Are Inheritances Taxable?

Suppose you get two million dollars from your deceased Aunt Sally per her will. Do you have to give the IRS a portion of that? No you don't as long as none of the money came from retirement accounts such as IRAs or 401ks.

US Treasury Bonds and State and Local Bonds

US Treasury bond interest is subject to Federal tax but not state tax. State and local bond interest is exempt from Federal tax and state tax if the bond is from your state of residency. For example, a bond for Fulton County GA is exempt from Federal and Georgia tax if you are a Georgia resident. This can be a nice way to receive totally tax free income. If you are a Georgia resident and you have bond interest from a California city bond, the interest is not subject to Federal tax but  is subject to Georgia tax.

$100,000 Penalty OMG!

The IRS really wants you to disclose any foreign bank accounts. If you have over $10,000 in the bank account at any time during the year, you need to fill out form TDF 90-22.1. Only the government could come up with such a form number. There is no tax due as the IRS only wants information regarding the account. If you willfully fail to follow the rules, the IRS can hit you with a penalty up to $100,000.

How Long Should You Keep Tax Records?

You should keep copies of the tax returns forever. The documents supporting the return should be kept for the current year and the three previous years. Records showing the cost or basis of an asset you own such as real estate or stocks need to be kept until the asset is sold.

Nondeductible Contributions

You can't take a tax deduction for the following contributions: politicians or political groups, individuals, most foreign charities, a group lobbying for law changes, raffle tickets, and even giving blood to a blood bank. If you donate your time to a charity, that isn't deductible either. You usually can deduct your out of pocket expenses working for a charity though.

Employee vs Independent Contractor

The IRS wants everyone to be an employee because tax compliance and collection are better with employees than with independent contractors. One way to make the case that your workers are independent contractors is to show that they work for others too and not just for you. How can you show that? Make sure your workers have business cards which they use to promote their services out to the general public.

Hobby Expenses

Hobby expenses are only deductible to the extent of hobby income, and to even make it worse they  are subject to the 2% of adjusted gross income limitation as miscellaneous expenses on schedule A. So you want the IRS to think of your activity as a business and not a hobby so all of the expenses are deductible. How do you do that? You may have to prove to the IRS or a court based on all of the facts and circumstances that you intend to make a profit such as keeping businesslike books, using a business checking account, using a separate credit card for business, and developing an expertise in the activity. You may not have had a profit in ten years, but if you can prove you intend to make a profit you are ok. You also help your case if there are no elements of personal pleasure or recreation in the activity.