Suzanne A. Ascher
ATTORNEY AT LAW
CERTIFIED PUBLIC ACCOUNTANT
Along with working, you are attending night school or you are taking occasional courses at the local community college. Someone in class mentions that he is "going to write the whole thing off," and it starts you wondering. Are you eligible for any deductions for the cost of your education?
The answer to that question, like most questions about taxes, depends on many things. If you are an employee, you may be able to deduct the costs of qualifying work-related education, but only if you itemize instead of taking a standard deduction. The deduction allowed would be the amount by which your work-related education costs plus other job and certain miscellaneous expenses exceed two percent of your adjusted gross income. If they don't exceed this floor, no deduction is allowed.
If you are self-employed, you may deduct the costs of work-related education directly from your self-employment income.
Qualifying Work-Related Education
In order to have deductible un-reimbursed business costs, you must be employed or self-employed. If you are absent for work for less than a year in order to get education to maintain your skills and then return to the same general line of work, the education received during this time qualifies as work-related. You must already meet the minimum educational requirements of your present job or profession. The minimum educational requirements may be set by law, by professional standards, or by an employer. The course you are taking must be of the kind that maintains or improves your job or professional skills or is required by your employer to stay in your present position AND it cannot lead to qualification for a new job or profession. If your employer requires the course you are taking but it qualifies you for a new profession, it is not a deductible work-related expense (but it may qualify the taxpayer for other educational tax relief).
Bar or CPA review courses are not deductible work-related courses because they are part of a program of study that prepares you for a new profession. In addition, travel as a form of education is not deductible even if it is directly related to your job or profession.
If the courses taken qualify as work-related education, deductible expenses included tuition, textbooks, lab fees, equipment, and other required expenditures.
Deductible travel expenses include one-way or round-trip local transportation costs (bus, subway, train, car, etc.). If you are required to stay away overnight attending a qualified course, you may deduct the cost of travel, lodging, plus half of the cost of meals. You may not deduct any personal expenses incurred during the time away from home, including sightseeing, entertaining, and extensions of the trip.
The Internal Revenue Code imposes a tax on an individual who abandons his U.S. citizenship for the principal purpose of avoiding U.S. taxes. The expatriation tax applies to citizens who lose U.S. citizenship and to long-term permanent residents who terminate U.S. residency or who are treated as residents of another country pursuant to a treaty and who fail to waive treaty benefits. This tax may be assessed on U.S. source income for 10 years after the loss of the individual's citizenship or residency.
The Internal Revenue Service presumes a tax avoidance purpose if the individual's annual net income tax for the five years before termination exceeds an amount set by the statute ($124,000 for 2004) or the individual's net worth on the date of termination was more that a statutory amount ($622,000 for 2004).
If an individual meets either of the tests leading to a presumption of tax avoidance as the principal purpose for renouncing citizenship, he or she may be eligible to request a ruling from the IRS that he or she did not expatriate to avoid U.S. taxes. The request must occur within one year from the date of expatriation. The IRS may grant a favorable ruling exempting an individual from the expatriation tax if the individual meets one of the following requirements: he or she was born a U.S. citizen and a citizen of another country and retains citizenship in the other country; he or she becomes (not later than the close of a reasonable period after loss of U.S. citizenship) a citizen of the country of the individual's birth, the birth country of a spouse, or the birth country of either parent; he or she loses citizenship before age 18 1/2; he or she was present in the United States for 30 days or less each year of the 10-year period; or he or she is exempted by regulation.
An individual subject to the expatriation tax is taxed as if he or she had been a citizen or resident during the 10-year period following the loss of citizenship or residency, but only if that tax is greater than the tax imposed on nonresident aliens. The expatriation tax applies to the individual's gross income effectively connected with the conduct of a U.S. business or trade as well as U.S. source income that is not effectively connected with a U.S. business or trade. Income subject to the tax includes any gain realized on the disposition of property or any income from property contributed to specified foreign corporations during the 10-year period. The expatriate subject to taxation is entitled to deductions to the extent that they are allocable to gross income, but any unused capital losses may not be carried over to another tax year. In addition, the expatriate may be subject to the alternative minimum tax.
Relief from double taxation of income is provided by a credit for foreign taxes paid on income that is subject to U.S. taxation solely by reason of the expatriation tax.
The main purpose of the Tax Court is to give the taxpayer an opportunity to be heard before he or she is compelled to pay any tax within the Court's jurisdiction, including income, estate, gift, self-employment, or special excise taxes. When a taxpayer receives a notice of deficiency from the Internal Revenue Service, he or she may decline to pay the tax and may petition the Tax Court to review the deficiency. The Tax Court is the only judicial body from which a taxpayer may obtain relief without the payment of taxes.
On the other hand, the taxpayer has the option of paying the taxes after receiving the deficiency notice in order to stop the running of interest without losing any Tax Court privileges. However, the taxpayer who pays the tax before receiving any notice of tax deficiency risks losing his appeal rights to the Tax Court.
