Excessive itemized deductions

[FEDUKE404]

Wanting to deduct everything

I absolutely despise these types of returns.

Truth be known, the guy is not really going to a "temporary" job location (this week you go to City X but next week you will resume working here in City Z).

He is more likely going to where the work is = his "tax home" = all is non-deductible commuting.

Other issue, as noted, is that weekend trips "home" are personal and not business.

But many folks, especially in construction work, think that every mile they put on their truck is deductible. Adding insult to injury is when the client walks in my door after his previous "tax professional" gave him all those round-zero miles without asking any of the relevant questions and/or asking for records. Frequently the client WAS getting some kind of consideration/reimbursement, but just kinda "overlooked" that aspect of things.

Also: In the "old days" the IRS could classify such a person as an itinerant. If push comes to shove, they may still take that approach. That would certainly take the wind out of their "business travel" sails.

FE

[ChEAr$]

down and scrutinize it a little closer, what about this?:

Although he works for the same company all the time, ..........

Then I'll bet a dollar to an Arkansas donut that the company reimburses him mileage if he
has to drive his personal vehicle out of town. Probably they furnish the transportation.
Has he attested that neither of these scenarios is the case? IRS would ask that upon audit.

[Black Bart]

But...

I agree. No deduction for all those miles. He chooses where he lives. His job is in another city. Had the same sort of situation with a guy who worked for years here for one company headquartered in another state. They eliminated the position but offered him same job out of their headquarters. He elected to commute for 3 yrs not to lose his retirement benefits. Rented house and flew up and back every 2 weeks. Could not deduct a dime.

as a practical matter, it can be and is done. It just depends on who they pick for a tax preparer.

About 20 years ago I had a similar "tax home" case. A long-time client took an out of state job; rented a house there, took his family with him, and only came back occasionally. I know he did not sell or rent his house but may have let relatives stay there free to keep it from falling apart.

I wouldn't deduct the travel so he consulted a CPA there who said if he retained ownership of the Arkansas house he was "away from home" -- that deducting rent, food, and living expenses would be "no problem." Maybe he misunderstood her, I don't know -- anyway I disagreed and gave him his records.

I ran into a few years later; he said they were still "writing off" travel expenses in upper-teen thousands (pretty high for those days) and had never had any trouble. I knew him to be a truthful, honest person and didn't doubt his story.

He stayed about ten years, then moved back but continued to have someone else do his taxes. The upshot of it is, in my view, that I lost him because he simply figured I didn't know what I was talking about since (1) I was not a CPA (2) a CPA told him it was deductible (3-most important) he was never checked.

We're still friends, but it's kind of sad in a way 'cause it's one of those things that never gets fixed. I imagine that if somebody ever asked him about me as a tax preparer, he'd probably say "Well, he's a nice guy, but he doesn't know as much about taxes as a CPA -- you'd probably be better off going to one of them."

[Burke]

I agree. No deduction for all those miles. He chooses where he lives. His job is in another city. Had the same sort of situation with a guy who worked for years here for one company headquartered in another state. They eliminated the position but offered him same job out of their headquarters. He elected to commute for 3 yrs not to lose his retirement benefits. Rented house and flew up and back every 2 weeks. Could not deduct a dime.

[Black Bart]

Yeah,

Each job site would be considered “temporary,” if each is less than a year. However, the tax home issue still applies. Where is the general tax home? If the taxpayer is always working in that city, then that city is the tax home, even if his family lives in another town. Out of town travel only applies when the taxpayer travels away from his tax home to work. At best, he might get mileage from his apartment to a job site, but not from his family’s home to the job site.

all true. His tax home is in the big city, so miles from apartment to the job site are nothing worth considering and I guess it's a dead issue.

Come to think of it, even if it was otherwise, as I understand the rules he'd still only be allowed one trip per year from his real home in Dogpatch to the job in Metropolis and one trip back because all those weekend trips back home are for personal reasons and have no business purpose.

[Bees Knees]

Each job site would be considered “temporary,” if each is less than a year. However, the tax home issue still applies. Where is the general tax home? If the taxpayer is always working in that city, then that city is the tax home, even if his family lives in another town. Out of town travel only applies when the taxpayer travels away from his tax home to work. At best, he might get mileage from his apartment to a job site, but not from his family’s home to the job site.

[Black Bart]

To refine it

I think this is your key issue. Any assignment expected to last more than one year is not temporary. It is irrelevant how far the commute is. It is non-deductible, even if you have to drive half way around the world to get to work...

down and scrutinize it a little closer, what about this?:

Although he works for the same company all the time, that company continually moves around from one job to another inside the same city and the nearby surrounding metropolitan area. Assuming each job takes less than a year to complete and then they move to another site, would each job be considered a different "assignment" - and therefore be regarded as temporary?

Or would the fact that the company really doesn't "go" anywhere except maybe down the street kill the deal? The company would probably be working for a different customer, so it would be a "new assignment" to them -- not sure about what that does for my guy.

