Article Highlights:

  • Divorce or Separation Agreements Can Specify Who Claims a Child.
  • If You Pay Child Support, You Claim the Child as a Dependent.
  • Avoiding Payroll Taxes by Treating an Employee’s Compensation as a Gift.
  • Only Medical Expenses for Taxpayer, Spouse, and Dependents Are Deductible.
  • Donation of the Use of a Time-Share Week Is a Charitable Deduction.
  • Pay Household Help in Cash and Avoid Paying Payroll Taxes. 
  • Health Savings Account Funds Are Only for Medical Expenses.
  • Only Must Report and Pay Tax on Income Over $600.
  • You Don’t Have to Report Interest Income if You Haven’t Received a Form 1099-INT.
  • You Can Help Friends and Family with Interest Free Loans.  
  • Older People Should Change the Title on Their Home to Their Child.
  • Cost of Attending a Medical Conference Is Deductible.
  • Claim a Medical Deduction for Repainting Home If Lead-Based Paint Is Discovered.
  • You Can Sell Your Used Electric Vehicle to an Individual and Get a Tax Credit.
  • Investments In Foreign Countries Are Not Subject to U.S. Taxes.
  • Only Homeowners Can Claim the Solar Credit.
  • A U.S. Citizen Married to A Non-Resident Alien Cannot File a Joint Return.

The U.S. Tax Code is used for more than just collecting taxes. It is used by the Government as a means of providing lower-income individuals with social benefits such as the earned income tax credit, child tax credit and health care subsidies. It also is used to promote government-sponsored programs such as combatting climate change through tax credits for electric vehicles, home solar installations, and home energy-saving improvements. As a result, the tax code has become quite complex and changes frequently. That is why getting tax advice from friends and relatives or off the internet can be risky and lead to misinformation and trouble with the IRS, or missing out on tax benefits. Here are examples of bad tax advice.

If your divorce or separation agreement says so, you can claim your child as your dependent.

Not true! The IRS will not accept a state court’s allocation of dependents because IRC Sections 151 and 152, not state law or a judge’s ruling, determine who may claim a child as a dependent for federal income tax purposes.

If you pay child support you are entitled to claim the child as a dependent.

Untrue! A child is the dependent of the custodial parent unless the custodial parent releases the dependency to the non-custodial parent. The IRS defines “custodial parent” to be the parent with whom the child resides for the greater number of nights during the year.

An employer can avoid payroll taxes by treating an employee’s compensation as a gift.

Not true! Although gifts are generally excluded from the recipient’s gross income, transfer by or for an employer to or for the benefit of an employee can’t be excluded as a gift (Code Sec. 102(c)(1)).

However, de minimis fringe benefits are not treated as a gift and are excluded from the recipient’s gross income (Code Sec. 132(a)(4)). A de minimis fringe is any property or service whose value is so small that accounting for it is unreasonable or administratively impracticable.

You can only deduct medical expenses for the taxpayer, spouse, and dependents.

That is generally true, butfor purposes of deducting medical expenses for a dependent relative, the individual does not need to meet the gross income test (IRC Sec 152(d)(1)(B)) to be a medical dependent.  In addition, for qualifying children of divorced or separated parents, each parent can deduct the expenses they pay, as long the child is a dependent of one of them.  

You get a charitable contribution if you donate the use of your time-share week to a charity auction.

Not true! Unfortunately although that might seem to be good advice, the “use” of an item does not constitute a gift of property. It is merely the granting of a privilege for which no charge is made and therefore does not constitute a deductible charitable contribution. Rev Ruling 70-477, I.R.B. 1970-37.

If you pay your household help in cash you can avoid paying FICA.

Not true! The IRS consider household help to be employees and employees are subject to Social Security and Medicare taxes (FICA) once a specified threshold is exceeded. Household employees do not includerepairmen, plumbers, contractors, and other business people who provide their services as independent contractors. IRS Publication 926.

Health savings account (HSA) funds can only be used for medical expenses.

Not true! Generally HSAs can only be established by eligible individuals who are only covered by high-deductible health plans. Eligible individuals may, subject to inflation adjusted limits, make contributions to HSAs. Even though the intent of HSAs is to provide a means for taxpayers with high deductible insurance to pay medical expenses, there is no requirement that HSA distributions must be used to pay medical expenses. However, such distributions are subject to income tax and a 20% penalty tax., except that an individual aged 65 or older can withdraw the funds penalty free but still must pay tax on the nonqualified distribution.  

