Article: Tax Spikes on Cell Plans; e-Books Next

Tax Spikes on Cell Plans; e-Books Next by AnnaMaria Andriotis Tuesday, December 21, 2010 SmartMoney Share Not all taxes are going down -- or even staying the same -- in 2011. To balance their flagging budgets, state and local governments will be doing the legal equivalent of digging through your purse, tacking on new or higher taxes to things like smartphones and e-books and making these must-have gadgets more expensive to own. "Governments are putting their hands into a variety of pockets, and they're looking at what's new and hot," says Jeff Kagan, an independent tech analyst in Marietta, Ga. Unlike the federal government, state and county governments are required to balance their budgets. The federal stimulus program helped bridge the gap for many municipalities in 2010, but that money is essentially gone now, and one of the easiest ways to make up for shortfalls will be a bigger tax on the gadgets more people are using, says Shawn DuBravac, chief economist at the Consumer Electronics Association. One example: When you buy an e-book for that new Kindle -- 1.3 million e-readers are expected to be sold this holiday season, according to Forrester Research -- don't be surprised if you're taxed not just by the state you live in, but also by the state where the server that you're downloading from is located. A buyer living in New Jersey who purchases a $10 e-book housed on a server in Texas might pay $1.52 in taxes (7% sales tax in N.J.; 8.25% in Texas). Worse, there are very few ways to avoid these tax hikes -- unless you want to ditch your cellphone (taxes are going up about 2% on plans) or go back to borrowing books from the library. Here are three places consumers will feel the pinch of higher tax levies in 2011. Cellphones Wireless consumers are being hit hardest by states' efforts to make up their budget shortfalls. Cellphone taxes tacked on to monthly service bills add up to around $500 over a two-year service contract -- and they're up 2% in 2010 over 2009. The tax hikes, which could amount to as much as 75% in some localities next year, are a way for states to make up lost tax revenue from consumers who are shedding landlines. States and municipalities used to rake in fees and taxes on those, but these days, more than one in five U.S. homes have cell phones but no landlines, more than double the number five years ago, according to CTIA-The Wireless Association, an industry trade group. That's a lot of ground to make up on taxes. On average, 15% of a monthly cell phone service bill is already made up of taxes and fees, compared to 7% for most other goods and services, according to CTIA. But in 23 states, taxes run even higher, including Washington at 23.64%, Nebraska 23.44%, Florida 21.31%, New York at 21.1%. Municipalities can -- and often do -- tack on a tax, too. And that's the most likely spot for consumers to feel the extra wallet strain in 2011. Maryland's Montgomery County, for example, raised its telecommunications tax by 75% to $3.50 per month for next year. And Oregon's Keizer City Council has voted in favor of a similar tax hike by 3% to 5%. e-Books Taxes on e-book downloads to an e-reader, like the iPad, Kindle or Nook, could add up to 21% of the total price, assuming multiple states apply taxes to the same transaction, according to MyWireless.org, a nonprofit consumer advocacy group. Roughly 9 million e-reader users download books. (On average, that's three e-books a month at an average of $9 per book, according to Marketing and Research Resources and CEA, respectively.) These consumers are increasingly at risk of being taxed on those purchases by their home state and by the state where the book is published, says a CTIA spokeswoman. The number of times a consumer is taxed could be even higher. For example, a county may decide to impose its own tax on downloadable e-commerce products. These taxes typically pop up at checkout. These additional taxes could make buying an e-book much more costly than buying a hard copy of the book at a local retail store, where only the sales taxes would apply. Cable To get the most bang from a tax hike on a consumer service, the best bet is to tack on charges to items people most own or pay for regularly. That's where cable service comes in. More than 62 million households had cable in 2009, according to the most recent data from SNL Kagan, a communications research company. (That's 27% more than had high-speed Internet service.) The rational: A small increase won't cause a customer to cancel cable -- and most people don't notice the bigger charges on their bill, says DuBravac. Taxes on cable bills -- and how much they rise -- are controlled by counties and cities, says a spokeswoman at the National Cable & Telecommunications Association. During the past month, a slew of municipalities have OK'd cable service tax increases. In Denton, Texas, for example, the city council voted to increase the public-access television fee (which pays for public, education and government channels) from 50 cents each month to 1% of the subscriber's bill. At an average cable bill of $75 per month, according to a late 2009 study by research firm Centris, that's an increase of 25 cents a month.

