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Mileage rate for Jan-June, 30 2011 .51 cents per mile. Starting July 1, 2011 the rate goes to 55.5 cent a mile.


Hobby Laws

If you (or someone you know) has a hobby, the information in this article will prove worthwhile.
Tax Law Obliterates Hobbies
Lawmakers hate taxpayers' hobbies. They apply the most draconian of all taxes to hobbies. If you have a hobby or are thinking of a hobby, read this article before you take step one.
Let's imagine that Congress hired you to make the most unfair and unjust income tax known to a U.S. taxpayer. How much tax would you assess? How would it work? Think about that tax. Make it as unfair as you can imagine.
Now, let's compare your most unfair tax with an income tax that actually exists in U.S. tax law.
Get Ready to Cry
For purposes of this example, let's assume that you and your spouse report more than $175,000 of taxable income before considering the taxable income and deductible expenses of your hobby. Next, let's say that your hobby has a gross income of $500,000 and expenses of $550,000 for a loss of $50,000.
Here is what current tax law does to this hobby:
The $50,000 loss is not deductible under the general rule that deductible hobby expenses may not exceed hobby income.
The $500,000 gross hobby income goes above the line on your Form 1040.
$500,000 ($550,000 minus $50,000) in hobby expenses are deducted as miscellaneous itemized deductions where they can suffer a reduction equal to 2 percent of adjusted gross income. Gross income includes the $500,000 of gross hobby income.
For purposes of the alternative minimum tax (AMT), the law disallows the $500,000 in hobby expenses and taxes the $500,000 at the 28 percent AMT rate for a tax of $140,000.
You should have tears running down your cheeks, because you are paying $140,000 in federal income taxes on a $50,000 loss. Wow! Lose money, pay taxes. This is truly outrageous—and it's true. Yikes.
Attack on the Mary Kay Lady
Jane Smith operates as a part-time Mary Kay lady. She has a gross income of $13,000 and deductible expenses of $18,000 for a net loss of $5,000. How much tax can she pay on her $5,000 loss?
John Smith, Jane's husband, earns a really good living in his law practice. Because the Smiths have a home-equity mortgage and children, they pay the AMT without considering the Mary Kay activity; therefore, the Mary Kay activity loss triggers an additional AMT of $3,640.
Remember, Mrs. Smith lost $5,000 in her Mary Kay activity. This loss triggers an additional tax of $3,640 on the $13,000 of gross income (28 percent times $13,000). Mrs. Smith gets taxed on her gross Mary Kay income and receives the benefit of zero deductions. Mind-boggling, isn't it?
Solutions
Avoid hobbies. Make all your activities businesses. Businesses deduct all their expenses, and business losses may be carried back and forward to generate more tax benefits.
If that's not for you, then avoid hobbies that generate gross income. Note that we said "gross income." Remember, for purposes of the AMT, you pay taxes on the gross and get zero benefit from your deductions.
Who Created This Problem
The Tax Reform Act of 1986 created the tax rules that apply the AMT to hobbies. You would think that someone during the last 23 years would have fixed this draconian tax. Not so.
How the Hobby Rules Work
Rule 1: Report gross income from the hobby above the line. As an individual, you report gross hobby income on line 21 of your IRS Form 1040.
In determining gross hobby income, deduct the cost of goods sold as determined using generally accepted accounting principles; and
include all gains from the sale, exchange, or other disposition of property.
Rule 2: Order the hobby deductions. If deductions exceed income, then deductions are allowed only to the extent of gross income. In determining how the deductions are allowed, you need to follow the three steps below, in the order listed:
Deduct expenses such as mortgage interest and property taxes that would be allowed regardless of activity.
To the extent that gross hobby income remains after subtracting the deductions in step 1, deduct operating expenses that do not reduce the basis of assets, such as advertising, insurance, and wages.
To the extent that gross hobby income remains after applications of steps 1 and 2 above, deduct expenses that reduce the basis of assets, such as depreciation and amortization.
Rule 3: Treat hobby deductions as miscellaneous itemized deductions—a below-the-line deduction. The hobby deductions allowed in step 2 go to the miscellaneous itemized deduction "jailhouse," where
if you don't itemize your deductions, you get no tax benefit from your hobby deductions; or
if you do itemize your deductions, your hobby deductions join the category where tax law reduces deductions by 2 percent of adjusted gross income.
Rule 4: Apply the AMT. The AMT on the hobby deduction works like this: Disallow all the deductions and tax the gross income. In other words, the hobby deductions that you claimed for regular tax purposes turn into taxable AMT income when computing the AMT.
For most taxpayers, the AMT is a most unpleasant surprise.
Rules for Making the Activity a Business
You do not want any hobbies that generate income, because tax law can tax the income and give you zero deductions.
Solution. Make all income-generating activities businesses.
The IRS looks at nine business factors. We turned those nine factors into nine questions to which your correct answer should be either "yes" or "not applicable." Here are the nine questions:
Do you carry on this activity in a businesslike manner with complete and accurate books and records? Do you have expertise in this activity? If not, do you use outside experts or otherwise study the activity in a manner that indicates a profit motive? Do you spend time on this activity? The more time you spend, the more this activity looks like a for-profit activity. Do you expect appreciation in property values to produce the ultimate profits? Have you had success doing this type of thing in the past? Does your history of profits and losses with this activity show that you engaged in this activity for profit? Does the profit you realize or hope to realize justify the losses incurred or expected?
Considering your other sources of income, do you need this activity to work for your well-being? (If you work at this full time and need this work to pay for your household, you pass the business test on this answer alone.)
Is your personal pleasure or recreation absent from this activity? (In other words, you are not golfing, fishing, horseback riding, woodworking, etc.)
Remember, "yes" answers increase your chances that the IRS will consider your activity a business. You don't need nine "yes" answers. You might only need one. But you need to consider the tax ramifications of a hobby versus those of a business. The ultimate answer depends on your facts and circumstances.