After the taxpayer files a timely petition with the Tax Court, the IRS is generally barred from determining any additional deficiency for the same tax year except in the case of fraud.
If the taxpayer has filed an action for a refund in a district court or the U.S. Court of Federal Claims and receives a notice of deficiency from the IRS, he may still file a petition for review in the Tax Court. The taxpayer has the choice of which court shall have jurisdiction over the tax matter. By filing a petition in the Tax Court, the taxpayer causes that court to have sole jurisdiction, but by failing to file a Tax Court petition, the district court or the U.S. Court of Federal Claims would have sole jurisdiction. However, if the case in the district court or the U.S. Court of Federal Claims has already proceeded to a hearing, that court retains jurisdiction.
A taxpayer who loses in the Tax Court has the right to challenge that decision in the U.S. Court of Appeals by filing a timely notice. If the taxpayer wants to have the assessment postponed until after the appeal is heard and decided, he must file an appeal bond with the Tax Court guaranteeing payment of the deficiency as finally determined.
You are about to start your own business, and you want to avoid any potential problems with the Internal Revenue Service. What if you are audited? What will the IRS be looking for in connection with your business?
When you are audited, the IRS examiner looks at more than your tax return. He or she compares you, the taxpayer, with the amounts reported on your tax return. If the audit is conducted in your office or home, the examiner will look all around at the surroundings to get a feel for whether the tax return reflects your life style. The auditor is looking for the "economic reality" of your situation, and some of the items that might be of interest include the following:
When a married couple files a joint federal income tax return, both parties are both jointly and severally liable for the tax and any interest and penalties that might accrue even if all the income was earned by only one spouse. However, in certain limited situations, the Internal Revenue Service is willing to grant relief to one spouse for either all or a portion of any understated liability as shown on the tax return.
Innocent Spouse Relief
When one spouse fails to report income or takes deductions or credits to which he is not entitled on a joint tax return and the other spouse unknowingly signs that return, the "innocent" spouse may be entitled to relief for all or a portion of the understated tax liability for federal income and self-employment taxes, excluding household employment taxes. The IRS can only grant relief for understated taxes -- that is, that amount calculated as the difference between the tax owed according to the return and the actual liability assessed by the IRS. An innocent spouse can not gain relief in the form of a refund of taxes already paid.
To qualify for innocent spouse relief under the Internal Revenue Code, the applicant must show all of the following: that he/she filed a joint return that contained an understatement of taxes resulting from a spouse's erroneous items; that the innocent spouse did not know and had no reason to know about the understatement; and that it would be unfair to hold the innocent spouse liable.
In evaluating whether it would be unfair to hold one spouse liable for an understatement, the IRS considers all facts and circumstances, including whether the innocent spouse either directly or indirectly received a significant benefit from the understatement and whether the innocent spouse was later deserted or divorced by the other spouse.
In a fairly recent change to the rules, an innocent spouse may now apply for partial relief from an understatement of taxes. In some situations, one spouse may know or have reason to know that there is some understatement of tax due to erroneous items of the other spouse. If, however, there is an understatement above and beyond the known understatement, the spouse may be considered innocent and not liable for the additional portion.
After the IRS receives an application for innocent spouse relief, it is required to inform the other spouse of the request, and the other spouse is entitled to participate in the determination process.
Relief by Separation of Liabilities
Another form of relief available to one spouse after the filing of a joint income tax return is the allocation of an understatement of taxes, interest, and penalties between the spouses. As in the innocent spouse relief, the spouse seeking relief must prove that he or she neither knew nor had reason to know about the understatement. However, there is a domestic abuse exception to the lack of knowledge requirement. If the spouse seeking relief had actual knowledge of the understatement but was a victim of domestic abuse before signing the tax return, he or she might be able to prove that it was signed under duress, thereby negating its binding effect.
A spouse is only entitled to a separation of liabilities if, after filing a joint return, he or she is divorced, widowed, or legally separated from the other spouse or is estranged and living apart from that spouse. The IRS will refuse to grant relief if it determines that the spouse seeking relief had knowledge of the understatement, was part of a tax fraud scheme, or received property from the other property in order to avoid the payment of taxes.
If a spouse is ineligible for either of the other two forms of relief from a tax liability arising from an understatement of taxes by a spouse, he or she might be entitled to equitable relief. In determining whether to grant equitable relief, some of the factors considered by the IRS include: whether the parties are separated or divorced; whether the applicant spouse will suffer an economic hardship if there is no relief; whether there is a legal obligation to pay the taxes, such as through a divorce decree; whether the spouse received a significant benefit from the understatement beyond normal support; and whether there was knowledge of the understatement. Abuse of the applicant or poor mental and physical health weigh in favor of equitable relief.
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