http://finance.yahoo.com/banking-budgeting/article/111672/tax-spikes-on-cellphones-ebooks

Steps to Prevent Identity Theft, and What to Do if It Happens

Steps to Prevent Identity Theft, and What to Do if It Happens
By ELISABETH GOODRIDGE
Published: May 1, 2009

Identity theft is not just an unauthorized charge on a credit card anymore.

Identity theft, according to the Federal Trade Commission, "occurs when someone uses your personally identifying information, like your name, Social Security number or credit card number, without your permission, to commit fraud or other crimes."

How your information is stolen, and how it is used, varies greatly. With stolen Social Security numbers, thieves are filing false medical claims, applying for mortgages and opening lines of credit for fictitious businesses. By adding fake fronts onto A.T.M.'s or gas pumps, they are collecting credit card numbers and PINs.

But while the trade commission estimates that nine million Americans are victims of some sort of identity theft each year, these extreme cases of identity fraud remain rare, luckily.

You may find that you will need only to close a compromised account or freeze your credit if errors appear. But recovering from the effects of an extreme case of identity theft can be incredibly messy and time-consuming. You could be denied a mortgage, for example, or refused new lines of credit. It can take months or even years to repair your credit history, and this type of crime is hard to prosecute.

While financial institutions, health care companies and other organizations have taken steps to improve security measures in recent years, do not rely on them to protect you. Taking some common-sense steps now can help prevent major headaches later.

PREVENTION Your first step should be to review monthly statements from your checking and other financial accounts. The earlier you catch an error, the easier it is to resolve it. Yes, balancing your checkbook may seem a monotonous chore, but understanding where your money goes will help you spot any irregular withdrawals or charges. Reviewing your credit card bill each month is critical as well, especially if you charge a lot of your daily purchases. If you have not already, this may be a great time to sign up for online accounts. It's easier and faster to review accounts online, on a computer you trust.

Next, order and review your credit reports. The three credit agencies, TransUnion, Equifax and Experian, are each required by law to provide you one free credit report a year. AnnualCreditReport.com has links to all three, and it is the only place to get them free. (Other sites may try to charge you or get you to sign up for monthly services of some sort.) Stagger your requests, and you can monitor your credit history every four months. While you are at it, make sure your name, address and other information are correct. If you find old or inaccurate information, have it removed.

While companies like your health care provider are no longer printing Social Security numbers on member identification cards, a lot of personal information is still out there. Be sure to shred old bank statements, applications for new credit cards and other documents that have personal information.

Secure your personal information online and offline. Do not carry your Social Security card in your wallet. Keep it at home with your other important documents. Be careful about online passwords as well and change them often. And be vigilant about sharing personal information when opening new accounts online. If online advertisements or offers seem too good to be true, they probably are.

ACTION The steps you will need to take to recover from identity theft depend on the type of fraud you believe has occurred. If you are going through your monthly statements and see an error on an existing credit card, monthly bill or financial account, first call the company to report it.

By federal law, credit card companies have strong consumer protections in place, and they have large departments to investigate fraud. For that reason, you may want to consider using a credit card to pay for online and major purchases. That will give you more protection than if you use a debit card, because the money comes directly out of your bank account when you use a debit card. Making purchases with a credit card provides a layer of protection.

Once you have reported the error and determined there is reason to believe a fraud has occurred, the Federal Trade Commission recommends that you place an initial fraud alert with one of the three major credit reporting agencies. (They are required by law to report the fraud alert to the other two agencies.) The alert, which remains on your credit report for 90 days, automatically entitles you to a free copy of your report. Review this for any accounts you did not open or activity you did not conduct, and confirm that the report has your correct name, address and Social Security number.