[Bees Knees]

Commuting miles: This is the fly in the soup. Spouse says he's been with the same one company in the same one place for several years -- rents apartment, works five days, comes home every weekend, so I think the out-of-state job site is his tax home. While I've only seen the '08 return, I suspect the former preparer has been writing off these commuting miles for years and hasn't a clue about "tax home."

I think this is your key issue. Any assignment expected to last more than one year is not temporary. It is irrelevant how far the commute is. It is non-deductible, even if you have to drive half way around the world to get to work.

I’d really focus on that point with him and let him know the courts throw those kinds of deductions out every time.

[David1980]

How many miles were reported last year on his tax return as commuting miles? One thing I've been able to do is add all the miles reported for everything for the prior years of a vehicle and ask "So it looks like we've deducted 100,000 miles so far on that vehicle. What's the odometer read?" and get a reality check to the taxpayer that way (for example, if the odometer only reads 50,000 but he's reported driving 100,000 it might click that his guesstimates were off...)

That only works for exaggerated miles though, not for misclassified commuting miles.

[WhiteOleander]

Not to comment on your case specifically, but our office has seen a large increase in 2106 audits. Some mail audits and some in person audits. Perhaps 7-8 in the last couple of years when we hadn't had any before. I think the IRS is starting to scrutinize these returns.

[Black Bart]

Large itemized deductions

Itemized deductions in excess of income are really not much different than Schedule C deductions in excess of income. It can happen, but usually for a Schedule C business, you suspect there is unreported income. For a W-2 / Schedule A activity where the deductions come from mileage, I suspect the miles are overly exaggerated. I would insist on a log book, and go over the rules on business verses commuting miles with the client. Usually construction workers believe they can deduct all miles when in fact, much of it is simply commuting miles. Temporary work locations are deductible only if there is a regular place of business. If there is no regular place of business, temporary work location miles are non-deductible commuting miles.

Also keep in mind the standard mileage method allows you to deduct more than what was actually spent. If the standard mileage rate is 50 cents a mile, but manage to somehow drive a car that only costs 30 cents a mile, you get 20 cents a mile for a deduction you never spent. Multiply that by 50,000 miles and that is $10,000 worth of deductions for money never spent.

Thanks; good points all -- some apply, some don't:
Unreported income: No, I'm pretty sure that W-2 is all the income.
Exaggerated miles: No, he travels out-of-state to the same place every week and the distance is spot on.
Log book: Does not have one, but I would insist next time.
Commuting miles: This is the fly in the soup. Spouse says he's been with the same one company in the same one place for several years -- rents apartment, works five days, comes home every weekend, so I think the out-of-state job site is his tax home. While I've only seen the '08 return, I suspect the former preparer has been writing off these commuting miles for years and hasn't a clue about "tax home."
SMR versus actual expense: Yeah, I thought of this; that the standard mileage rate isn't a "real" expense and can be far above actual dollars spent. He's using SMR to cut taxes substantially more than actual expenses would and is "making money" overall even though his taxable income is a minus figure.

I'm thinking he's never been checked and taxpayers usually equate that with "legal." I haven't discussed it with him yet, but he will probably want to continue on with it which will force me to cut him loose.

But, "tax home" aside, it just seems that $45K income and $50K travel would interest IRS at first glance. I know it happens occasionally under special circumstances, but not for most people in an ordinary work year. It seems that IRS does not check this type of thing as much as you would think (although I'm not going to do this one and find out the hard way) .

[Bees Knees]

Itemized deductions in excess of income are really not much different than Schedule C deductions in excess of income. It can happen, but usually for a Schedule C business, you suspect there is unreported income. For a W-2 / Schedule A activity where the deductions come from mileage, I suspect the miles are overly exaggerated. I would insist on a log book, and go over the rules on business verses commuting miles with the client. Usually construction workers believe they can deduct all miles when in fact, much of it is simply commuting miles. Temporary work locations are deductible only if there is a regular place of business. If there is no regular place of business, temporary work location miles are non-deductible commuting miles.

Also keep in mind the standard mileage method allows you to deduct more than what was actually spent. If the standard mileage rate is 50 cents a mile, but manage to somehow drive a car that only costs 30 cents a mile, you get 20 cents a mile for a deduction you never spent. Multiply that by 50,000 miles and that is $10,000 worth of deductions for money never spent.

[Black Bart]

AMT also kicked in for my client -- cost about $1,000. Still, I'm interested in whether or not anybody has ever had a client whose itemized deductions exceeded their income in a normal, full work year. I have not that I can recall.

[BOB W]

Sometimes the high mileage and other business expenses of sales persons on a W-2 are very high. Then AMT kicks in for my clients at this point. They still benefit from these high numbers but it is much better for them if their company reimburses them.

I tried that with one of my clients but his company refused to reduce his gross W-2 under an accountable plan. So his AMT continues and so does his odds of audit.

[JG EA]

Sometimes the high mileage and other business expenses of sales persons on a W-2 are very high. Then AMT kicks in for my clients at this point. They still benefit from these high numbers but it is much better for them if their company reimburses them.