You only must report and pay tax on income more than $600.

A misconception! Income greater than $600 is the threshold amount where those in a trade or business must file an information return with the IRS reporting payments of income to an independent contractor or service providers, generally using a form in the 1099 series. Many misinterpret that to mean that income of $600 or less is non-taxable, which is not true.

You don’t have to report interest income if your bank hasn’t sent you a Form 1099-INT.

Not true! Although financial institutions are not required to issue account holders a Form 1099-INT if the interest amount is under $10 for the year, account owners still must include in income the interest they received if the amount is $0.50 or more.

You can help friends and family with interest free loans with no tax consequences.   

Not true! The tax code (Sec 7872) considers the lack of interest on a loan of more than $10,000 to be a gift. The amount of the gift is the amount of interest based upon an applicable federal rate (AFR), or where the loan interest rate is below the AFR, the difference between the AFR interest and the interest charged. Thus the borrower is treated as paying the imputed interest, which is tax deductible if it otherwise qualifies, and the lender must treat the interest as investment interest income.   

Older people should change the title on their home to their child.

Not a good idea! Since that would be treated as a gift and a gift tax return would be required. Worse yet, as a gift the child’s basis (the amount from where taxable gain is measured) would be the same as the parent’s basis. Thus when the child sells the home the child would have the same gain as the parent would have had, except the child would not qualify for the $250,000 home sale gain exclusion. Of course, if the child lived in the home for 2 of the 5 years preceding the sale, the child could also qualify for the home sale exclusion.

On the other hand, if the parent continued to own the home and the child later inherits the home when the parent dies, the child’s basis becomes the fair market value at the date of the parent’s death, and if the home is sold right away there would be no taxable gain, and possibly even a deductible loss. 

You can deduct the cost of attending a medical conference related to a dependent’s disease.

That is only partially true! A taxpayer is allowed to deduct the cost of the conference registration fee and travel to the conference, because those costs are primarily for a dependent’s medical care and the taxpayer’s attendance was essential for that care. However, the costs of meals and lodging are not deductible, because the dependent did not receive medical care at a licensed facility, a prerequisite for a medical deduction of meals and lodging. (Rev Ruling 2000-24, 2000-19 IRB)

If lead-based paint is discovered in your home you can claim a medical deduction for the cost of repainting your home.

An exaggeration, since just the cost of removing lead-based paints from surfaces in a taxpayer’s home to prevent a child who has or has had lead poisoning from eating the paint can be included in medical expenses. These surfaces must be in poor repair (peeling or cracking) or within the child’s reach. The cost of repainting the scraped area is not a medical expense. (IRS Publication 502, page 10)

You can sell your used electric vehicle to an individual and get a tax credit of $4,000.

Not true! A total misunderstanding of the new credit for previously owned electric vehicles.  The buyer gets the credit not the seller, the credit is the lesser of $4,000 or 30% of the vehicle’s selling price, and finally the vehicle must be purchased from a dealer not a private party.  

Investments in foreign countries are not subject to U.S. taxes.

Not true! U.S. Citizens and resident aliens are taxed on worldwide income.

Homeowners can claim a credit for purchasing and installing solar electric systems on their home.

That is true, but not the whole story. The taxpayer need not own the property to qualify for the credit; the taxpayer need only be a “resident” of the home.  

There is a “standard” amount that can be claimed as a charitable contribution.

Not true! Only actual amounts donated to qualified charitable organizations are eligible charitable contributions, and stringent substantiation rules apply for both cash and non-cash donations.

A U.S. citizen married to a non-resident alien cannot file a joint return.

Not true! Since a person who is a nonresident alien at the end of their taxable year, and who is married to a U.S. citizen, or a U.S. resident, can be treated as a U.S. resident for income tax purposes if the spouses so elect (Code Sec. 6013(g)(1)).  By making the election they can file using the married joint status. In so doing, both spouses must agree to subject their worldwide income to U.S. taxation for the taxable year, and future years unless the election is terminated. (Code Sec. 6013(g); Code Sec. 6013(h))

Taking tax advice from novices can lead to tax problems and missed benefits. Recently there have been some false tax strategies purposely posted on social media by troublemakers and scammers. Don’t be misled; call this office with your questions.