Once you have determined that a fraud has occurred, you should also file both a complaint form with the trade commission and an identity theft report with your local police department. And you should file these complaints if you see any new accounts on your credit reports that you did not personally open.

After you have filed the reports, make multiple copies of them and save the originals in a safe place. While identity theft is hard to prosecute, these documents will help you investigate your case with the credit agencies and the financial institutions you do business with. Filing with the trade commission may also provide you with certain protections. In addition, law enforcement may use your information in their identity theft investigations.

Depending on the severity of your situation, you may want to consider the second type of fraud alert. The initial alert, which is recommended if, say, you lose your wallet, requires potential creditors to take certain steps to verify your identity before opening new accounts in your name. The extended fraud alert, which lasts seven years, requires creditors to contact you personally before new accounts are opened.

But there is one thing to remember: Fraud alerts help only when a thief is trying to open a new line of credit. They may not prevent a thief from using existing accounts or ordering new cards. Nor can they prevent the opening of a bank account or another account that does not require a credit check.

While they are different in each state, credit freezes are also available. When you place a freeze on your credit report, businesses and creditors cannot check your credit history unless you temporarily lift the freeze. The cost of freezing your credit, the cost of thawing it temporarily and the rules on who can freeze their credit depend on the state.

Regardless of the severity of the problem, be careful when you contact the companies of the compromised accounts or the accounts you think have been tampered with. While the level of risk varies because of credit limit, credit history and other factors, your credit score may be negatively affected if you choose to cancel credit card accounts. Inform the creditor that you have reason to suspect you are victim of fraud, and ask it for the company's policy in situations like these. One option is to ask that the account be assigned a new number. Another option, when contacting credit agencies, is to place a 100-word consumer statement on your credit report explaining the fraud. This statement will stay on your credit report as long as you want.

And again, be sure to get documentation on all of your conversations and interactions with these lenders.

EXTRA HELP In recent years, the three main credit agencies — and other companies as well — began offering credit monitoring and identity fraud services for monthly or annual subscriptions. Some companies even offer identity theft insurance. Prices and services vary, but over all, the agencies promise to monitor your credit report and send alerts if any questionable activity is found.

Whether it is a wise idea to sign up for such services depends on your wallet and your need for peace of mind. If you have already been a victim of identity theft and have had to spend a significant amount of time and resources to clean up your record, the services may reassure you. But if you have not had any problems and you are already vigilant about reviewing your accounts, it may not be worth the money.

http://www.nytimes.com/2009/05/02/your-money/identity-theft/02idtheftprimer.html?ref=your-money&pagewanted=all

