This Year's Tax Changes That Effect Networkers - Sandy Botkin
According to tax expert Sandy Botkin of the Tax Reduction Institute, the New Year brought a number of positive changes to the IRS code affecting Network Marketers and their families. Here he gives you the low down on the changes that will effect you most in the course of the year (start planning now for next year's taxes!) and, if you're working on your 1998 tax return, some audit red flags you need to know. -- Uma Sackett
Changes for 1999
The Big Home Office Win
Prior to 1999, Network Marketers could take a home office deduction, but it wasn't easy. To claim the deduction, you had to spend over 50 percent of your business-building time physically at home (highly unlikely for active Network Marketers), or physically display products and store inventory there.
Now every Network Marketer in the US will be able to legally, morally and ethically take a home office deduction. Starting in 1999, the law says that if you rendered significant administration or management for your business in a set spot in your home, you can claim the home office deduction. Networkers are major winners in this change!
The catch is that all home office deductions are limited to the net income from the business-- if you made $200 in your business, then the home office deduction is limited to that $200.
Tip: Claim the home office anyway, because if the deduction exceeds the net income from your business, you can carry over the deduction. If you ever sell your home or increase your income from your business you can use that carried over deduction to offset the income in future years.
Save More On Health Insurance Premiums
In 1998, as a sole proprietor or an S corporation, you were allowed 45 percent of your medical insurance premiums as a medical deduction.
Tip: Hire your spouse and make them the primary insured on the medical plan and deduct 100% of the medical insurance premium as a tax-free employee fringe benefit.
Starting in 1999, the allowed deduction is increasing by a healthy 15 percent-- if you are a Networker paying medical premiums directly, you can look forward to deducting 60 percent for yourself and family.
Student Loan Deduction-- Increased
In 1998, you were allowed to deduct $1000 of student loan interest being paid on your child's or your own education. This year, that deduction is up to $1500 if you're married and have under $60,000 adjusted gross earnings. The deduction decreases for households with income of above $60,000, and is eliminated for those making $75,000 and above. For single taxpayers, the phase out is from $40,000 to $55,000 of modified gross income. What Congress gives, they also take away.
Child Tax Credit-- Increased
In 1998, you got a $400 child tax credit for children under age 17. Note the difference here between a credit and a deduction-- a credit is a dollar-for-dollar reduction of your tax bill. The benefit of a deduction depends on your tax rate. In 1999, that tax credit is $500. Phase out starts for singles earning over $75,000 and married couples who make over $110,000.
New-- Hope Education Credit
The new Hope Education Credit allows you to take up to 100 percent on the first $1,000 of tuition and 50 percent on the next $1,000. You are allowed a maximum credit per student of $1,500 for the first two years of undergraduate college education. (Strangely, this specifically does not apply to anyone who's been convicted of a drug felony. If your kid is convicted on a drug charge, you won't get the credit, but if he's a hitman or a bank robber, that's okay!)
New-- Lifetime Learning Credit
The Lifetime Learning Credit gives you up to $2000 credit for educational expenses at any level for yourself or your dependents. Unlike the Hope credit, which can be applied per child, this Credit applies one per tax payer. The Lifetime Learning Credit phases out at $100,000 if you're married, $50,000 if you're single, and will be adjusted with inflation.
Audit Red Flags
The typical audit rate is less than one percent, but whether you fall into or avoid the following red flag traps will significantly affect your odds of a personal audit.
Failing to Report All Income
If I had to pick the single biggest red flag, it is failing to accurately report all income on your tax return that is reported to IRS in a 1099. All Networkers, like most people in the country, receive income from various sources-- banks, commissions, stock sales-- and they get a 1099 showing the earnings information. If your tax return shows less income than IRS says you made, it's (pretty much) guaranteed that the IRS will be inviting you to come down for a chat. It is vital that everything on your 1099s match what's on your tax return.
Note: A lot of Networkers think that if they didn't get a 1099, they don't have to pay taxes on it. That is not true. Generally, 1099s aren't required to be sent if you made less than $600, but it's still taxable.
Failing to Properly Document Entertainment Expenses
Entertainment is 50 percent deductible, so a lot of people report only 50 percent of their entertainment. That is incorrect. Report the entire 100 percent, and then show IRS on the tax return that you are deducting for 50 percent. That way they can clearly see that you are taking the deduction only for half.
Tip: Here's a formula for remembering how to properly document your entertainment expenses: WWWW$
WHO did you entertain?
WHERE did you entertain them?
WHY, for what specific reason, did you entertain?
WHEN? At what date and time?
$ How much did you spend?
Failing to Properly Document Mileage
If your tax return includes a big 0 for commuting, the IRS is likely to call you for one of those chats. If the IRS asks you for your business and personal mileage, you better have records of each trip-- business and personal separate.
Should someone who hasn't been keeping meticulous records in the last year claim deductions? No. Start keeping those records immediately and deduct next year. If the IRS audits you and gets a lot of money out of you because you don't have the records to back yourself up, you can count on them keeping in touch. On the other hand, if they audit you and you're in good shape, they tend to leave you alone for years.
The idea that the more deductions you take, the more likely you are to be audited is a myth. Actually, it's the reverse: If you take more deductions and you document them properly, you get all the benefits of those deductions and reduce your long-term chances of audit.
Two Final Tax Tips:
1) The IRS sends out payment-due notices and people pay them without realizing that a large percentage of those notices are wrong! Always check the notice carefully to make sure it's correct before paying.
2) Document in your check book every deposit you make and where the money came from. IRS will immediately ask for your bank records in an audit, and you'll have to account for all deposits made. Gifts, inheritance, tax-exempt interest, a reimbursement from an insurance company-- none of these are taxable, but if you can't account for it, IRS will charge you on all of it as unreported taxable income. Whenever you make a non-taxable deposit, photocopy the check and put it in a file.
Sanford C. Botkin, Attorney, Certified Public Accountant, is Chief Executive Officer and Principal Lecturer of the Tax Reduction Institute, a tax education company located near Washington, DC. During the past ten years, Mr. Botkin has taught more than 50,000 taxpayers how to save more than $300 million on their taxes with his Tax Strategies seminar, Tax Reduction Diary System, and his instructive tape series, Tax Advantages For Your Home Based Business. Mr. Botkin has extensive financial and legal experience, including five years as a legal specialist in the Office of Chief Counsel for the Internal Revenue Service. He was also one of eight attorneys selected by the Internal Revenue Service to train new attorneys to the Internal Revenue Service's Corporate Tax Division. Mr. Botkin is a member of the Florida Bar Association and the Florida Institute of Public Accountants, and was a 1995 Distinguished Real Estate Instructor. He is also on the faculty of Anthony Robbins Companies where he can be heard in the Wealth Mastery and Date With Destiny programs.
Back to top of article
Reprinted with permission from Upline, Upline Legal - March 1999, 888-UPLINE-1, http://www.upline.com