Find All of My Identity Theft Blog Posts in One Location

One year ago Saturday, Wendy Boka’s identity theft saga with the IRS finally ended when she received her long-awaited refund check from the IRS, took it to the bank and it went through without issue.

My ongoing blog posts (19 parts) about Wendy’s story, and the IRS’s ham-fisted way of handing her case, has been the most-talked-about thing on my blog for nearly 2 years (Part 1 debuted on August 6, 2012).

Now, I have brought together all 19 parts in one convenient location on this blog — click here! — so that any reader can quickly and conveniently access any piece of Wendy’s story at any time.

Lo, The Plight of the Unknown EA

The local business directory for my town was just published.

I’m an Enrolled Agent. Commonly abbreviated as “EA.” But apparently the publishers of the directory were confused:

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Apparently I’m actually an extended-play record.

I haven’t called the local group that published the directory yet. It was a free listing, and it made me laugh, so I’m not angry.

It was probably just a typo or just an honest mistake.

But would a mistake like this be made with a CPA?

I doubt it.

Then again, CPAs have major name recognition.

Meanwhile, 90% of the population has never heard of an EA.

Taxation of Credit Card Benefits

A few weeks ago I got a booklet in the mail from my credit card company. The booklet was sent as a reminder that I have a “credit defense” benefit on my credit card.

I pay a premium $0.39 per $100 of ending balance in my account. For that payment, I get to use a variety of benefits provided by the credit card company.

For example, if my wife or I were to get laid off or become disabled, the credit card company would make our minimum monthly payment each month for a certain period of time. Other benefits include reimbursements for medical expenses, car repair, taking the pets to the vet, and moving expenses.

I’ve never actually used any of these benefits, but I don’t mind paying the premium because I’m paranoid about sudden loss of jobs or becoming disabled.

At any rate, what are the tax consequences of these types of benefits?

I did quite a bit of research for this post, but turned up little when it comes to reimbursement of auto expenses, pet expenses and moving expenses. There is, however, guidance on the unemployment benefit part.

Let’s break this into two pieces.

One: Unemployment or Disability Payments

If you become unemployed or disabled and the credit card company makes your monthly payments for you, those payments are taxable if the payments exceed the amount of premiums you paid during the year.

This part is clear (see page 94 of IRS Publication 17).

Two: Reimbursements

What’s less clear is what happens if the credit card company reimburses you for things such as car repairs.

For example, under my credit card’s benefit program, they will pay up to $250 of car repairs once a year. The way it works is, I pay for the car repair using the credit card, and then the credit card company will issue me a credit on my account for up to $250. Same concept for medical expenses, pet expenses, etc.

I couldn’t find anything definitive about this, but I think this type of benefit is not taxable. Unlike with the unemployment/disability payments, these benefits are a reimbursement for expenses actually incurred.

The credit to the account does reduce the amount of credit card debt owed, but unlike in typical debt cancellation, this is not really an acquisition of wealth because it’s a reimbursement of an expense.

The only tax implication I can think of is if you’re reimbursed for a deductible expense. In that case, you would reduce your deduction by the amount paid by the credit card company.

Deducting Losses in Retirement Accounts

The general tax rule is that market losses in retirement accounts are never deductible. That statement is true, but as with everything relating to the taxes, there’s a “but.”

In rare circumstances, you might be able to deduct losses from these accounts.

Basic Requirements for All Types of Accounts

  1. All accounts of the same type must be fully paid out. For example, if you have 3 IRAs, all 3 accounts must be fully paid out.
  2. You must have after-tax basis. This means amounts put into the account with after-tax dollars. With Roth IRAs, your basis is whatever you have paid into the account. In traditional IRAs and 401(k) plans, your basis would be any non-deductible contributions you have made. Most 401(k) plans will never have non-deductible contributions in them.

The Mechanics of Figuring the Deduction
Assuming you meet the above two requirements, you then have to calculate your loss. To do this, you take the amount of cash you receive and compare it to your basis. If the cash received is less than your basis, you are eligible for a deduction.

Example: You close out a Roth IRA account. It is the only Roth IRA you have. Through the years, you paid in $5,000 into the account. You received $4,000 when you closed out the account. The amount of loss eligible for a deduction is $1,000 ($4,000 received minus $5,000 basis).

Hurdles to Clear
In the example above, you are still not in the clear for taking a $1,000 deduction. Tax law puts three hurdles in place that make it hard to actually take the deduction.

  • Hurdle #1: losses on retirement accounts are not considered capital losses. Instead, they are considered miscellaneous itemized deductions. This means: you only get the deduction if you itemize deductions.
  • Hurdle #2: because it’s a miscellaneous itemized deduction, the amount of the loss has to exceed 2% of your income in order to be deductible.
  • Hurdle #3: Only the portion of the loss that exceeds 2% of your income can be taken as a deduction.

Example: continuing with the above example of a $1,000 loss – if your income is $40,000, you take $40,000 x 2%, which equals $800. You subtract $800 from the $1,000 loss, which equals $200. You can put $200 as an miscellaneous itemized deduction on your tax return.

I Can’t Do Much to Help You Once the Transaction Is Completed

A professional in my network of contacts recently asked if I could help one of his clients. His client had sold some property for a large gain and was facing a tax bill of tens of thousands of dollars. According the professional, the client’s current CPA “had no suggestions” on how to make the tax hit go away, so he was hoping I could help.

It turns out, as it so often does with things like this, that the current accountant wasn’t an idiot, and I couldn’t do much to help either.

Why? Because this was in early May 2014, and the property in question had been sold in 2013.

Contrary to popular belief, there’s no magic that any accountant or tax preparer can work after something has been done, especially if the year has ended.

In this person’s case, he may have qualified for a 1031 exchange, but in order for a valid exchange to happen, the replacement property must be identified within 45 days of the sale of the old property. Since the sale happened in 2013 and it was now May 2014, that wasn’t an option.

And since the year had ended, things like selling other properties at a loss weren’t an option either.

Your accountant is not a magician. If you do something without asking for advice beforehand, and you end up with a big tax bill, and your accountant says there’s nothing that can be done … your accountant is saying that BECAUSE IT’S TRUE, NOT BECAUSE HE’S AN IDIOT.

The point is: the time to ask for tax advice about something that will generate a massive tax bill is beforehand, not afterwards.