Your End-of-the-Year Tax Checklist for 2010

Your End-of-the-Year Tax Checklist for 2010 by Robert D. Flach, MainStreet Wednesday, December 22, 2010 Share The average person avoids thinking about taxes until the April deadline approaches, when it's too late to make changes that can cut your bill. As 2010 draws to a close it's not too late to take steps to decrease the amount you'll owe the Internal Revenue Service. Here are some tax-planning moves to consider now: 1. Prepare a Preliminary Tax Return Using your 2009 return as a guide, prepare a projected Form 1040. Start by estimating your adjusted gross income for 2010 and your allowable deductions. Determine if you will be able to itemize your deductions — do your eligible expenses exceed the standard deduction for your filing status? Lastly, figure out the tax bracket you'll likely fall into for 2010. The standard deduction for married people filing jointly remains at $11,400 for 2010. The standard deduction for singles and married people filing separately is $5,700, and the amount for the head of a household increases to $8,400. The personal exemption is again $3,650. 2. Consider Postponing Your Income and Boosting Deductions If you expect to be in the same tax bracket next year, or a lower one, try to put off collecting income until 2011 and rack up as many eligible deductions now instead of waiting until after the New Year. You'll have more expenses to deduct this year and less income to tax at the same or higher rate. If your income is likely to increase next year and push you into a higher bracket, do the reverse and try to collect as much of your taxable income as possible in 2010 and postpone deductible expenses until 2011. Income received in 2010 will be taxed at a lower rate and deductions claimed in 2011 will provide greater tax savings. 3. Size Up Your Itemized Deductions It doesn't pay to itemize your deductions unless the total exceeds the standard deduction for your filing status. If you think you'll be able to itemize your deductions on your 2010 Form 1040, try to incur as many deductible expenses as possible this year. If you won't be able to itemize, postpone any payments that could be deductible until 2011. By deferring these expenses, you'll have more deductions to claim next year. 4. Pay Medical Bills Now The timing of itemized deductions is especially important when it comes to medical expenses. You can deduct medical expenses only if they exceed 7.5% of your adjusted gross income. If your income totals $70,000 for 2010, you can't deduct the first $5,250 of your medical expenses. If your costs total $6,000, you can claim $750. In this scenario, if your medical expenses are more than $5,250 and you have enough deductions to itemize, pay your outstanding medical bills before 2011 begins. If your medical expenses are less than $5,250, put off paying any medical bills until 2011. 5. Use Your Credit Card If you don't have the cash to pay for deductible expenses, consider using a credit card to pay for the items so you can get the deduction for 2010. Eligible expenses charged to bank-issued credit cards are deductible in the year charged, not the year you actually pay it. However, it's a different story for store-issued cards. If you use a store-sponsored card to buy deductible items at a department store, such as Macy's or Sears, the expenses can't be deducted until the actual charge is paid. So stick to bank cards for end-of-year purchases. 6. Review Your Investments Look at the investments (including real estate) you sold this year and add up your gains and losses. Separate the totals for your short-term positions (owned for one year or less) and long-term holdings (more than one year). Gains and losses from the sale of inherited property are always considered long-term. Capital-gains distributions received from mutual funds are also classified as long-term. Do a similar calculation for unrealized "paper" gains and losses for investments you still hold. Consider selling losing investments before the year ends to wipe out any taxable gains. Consider unloading holdings at a profit if your losses exceed the $3,000 maximum current deduction. 7. Consider Mutual Fund Dividends (If Not This Year, Then Next Year) The law requires mutual funds to distribute net gains from security sales to their shareholders. During the fourth quarter, fund managers calculate their net gains for the year and distribute it through dividends to shareholders. The shareholders will pay federal and state income taxes at the special capital gain rates on these distributions. After a distribution is made, the value of the fund's shares drops. If you buy shares of a fund for $10,000 on Dec. 1 and the fund issues a $1,000 capital gain dividend on Dec. 15, your shares will be worth $9,000 on Dec. 16. You had no real gain or income, but you must pay tax on the $1,000 distribution. If you want to purchase fund shares during the final months of the year, wait until after the distribution is issued and the fund's value drops. It might be too late for you to address your mutual fund dividends this year, but it's something to keep in mind for next year. 8. Don't Forget the Alternative Minimum Tax While these strategies may reduce your "regular" taxes, they may backfire if you're subject to the dreaded Alternative Minimum Tax (AMT). For those who qualify for the AMT, medical expenses are only deductible if they exceed 10% (not 7.5%) of your adjusted gross income. Taxes, investment and job-related expenses aren't deductible at all. If you usually pay the "regular" tax but anticipate having to pay the AMT for 2010, consider postponing any potentially deductible expenses until 2011, when you may not be subject to the AMT. The AMT rates are 26% or 28%. If for 2010 you are in the 28% or higher bracket for "regular" taxes and you will pay AMT at the 26% rate, you may want to claim as collect income as possible 2010. The additional income will be taxed at 26%. Final Thoughts As you consider these tax planning tips, keep in mind that certain strategies will help some people more than others. It is a good idea to discuss your year-end plans with your accountant before taking action. And remember: Your first criteria for evaluating any financial transaction should always be economic — taxes are second.

http://finance.yahoo.com/taxes/article/111690/your-end-of-the-year-tax-checklist-for-2010?mod=taxes-advice_strategy

Putting That Tax Holiday to Work in 2011

_December 22, 2010, 12:49 pm
Why to Donate Old Goods Now
By JENNIFER SARANOW SCHULTZ

Have a bunch of old clothes or household goods sitting around that you've been meaning to donate to charity?

