest for underpayment.  Same goes for calculating your estimates.  Changing income levels is a problem for may people, so the IRS does allow the “safe harbor” of essentially paying the same amount in taxes as you did last year until you file your return.  At that point you need to make sure you have enough money to pay Uncle Sam what you owe. 

One person who had particular problems with doing just that was Mark Twain. While there are more contemporary examples of artists with tax troubles, I couldn't resist Twain's take on the situation -- which unfortunately is still relevant. Hopefully some of the students I see this week will enjoy a version of Mark Twain's artistic success, but not his tax problems. 

Don't Miss These Deductions

More overlooked deductions on the menu this week.  For fun we’ll focus on what those of us inside public accounting call “above the line deductions”.   There are a number of reasons these are better than other kinds of deductions.  You can follow the link on above the line if you want more details -- the net impact is that they are hard to qualify for, but easy to take.  That’s because you don’t need to itemize to use them. While lots of people itemize, many people are better off with the standard deduction.  In particular young taxpayers often fall into the category of an easier return to file, but with fewer tax breaks.

One example of how starting out is a tougher time for taxpaying is your first job search.  Once you have a chosen profession, expenses for your job search can be deducted.  That’s not true for your first job hunt.  However -  moving to take your first job is not only deductible, but you can take it even if you don’t itemize.  The key qualification is that your new job is more than 50 miles away from your old home.  (You may need to read that a few times to get clear on what that means.)  Mileage deductions for moving have been changed.  If you moved in 2011 before July it’s 19 cents.  It went up to 23.5 cents for the remainder of the year.

If you own your own business and qualify for Medicare you get another deduction that doesn’t require you itemize.  (Accountants love these!) You can take the full premiums for Medicare Part B, Part D and any Medigap policy you use.  Unlike the typical medical expense deduction on Schedule A,  these premiums are deductible from the first dollar,  with no threshold to meet.  One important thing to check before you take this is, if you are covered under a spouse’s health insurance through an employer, then you can’t use this.  It’s only if you get your insurance through your business.

Members of the National Guard or military reserve who travel more than 100 miles and overnight to attend drills or meetings get to deduct the travel.  One again no itemizing required. (Yipee!) That said, I’m sure one reason this deduction gets overlooked is that it’s a little tricky to calculate.  You get to deduct your travel costs subject to federal maximums.  Follow the instructions carefully or better yet, call your accountant.  :-)

Auto-Tax

You have to wonder about the IRS.  In the same week they announce a plan to discuss a real time tax system that would provide feedback on your return before you file,  they also acknowledge $153 million in refunds that they can’t get to people because they don’t have a correct mailing address.  The US found Osama Bin Laden, but they can’t find taxpayers who filed and overpaid taxes?!

The average size of the undelivered refund check this year is $1,547.  I’m thinking that means at least some of these people are actively trying to get the checks that the Service can’t get to them.  According to the IRS people who e-file get their checks – it’s just snail mail that creates a problem.  If you are one of the folks whose refund has gone missing,  the Where’s My Refund tool on the IRS website has an address updating feature.  Don’t know if that will solve the problem, but it’s probably worth checking.

This brings us to the crux of most IRS problems, which is that they have different information about you than you have about you.  Somehow they’ve decided that automating that disinformation will make the situation better.  Like much of the “logic” around the tax code, I don’t follow that line of reasoning.

This new system would pre-populate key information on your return, so you would know if your view of what you earned matches the IRS records before you send in the return.  According to the Commissioner, the average taxpayer has between 10 and 15 information returns associated with their tax filings, so this is a big chunk of information. Given the current state of affairs, this would at least let taxpayers know when and where there’s an issue.  What it wouldn’t do though is give you any way to solve the problem. 

Right now not every information disconnect results in a problem with the IRS.  Under the proposed system, every mis-step would be flagged.  This might solve the nation’s unemployment problem, as the IRS would need to hire lots more people, but net at the end of the day I’m not sure that more taxes would be collected.  My guess is pharmaceutical companies that sell sedatives and psychologists would also benefit should this new system be implemented.  We’ll see…