MOODY'S ISSUES WARNING ON DEBT LIMIT

If you have been following my blogs, you know that I am concerned about the federal government’s debt load. Now theHill.com reports, "If policymakers cannot make progress on a deal to raise the debt limit in the next few weeks, the nation's credit rating could be endangered", Moody's Investors Service said Thursday. According to The Hill newspaper, "The credit rating agency said in a statement that it was surprised by the level of political gamesmanship surrounding the debt-limit debate," and that "a long-term deficit-reduction deal must be reached as part of a deal to raise the $14.3 trillion limit if the nation wants to protect its perfect AAA rating."

http://thehill.com/blogs/on-the-money/801-economy/164455-moodys-issues-debt-limit-warning

You don’t have to be a CPA to know that you cannot continue to spend more than you make.

HOME OFFICE DEDUCTIONS

Q. In a previous issue, you stated that you could deduct home office expenses based on the number of rooms in the home. Do you have any authority for this statement?

A. Yes. Typically, home office deductions are based on the percentage of business use (square footage of the business portion of the home divided by the total square footage). But the IRS says in Publication 587, Business Use of Your Home, a taxpayer can base the percentage on the number of rooms if the rooms are about the same size. Say you use one room of an eight-room house for business. The room is 300 square feet out of a total of 3,000 square feet. In this case, the “rooms method” (12.5%) yields a bigger deduction than the square-footage method (10%).

You can find the IRS publication at www.IRS.gov.

CELEBRITY TAX PROBLEM OF THE WEEK

Casey Anthony on Trial, Liened by IRS

It has been quite an eventful month for Casey Anthony. The 25-year-old Florida woman faced prosecutors in court for the first time this month on charges of first-degree murder in connection with the 2008 death of her daughter, Caylee. Caylee was reported missing to the Orange County Sheriff’s Office on July 15, 2008, by her grandmother, Cynthia Anthony. Prosecutors allege that Casey killed Caylee because the little girl was complicating her dating and social life, while the defense alleges that Caylee accidentally drowned in the family pool.

Just days before opening arguments in Anthony’s murder trial, the IRS filed a federal tax lien against Casey, claiming she owes $68,520.41 in unpaid federal income taxes, interest and penalties. The lien is for the same year, 2008, in which Caylee was allegedly murdered.

Casey Anthony was arrested three times between July 2008 and October 2008 on various charges ranging from forgery, fraudulent use of personal information, and petty theft. She was arrested a fourth time in October 2008, those charges related to the murder of her daughter. It is not clear whether Casey held a regular job at any point during that year although at one point, she had worked as a manager at a nightclub. An acquaintance testified at trial that Casey Anthony told her that she paid a nanny at least $400 per week for childcare, and one would assume that would be so that she could work. Of course, she would have had to have done quite well over the course of her employment that year to run up a tax bill of over $68,000. Under the circumstances, it isn’t likely that the income is solely attributed to wages.

It seems that Casey might be taking a page from former Survivor champion Richard Hatch’s playbook. A television network – in this case, ABC – had a deal with Anthony to pay $200,000 in exchange for family videos and photos. As we know from the Hatch case, this makes it taxable to the recipient. If the money was paid directly to Casey (or on her behalf), she would be responsible for reporting the money to the IRS and paying any related taxes due.

The deal was allegedly crafted with ABC by Anthony’s attorney with the understanding that the money was going to be used for defense costs. That would be a great deal for her defense attorney but unfortunately for Casey, attorney’s fees for personal reasons (and that would include criminal defense work for a homicide case) are not deductible on your federal income tax return.

Assuming a 33% tax rate for a single taxpayer in 2008, that $200,000 ABC payment would likely result in a tax bill approximating that $68,520.41 lien. That’s a little bit of educated speculation on my part and I can’t say for certain that the payment resulted in the lien though the evidence tends to suggest that it did. What is clear is that with Anthony’s freedom – and future – in limbo until after the trial, it’s likely that the IRS may never collect.

TAXABLE INVESTMENT SEMINAR MEAL

Q. I received an invitation for a free meal at an investment seminar. Is this taxable, if I go?

A: No. The event is governed by the tax rules for meal and entertainment expenses. Therefore, as the recipient of the meal, you don’t owe any income tax on this benefit. But, it’s not completely “free”. Undoubtedly, you’ll have to listen to a sales pitch from a financial planner, plus, you may have to endure follow-up contacts.

DEDUCTIBLE HOME ENTERTAINMENT

Q. In a recent article, you said you can deduct home entertainment even if you never discuss business at the party. Is this really possible?

A. Yes. The first paragraph of the article you reference explains that deductible entertainment may precede or follow a substantial business discussion. Later on I mentioned that business doesn’t actually have to be discussed during the party, which is true, although a prior or subsequent business discussion is implied.

Don’t forget that only the amount attributable to business guests at a house party is deductible. Deductions are limited to 50% of qualified expenses, but if this is a company party such as a Christmas party or summer outing, then the costs are 100% deductible.

KNOW THE DIFFERENCE BETWEEN GIFTS AND COMPENSATION

If you give a favorite employee a big check at Christmas, you might consider it a gift, but the IRS will likely consider it income. Another example would be, that you have an employee this is getting married, so you purchase that expensive food processor and think that you made a gift. Nope! The IRS may just say that the value should be added back to the W-2.

It’s hard to believe, but these examples could be true even if the employee and owner are family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for the past services, not a gift.

If you have the occasion to make a gift to an employee, talk to us so that we can keep the IRS off of your back.

BEWARE OF PHONY EMAILS FROM THE IRS

We’ve said it before and we’ll say it again: Never send personal financial data in response to unsolicited email. The IRS says scam artists are sending emails to random people, telling them they’re due for a refund or are under investigation. The message directs people to a fake IRS web site that asks for personal data. In reality, the IRS won’t contact you via e-mail.