You may not want to wait until January. Just like with monetary charitable contributions, if you give the goods before the end of the year, there's a good chance you'll be able to deduct them from your taxes.

"You can give anytime during the year but if you haven't yet, you may as well do it now because then you'll get the deduction in 2010," said Jude Coard, a partner at the accounting firm Berdon LLP.

So how must you go about the donating process if you want the tax benefit?

First, instead of just placing the items in a garbage bag and dropping them off in a donation bin, you should make a list of the items you plan to give, how much you paid for them and their estimated fair market value now. You can find figure an estimated value by looking at what they are going for in places like the Salvation Army store, consignment stores and thrift shops.

Then, assuming the donations are all in at least good condition, if the amount you want to donate of non-cash property has a fair market value of $500 or less, you merely need to enter your non-cash contributions on a certain line on your 1040 form. You don't need to attach any extra form detailing the information from the list you made.

Still, you should keep a copy of that list for record-keeping purposes. "You should have a record of how you got the deduction value, what you gave and when you gave it in case you are audited," said Mr. Coard.

On the other hand, if your total deduction for noncash contributions is more than $500, you'll need to complete form 8283. There, you'll need to enter the information about each item, and attach it to your form 1040. If your deduction is more than $5,000 or if your items aren't in at least good condition, you'll also need to include an appraisal. Also, be sure to ask the charity you are giving the items to for a receipt.

To be sure, you may not need to go through all this effort if you're not itemizing your deductions and instead are taking the standard deduction. Still, you may want to donate those charity goods now rather than later just for the good feeling that comes from helping someone else (and de-cluttering).

What is your process for donating old clothing and household goods and getting the associated tax benefit? And where do you find it easiest to donate these goods?

http://bucks.blogs.nytimes.com/2010/12/22/why-to-donate-old-goods-now/

Putting That Tax Holiday to Work in 2011

Your Money
Putting That Tax Holiday to Work in 2011
By RON LIEBER
Published: December 24, 2010
The biggest Christmas present that many people will get this year comes from the federal government. And most will probably fritter it away.

Using Your Tax Break
What will you do with your payroll tax break in 2011?
Ron Lieber writes the Your Money column, which appears in The Times on Saturdays.

