Three Scenarios That Keep My Work Interesting

I know the past few posts have been pretty tax heavy, but I can’t think of much else when I spend most of my day reviewing return after return. Despite the stress and long hours, encountering situations I don’t see very often reminds me of why I love my job and this time of the year.  

I love getting to delve into people’s finances and explore interesting life circumstances.  I continue to learn from different scenarios, and I wanted to share some of those situations that you may find interesting too.

1)   The Food Truck Rental: I reviewed a return where the client makes part of his income from renting a food truck he owns.  The question became where to put that income. Usually rental income, which most often stems from rental real estate, appears on a Schedule E. However, the rental of personal property needs to go on a Schedule C. The instructions on Schedule E state: “You are in the business of renting personal property if the primary purpose for renting the property is income or profit, and you are involved in the rental activity with continuity and regularity.” Simply put, being in the business of renting personal property means you have to report that activity on your Schedule C. Unfortunately, this twist of fate means bad news for the client because he would have to pay self-employment tax – the FICA tax for the self-employed – on that income.  

But an exception to the exception also exists. (Doesn’t it always?) If the renting of personal property was not a business, then you can report the income on line 21 on your 1040, and thus avoid the self-employment tax. The instructions for the Form 1040 state that the income goes on line 21 when you are not in the business of renting such property, despite engaging the rental for profit. For this client, I sided with putting the income directly on 1040 because this was his only food truck rental. And while he rented it out for profit, he wasn’t in the business of renting food trucks.

2)   Paying too much Social Security Tax: Speaking of FICA tax, I came across another return where the client had three W2 jobs and grossed $125,000 for the year. As I stated above, we all have to pay tax towards medicare and social security. In 2013, you stop paying social security tax after you have earned over $113,700. It’s easy to know that cut off if you only work for one employer. But you may not notice if you have multiple. Luckily, if you do overpay, you get a credit for that amount on line 69 of your 1040.

3)   Back Social Security Payments: Finally, I have a client who received $56,000 in back social security payments from 2010 and 2011. She wasn’t sure whether she needed to amend her prior year returns to include that income or claim it all this year, which would increase her and her husband’s marginal tax bracket. The rule states that she must include the taxable part of a lump-sum payment received in the current year (reported to you on Form SSA-1099) in her current year’s income, even if the payment includes benefits for an earlier year. However, we could elect to figure the taxable part of a lump-sum payment for an earlier year separately, using their income from that year. That way we could lower the taxable portion of her benefits.  Unfortunately, her benefits would have been taxed at 85% either way because of her husband’s income.

So just a taste of some of the fun stuff I’ve run into this year. These kinds of unique scenarios keep tax interesting for me and make what could be a monotonous task fresh.  I hope you find them entertaining too.