Tax Tips


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Tax Time Getting Ready
We are going to hear a lot about Taxes in the coming months. When its election time Taxes seem to be one of the areas that all politicians want us to believe they can fix. Over the years Taxes have been fixed so many times that we have the most complex, confusing and irritating system ever.
Start getting ready early for preparing your tax return. Set up a filing system for storing your important documents and records. As you receive Forms W-2, 1099 and other tax documents file them immediately. This will reduce time looking for them later. Have a financial plan and a budgeting system to monitor your income, expenses and assets (what you own) and liabilities (what you owe). This information will help you plan for retirement or keep you on track if you are already retired.
There are changes this year and some will affect a good number of people. The Alternative Minimum Tax is an issue that needs to be fixed for good and not just patched up to get by another year, but that is exactly what our Congress did, and it was December 19, 2007 before they patched it. To fix the AMT the regular tax needs to be properly fixed first and that would require too much time and work for our politicians who spend most of their time running for re-election. As a result of the foot dragging the IRS will not be able to accept returns from tax payers who have Education, Energy, Child and Dependent Care or Mortgage Interest Credits until after February 11th. It is possible the AMT Tax could affect their amount of tax due or refund total. The IRS must re-tool all of their software because of the late passage of the tax bill. It is estimated that over 14 million tax payers will be affected.
Some changes to keep in mind are *Increased amounts for the Standard Deduction and the Personal Exemption. *Increased income limits for Student Loan Interest Deduction and Hope and Lifetime Learning Credits. *Limit increase on Itemized Deductions. *Increase in Earned Income Credit amount. *New record keeping rules for Charitable Contributions. *Deduction for Mortgage Insurance costs. *Adoption Benefits increased. *Bigger deduction for Long-Term Care premiums. *Larger deduction in Sec.179 depreciation for Business. *New rules for Traditional IRA’s and Qualified pension plans. If you have questions and concerns make a list and take it with you to your Tax interview. Mary Burr

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It’s tax time

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It’s tax time:
Do it yourself or get professional help?

Finding a professional tax preparer to help you put together the numbers, or taking the time to research the tax forms in order to prepare your own return can be a critical decision. Increasing numbers of taxpayers are preparing their own tax returns on affordable software that guides them through a maze of questions to hopefully arrive at the correct tax amount due or accurate refund total. For many taxpayers, with relatively uncomplicated tax returns, this works well for them and can save money over and above the cost of the software. Each year a new purchase of software is required as the tax laws change as fast as the weather in Nebraska. At last count more than 62% of taxpayers hire a professional tax preparer to crunch their numbers and take the responsibility of putting them together on the proper forms. The best reason to hire a professional in the tax field to assist you is because your financial picture may have grown so complicated that you are not confident in doing the job right. When situations in your life come about that might include the buying and selling of real estate or swapping real estate, cashing in stock options or selling stocks this could be the time for professional help. You may also want to have some assistance if you have opened a small business, tapped your retirement accounts or fallen into the dreaded clutches of alternative minimum tax. These are but a few of the reasons to seek help in reporting to Uncle Sam. Tax professionals have acquired an extensive range of education, certification and experience. They spend many hours each year in seminars and additional schooling to stay up to date on the many changes that come about each year and to sharpen their skills. Another thing to keep in mind is that if you are notified of audit only a professional can represent you at an IRS audit. Most professionals specialize not only in tax preparation, planning and consulting, but also in auditing.
I am a firm believer that each high school should offer within a required course the information on how to properly fill out a form W-4 for employment, and to prepare a 1040EZ and a State of Nebraska 1040NS. Many students have a part time job and earn several thousand dollars a year and owe no Federal or State taxes. Their employer should not withhold any taxes if they would, when filling out their form W-4 (Employee’s Withholding Allowance Certificate), mark box 7 which states “exempt” that they do not make enough money to be taxable. Students and others who must file need to be aware of www.IRS.gov a web site for free filing their return with E-file available at no charge. Some might even choose to prepare their return the old fashioned way, fill out the forms by hand, and send it snail mail. No need to go to a professional and pay big $$ to have them prepare these forms which requires 3 or 4 lines filled in that they could very easily do themselves with just a little background information. Students, that are claimed as a dependent on their parent’s tax return, can make W-2 wage income up to $5,150 and not be taxable. If they also have other income, like interest or dividends, the rules are a bit different but not difficult.
Maybe some day all of the multitude of rules will become clearer, until then, try not to let it be to taxing. Mary Burr

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New State Income Tax Credit--Available for Endowment Donors

Nebraska lawmakers approved Legislative Bill 28, the Endow Nebraska Act, on June 1st that will create an incentive to contribute to long-term endowments in the state of Nebraska. The tax credit takes effect January 1, 2006 and is available to both individuals and businesses that donate to long-term, nonprofit endowments based in Nebraska. The credit is applicable only to contributions used for Nebraska charitable purposes and expires after 2009. State leaders hope that LB 28 will encourage Nebraskans to invest in Nebraska. If you would like more information on LB 28, www.nchsfoundation.org or call 888-345-1374. Article from Home talk foundation Spring 2005 addition.

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