Thanks to the tax bill that President Obama signed a week ago, a large number of Americans will get a yearlong discount on their payroll taxes in 2011. Normally, employees pay 6.2 percent of their salaries, up to a $106,800 limit, toward Social Security. In 2011, that number will fall to 4.2 percent.
As a result, individuals could end up with a payroll tax savings of up to $2,136 in 2011, according to CCH, a tax information provider. Households with two wage earners who both make more than $106,800 will get $4,272, double the amount for individuals.
The self-employed will share in the yearlong tax holiday as well, though they will still be liable for the full 6.2 percent of the employer contribution to Social Security. As a result, they'll pay 10.4 percent in payroll taxes instead of the usual 12.4 percent.
Some government workers and others who do not contribute to Social Security will not get this temporary break. And as Roberton Williams of the Tax Policy Center pointed out in a blog post earlier this month, the payroll tax holiday represents a net loss for many low-income individuals, who will lose access to the Making Work Pay tax credit, which expires at the end of the year.
Still, the payroll tax break is a handout worth about $120 billion, according to the White House. And the administration hopes that you will spend every cent to help get the economy going again. In fact, the tax break was shaped with just that in mind. When money dribbles into a paycheck, as this tax break will for many millions of workers, they tend not to save it in the same way that they might if it came in the form of a lump-sum check.
But you should think before you spend. This is too big of a potential win for you to be anything but deliberate in your effort to put every last dollar to good use. No matter your goal, whether it is to pay off debt or save for a large purchase or retirement, it's probably best to automate your efforts to collect the money.
Here's how to do it:
WHAT YOU'LL GET First, estimate your winnings. The personal finance magazine Kiplinger's put a calculator up on its Web site this week that can help. (I've linked to it from the online version of this column.)
Keep a couple of things in mind, though. First, the calculator covers only the 2011 tax cut; it doesn't account for the $400 maximum per person you may lose if you qualified in 2010 for all or part of the Making Work Pay tax credit, which is about to expire. Also, it may take a few more weeks before your employer or the company that handles its payroll has updated its software to reflect the change. Keep a close eye on your check and how it changes, and remember to take any 2011 salary increase into account.
PAYING DOWN DEBT If you're paying interest of 15 or 20 percent or more on a credit card or other loan balance, it's probably best to take your gift from the government and apply it to that debt. Hopefully, you're already using some sort of automated payment system to make sure you pay your bills on time, so as to avoid late fees and interest charges.
Now that you have a bit more money, you can adjust your monthly payment higher by the additional amount you are getting from the government. This trick works with mortgage and car payments as well. Just make sure the lender is applying any extra money to paying down the principal.
GIVING MORE AWAY This three or four-figure 2011 bonus isn't available to people who have no wages. And many of those who are unemployed are placing increased demand on nonprofit organizations that provide housing, food and other services.
Many of these organizations are happy to set up a recurring donation, where they will charge your debit or credit card for whatever portion of your 2011 tax break you want to give them each month. Or, you could push part or all of the additional money to them via a personal check every so often by scheduling a regular payment through the online bill-paying system at your bank.
SAVING FOR A BIG SPLURGE If you're determined to reward yourself after a couple of years of hunkering down, at least have the discipline to salt away the money each pay period until you have enough to pay in full for whatever it is you have your eye on. You can do this by pushing money from your checking account to a dedicated savings account, and most of the online savings banks are happy to pull money from your checking account automatically on a regular basis.
SmartyPig, however, is custom-made for this sort of save-to-splurge scheme. It pays a 1.75 annual percentage yield for balances under $50,000 right now, which beats any other rate that I've been able to find. And it forces you to be disciplined, since you can't use the service unless you allow it to pull money from your checking account regularly.
Plus, if you put your savings toward spending at its partner merchants, you get a bonus by putting your money on those stores' gift cards. American Airlines offers a 3 percent bonus, for instance, so $500 of SmartyPig savings would yield a $515 American gift card. Lands' End, L. L. Bean and Macy's all offer over 10 percent bonuses.
Just check the prices for your items first. A 10 percent bonus toward luggage does you no good if the bag is available for 20 percent less elsewhere.
Also, before you splurge, think hard about whether a new big expense might pop up in 2011, say higher health insurance premiums or higher property taxes, for which you'll need to write a big check.
RETIREMENT Think you know better than policy makers in Washington? Then take all of this money and put it toward your retirement, even if you need to put it in a regular brokerage account because you've maxed out more traditional options like a 401(k) or other tax-privileged retirement account. After all, it was supposed to go toward Social Security in the first place.
If you're not already maxing out your 401(k) or similar plan contribution at work, raise the amount that your employer takes from your paycheck to match the temporary raise you're getting because of the payroll tax holiday. This is especially crucial if you're not taking full advantage of any matching funds that your employer may offer. If you have no workplace retirement plan, the entity that has your individual retirement account or other traditional brokerage accounts should be able to pull money regularly from your bank.
The real beauty here is in the potential for compounding. That luggage bought with the gift card will only depreciate. But $2,000 will turn into $11,487 if it earns 6 percent a year over 30 years.
Your tax dollars at work, right? And you're going to need them 30 years from now if we keep declaring holidays like this one.
http://www.nytimes.com/2010/12/25/your-money/25money.html?_r=1&hp

Married Filing Jointly Filing a joint return with your spouse

 Married Filing Jointly

Filing a joint return with your spouse

By William Perez, About.com Guide

Married taxpayers can choose between filing a joint tax return or a separate tax return. The Married Filing Jointly filing status provides more tax benefits than filing separate returns, but taxpayers will need to weigh the pros and cons and decide for themselves which is the best filing status.

