Tax Tips
Relating to your income, personal expenses and pesky squirrels

By Howard Abrams, PBS Tax & Bookkeeping

Q.  I’m an owner-operator, married and self-employed, operating one truck. When I received my income tax return, I could not believe my net income from my business was so high. My taxes should not be that high. We never have any money. There must be some mistake. How do I know the numbers are right?

A. You need to account for all the money you spent personally during the tax year in question. We know how much money your business made. Let’s find out if it’s really true.

Since you have a personal checking account, all the money you spent during 2014 should be in that checking account and accounted for. For example, checks paid for personal bills including your rent or mortgage, credit card payments, checks to yourself, to utilities, etc., will be listed on your check register. You will need to include debit card expenses.

Allocate each item to categories such as mortgage payments, health insurance, telephone, insurance, heat, water, gardening, taxes, food and entertainment. Don’t forget to allocate your credit card charges and to account for ATM withdrawals. Then get a total of all personal expenses for the year. Compare that to the net income of your business. The total amount of money spent personally should approximate what your net income from your business operations showed. If not, you must investigate why.

Q. What does all this mean?

A. If your personal expenses are higher than your net profit, maybe you are spending too much personally. If your personal expenses are less than your net profit, you should have money on hand. If not, you need to find out why. Maybe you are missing some deductions. The point is to account for any difference. This may lead to a lower net profit or to an understanding of your spending habits.

Q.  I’m 71 and heard I must take a required minimum distribution from my IRA account. What about my 401k?

A. Yes. You are required to take a required minimum distribution – also called an RMD – from your 401k as well as your IRA. The IRS has actuarial tables to figure out the annual RMD amount, or your bank or brokerage house can help you.

Q. Can I draw from my IRA the required minimum distribution for both plans combined and leave my 401k alone?

A. No. You must take the RMD required from each account.

Note: If you forget or do not take the RMD, there is a 50 percent IRS penalty on the amount that should have been taken.

Q. We are considering paying the mortgage and taxes on our daughter’s home. Can she get the mortgage interest and real estate tax deduction on her income tax return?

A. It depends on whether your daughter pays the mortgage and taxes. She can deduct the interest and taxes on her return if she pays them. If you pay the mortgage interest and taxes directly, she cannot get the deduction. And neither can you unless you are co-owners of the house. Therefore, to get around that, you make a cash gift to your daughter and she makes the mortgage and tax payments directly.

Q. The spouse of one of our owner-operator clients called to report that she noticed water on the walls in the three rooms of their home. Her husband decided to check around and discovered holes in the roof. The holes were caused by squirrels that had eaten through the roof wood, permitting rainwater to soak through down the walls of our home. Can we claim a casualty loss for the cost of repairing the holes in our roof caused by squirrels and of fixing the walls?

A.  No. The IRS issued a private letter ruling in response to this very question. It said a casualty is the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected and unusual nature. In this case, the damage was not unexpected and unusual because it is common knowledge that squirrels are destructive. Therefore, the loss is not considered a casualty loss. LL

 

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153. Visit our website at pbstax.com.

Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.