2) Can I deduct a loss in my IRA?

This was a very common question this year (2008 tax year).  The short answer is no.  But there are circumstances in which you can.  It all comes down to what type of IRA you own.  If it is a traditional IRA with 100% pre-tax money then you cannot deduct losses.  The reason that you cannot deduct losses in your pre –tax money IRA is because you have not yet been taxed on this money.  You will however have less money in the IRA to eventually pay tax on! 

If however you have basis in the IRA (post tax money) or you have a Roth IRA, annuity, and/or 529 plan you can deduct the loss provided you cash out ALL of that particular type of account (all of the Roth IRAs or all of the 529 plans) at the same time – in other words liquidate all of the accounts of that type.  For example, if you had several Roth IRA accounts worth a total of $20,000 with a basis of $30,000 and you liquidated all of them you could cash them out and deduct the $10,000 on your schedule A.  (This is assuming you have not rolled the money over and not had the money in the Roth for at least 5 years- otherwise there will be a premature distribution penalty applied).  For Roth IRAs that are contributory (you did not roll funds from a traditional IRA) this is not a concern.  Unfortunately the loss is not a capital loss deductible on Schedule D but instead is a miscellaneous itemized deduction and as such would be subject to a reduction of 2% of your Adjusted Gross Income.  Not such a good deal!

Since this is a risky strategy we would recommend consulting with your tax advisor before proceeding. 

3) Can I deduct business gifts?

Yes, but there are limits.  The IRS is slow at adjusting for inflation at times.  Business gifts are allowed, but they are limited to $25 per person.  Not very generous at this point in time…perhaps they will raise it some time in the future.  One of the reasons they have this limit set so low is that they do not want business owners giving employees or others compensation disguised as gifts.  If the gift was really compensation or a kickback, it should be taxable income to the receiver.  So it is best to keep your gifts per person under the $25 limit and to record who you gave the gifts to for your records. 

4) Do I have to report Self-Employment income if it’s under $600 per year?

Here is another common myth that we will dispel to your disappointment.  If you meet the filing requirements (self employment earnings of $400 or more, or other income greater than $8,350) then you are required to report ALL of your income, even $1 of earnings.  It does not matter than the payor did not issue you an earnings document (W-2, 1099, or other such reporting document).   

What if you are the payer of the monies?  You are only required to report earnings PAID to another individual if you paid them more than $600 during the year. 

5) Married filing Joint vs Married filing separate

Every year clients ask if they should file married filing jointly (MFJ) or married filing separately (MFS).  97% of the time it makes sense to file MFJ.  Here’s why:  If you file married filing separately…many tax credits are eliminated, many phase outs are halved, and allowable losses can be halved as well.  This is just the start.  Since many of you are in California, a community property state, half of what you make belongs to your spouse and vice-versa.  In many cases, the tax savings, if any at all is very minimal…but the work involved in reporting half of your income on your spouses tax return and vice-versa more than negates the tax savings, especially when our bill comes. 

Suffice it to say, we keep an eye out for that tax savings.  Our software automatically calculates the savings to see if it makes sense to split the return out for married filing separately.

In some cases it might make sense to file married filing separately apart from tax savings.  If you want to separate yourself from your spouse’s tax liabilities you should consider married filing separately.  In some cases we have seen spouses file MFS because his/or her spouse was not reporting all of his/or her income.  They did not want to be responsible for the consequences.   On a married filing joint tax return the spouses have joint and several liability for the tax even if one spouse was cheating and the other not.  There is a provision in the tax code for innocent spouse relief but this relief is very difficult to get in practice.

6) Start a business for losses to save taxes.

Okay, so we said top 5 tax questions…but this one was just too juicy to pass up.  We see folks every year who start business to get a write off on their taxes.  Folks, this is not a good strategy.  While many think our tax rates are high…they are still not 100%.  That means for every dollar you earn you are still making money after Uncle Sam and Uncle Arnie take their cuts.  To achieve a write off by starting a business you have to spend the money.  So you are actually losing money, albeit with a discount from Uncle Sam and Uncle Arnie in the form of a tax write-off…but it’s still a loss. 

So let’s discuss the legalities in achieving this write-off.    First off your business should be legitimate.  The IRS has 9 factors they will look at to determine if you are operating a legitimate business or what they call a “hobby”.  In a nutshell you should be operating this business like a business – if it walks like a duck, quacks like a duck…you get the point.  You should have a separate bank account, clean set of books, use the proper professionals and consultants, market your products and services, and put more than 750 hours in per year.  If you want more information on this topic or any of the other topics discussed above call our office!

About the Author

Mark Allen, CFP®, EA is The "go-to professional" specializing in tax and wealth management services for small business owners and real estate investors. Along with his Master’s degree in Financial Planning, Mark is enrolled to practice before the IRS as an Enrolled Agent, a Certified Financial Planner™ professional, California Life & Health Insurance licensed (#0G29808), and an Investment Advisor Representative with Transamerica Financial Advisors.  Mark integrates all disciplines into a holistic, client-centered approach towards maximizing your after-tax income and wealth.

Currently, Mark resides with his wife and children in El Dorado Hills where he enjoys gardening, walking, and outdoor activities. Mark also works part-time out of the Pleasanton Wealth Management Associates office.