If you are married, then you and your spouse can filing a joint tax return. You are considered married if you are legally married on the last day of the year. In order to file jointly, both you and your spouse must agree to file a joint tax return, and both must sign the return. Married Filing Jointly (MFJ) provides more tax benefits than filing a separate return.

The IRS advises that, "If you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize deductions) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses" (from Publication 501, "Married Filing Jointly").

What's a Joint Tax Return?

By filing a joint tax return, both spouses report all their income, deductions, and credits. Both spouses must sign the return, and both spouses accept full responsibility for the accuracy and completeness of the information reported on the tax return.

The IRS cautions, "Both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse" (from Publication 501). The IRS may grant relief from joint liability for taxes through innocent spouse relief, separation of liability, or equitable relief. Refer to Publication 971 (Innocent Spouse Relief) for additional information about these tax relief programs.

Deceased Spouse

If your spouse died during the year, you can still file a joint return for that year. In the following years, you can file as a surviving spouse, as head of household, or as a single taxpayer. The IRS explains, "If your spouse died during the year, you are considered married for the whole year and can choose married filing jointly as your filing status" (from Publication 501).

Filing Joint versus Separate Returns

Filing a separate return provides relief from joint liability for taxes. However, married taxpayers who file separately are not eligible for many tax deductions and credits, and have higher tax rates. In general, it is more advantageous to file a joint return.

Domestic Partners Cannot File Joint Returns

The IRS does not follow state law for recognizing same-sex marriages. The Federal Defense of Marriage Act of 1996 defined marriage as "a legal union between one man and one woman as husband and wife, and the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife."

Some states, such as California, are requiring domestic partners to file tax returns as if they were married. Domestic partners should consult with an experienced tax professional for advice on filing their federal and state tax returns.

JNZ Capital Blog Test

first post 1.2.3

Extraordinary Tax Deductions

by Peter Blank
Wednesday, April 7, 2010

Sometimes, despite objections from the IRS, taxpayers get to write off the darndest things. Here are our favorites.

Okay, admit it: As you've struggled with your tax return, trying to come up with some extra deductions to pump up your refund or reduce what you owe Uncle Sam, you've taken a few flights of fancy. "Can I claim a deduction for all those blood donations at the Red Cross?" Nope. "How about a charitable contribution for all the time I donate to the church?" No, again. "Can I count the wedding gift for my boss's daughter as an employee business expense?" Come on!

On the other hand, over the years your fellow taxpayers have successfully claimed write-offs for many things that most of us wouldn't dream of taking. Here's our list of what we think are among the most imaginative deductions allowed, ranging from cat food to a casualty loss for a vehicle totaled by a drunk driver:

1. A "significant other." A man hired his live-in girlfriend to manage several of his rental properties. Her duties included finding furniture, overseeing repairs and running his personal household. The Tax Court let him deduct as a business expense $2,500 of the $9,000 he paid her but disallowed the cost of her housekeeping chores as nondeductible personal services.

2. A private airplane. Rather than drive five to seven hours to check on their rental condo or be tied to the only daily commercial flight available, a couple bought their own plane. The Tax Court allowed them to deduct their condo-related trips on the aircraft, including the cost of fuel and depreciation for the portion of time used for business-related purposes, even though these costs increased their overall rental loss on the condo.

3. Cat food. A couple who owned a junkyard were allowed to write off the cost of cat food they set out to attract wild cats. The feral felines did more than just eat. They also took care of snakes and rats on the property, making the place safer for customers. When the case reached the Tax Court, IRS lawyers conceded that the cost was deductible.

4. Moving the family pet. The IRS says if you are changing jobs and meet a couple of tests, you can deduct your moving expenses -- including the cost of moving your dog, cat or other pet from your old residence to your new home. Your pet -- be it a Pekingese or a python -- is treated the same as your other personal effects.

5. Body oil. A pro bodybuilder used body oil to make his muscles glisten in the lights during his competitions. The Tax Court ruled that he could deduct the cost of the oil as a business expense. Lest it be seen as a softie, though, the court nixed deductions for buffalo meat and special vitamin supplements to enhance strength and muscle development.

6. Restitution in a fraud case. Sometimes, crime really does pay, or at least it does for tax purposes. A dentist's wife kept his books and, unbeknownst to him, billed insurers for services he didn't perform. Her scheme was uncovered and she was sentenced to 18 months in jail, but she wasn't required to pay restitution. The dentist repaid the ill-gotten gains to settle the insurer's civil claims against his practice. Since the repayment merely compensated the insurer for its loss and wasn't punitive, the dentist was allowed to deduct it as a business expense. In fact, the loss created by the write-off triggered a refund for the dentist of taxes paid in prior years.

7. Wrecking a car while driving drunk. A reveler drank too much at a party and had the good sense to arrange a ride home. A few hours later, after slowing down in his revelry, he thought he was okay to drive. Unfortunately, the vehicle he was operating slid off the road and rolled over. The cops arrested him for drunken driving because his blood alcohol reading was just over the legal limit. His insurer refused to pay for the damage to his car because of the arrest. Yet the Tax Court let him deduct the cost of the damage as casualty loss because it said that he had tried to act reasonably. Had he driven straight home from the party with a high blood alcohol level and had the accident, the court declared that it would have nixed his deduction because his actions would have constituted gross negligence.

8. Free beer. In a novel promotion, a service-station owner gave his customers free beer in lieu of trading stamps. Proving that alcohol and gasoline do mix -- for tax purposes -- the Tax Court allowed the write-off as a business expense.

9. A business meeting in Bermuda. Bermuda is a great place to schedule a tax write-off because business conventions are deductible without having to show that there was a special reason for the meeting to be held there. Why? Bermuda and the U.S. exchange tax information under international agreement. Other countries in the Caribbean region qualify, too, including Barbados, Costa Rica, Dominica, the Dominican Republic, Grenada, Guyana, Honduras, Jamaica, St. Lucia, and Trinidad and Tobago. Meetings held in Canada, Mexico and all U.S. possessions also receive this favorable tax treatment. Attend a convention in Paris or Rome or Beijing, though, and there's no deduction unless you can show it made as much sense to travel abroad as to head to Pittsburgh.

10. Baby-sitting fees. Fees paid to a sitter to enable a parent to get out of the house and do volunteer work for a charity are deductible as charitable contributions even though the money didn't go directly to the charity, according to the Tax Court. The court expressly rejected a contrary IRS revenue ruling.

11. Landscaping. A sole proprietor who regularly met clients in his home office was allowed to deduct part of the costs of landscaping the property, on the grounds that it was a part of the home being used for business, according to the Tax Court. The court also allowed a deduction for part of the costs of lawn care and driveway repairs.

12. Swimming pool. A taxpayer with emphysema put in a pool after his doctor told him to develop an exercise regime. He swam in it twice a day and improved his breathing capacity. Turns out he swam in the pool more than his family did. The Tax Court allowed him to deduct the cost of the pool (to the extent the cost exceeded the amount it added to the value of the property) as a medical expense because its primary purpose was for medical care. Also, the cost of heating the pool, pool chemicals and a proportionate part of insuring the pool area are treated as medical expenses.

Copyrighted, Kiplinger Washington Editors, Inc.