Thompson & McCarty, P.C. CPA

The Federal and Alabama governments once taxed all gains on the sale of a primary residence. When that was true, they deferred the taxes when the total proceeds from the sale of a home was rolled into the purchase of a new home within 24 months from the date of the sale. The burden of proof that this requirement was met rested with the taxpayer. As of May 6, 1997 you may exclude up to $250,000 of gain on a primary residence provided that you live in the house at least 2 of the previous 5 years. That applies to each person. So, a married couple can exclude up to $500,000 if they meet the primary residence test. This change in tax code eliminates the old deferral method of tax savings. Your tax basis in your current home is not changed by the new law. It is widely known that many people have a much lower tax basis in their residence than what it is currently worth. This tax loop hole can be used every two years. This is the most widely misunderstood tax break I know of. It could be utilized a number of ways to put cash in your bank account.

Mileage rates for 2006 are much less complex than for 2005 issue. Beginning Jan. 1, 2006, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 44.5 cents per mile for business miles driven;

• 18 cents per mile driven for medical or moving purposes; and

• 14 cents per mile driven in service of charitable organizations, other than activities related to Hurricane Katrina relief.

For 2006, these Katrina-related charitable rates will be 32 cents per mile for deduction purposes and 44.5 cents per mile for reimbursement purposes.

A well kept mileage log is essential for maximizing your deductions and preparing your return to withstand the scrutiny of the IRS. Don't fool yourself and think that the Federal or State taxing authorities are never going to ask you for a mileage log. If they audit your return, and you do not have a mileage log, you will lose your deductions. If you think it will be easier to put a log together "IF NECESSARY" you are just kidding yourself. I have personally witnessed the horror from people faced with the need for a mileage log when they don't have one. It is usually a long time removed from the filing when the need arises (read audit occurs). By then people have no idea when and where they drove to accumulate the miles that are on their return. I constantly remind folks to keep up with this information because it is a good practice to do so and it is REQUIRED by the IRS.

Mileage rates for 2005 are a complex issue. We have two standard mileage rates that we have to deal with for 2005. Before September 1, 2005 the mileage rates are:

• Business Mileage Rate is 40.5 cents per mile
• Medical and Moving mileage is 15 cents a mile
• Charitable miles are at 14 cents a mile

On September 1, 2005 the following rates apply:

• Business Mileage rate is 48.5 cents per mile
• Medical and Moving mileage is 22 cents per mile
• Charitable mile are the same 14 cents a mile

This means that when you submit your information to your tax professional you should segregate miles before August 31, 2005 from mileage September 1, 2005 through December 31, 2005. Another option would be to submit your well kept mileage log. A well kept mileage log will makes this a less stressful issue.

A lawyer has to claim as income any settlements that he recieves. If he is not incorporated, or working for someone else, he even has to pay self employment on these settlements. A law passed last year allowed some taxpayers to take legal fees as an above the line tax deduction for attorney fees associated with a settlement. This is positively the correct way for the U.S. Income Tax code to be administered. One person has to report income so the person that paid the income receives a deduction for the expense. However, defamation, false imprisonment and emotional distress settlements are not covered by the new law. This means that an individual is having to pay taxes on money that he never receives. The attorney fees are often paid directly to an attorney. But the 1099 reports the settlement as though the "Winner" of the legal action receives the money. Even if the winner of a settlement has the opportunity to itemize the deduction, it is subject to a 2% of AGI limitation and the itemized deductions will probably trigger alternative minimum tax (AMT). This is unacceptable. It will not change unless we the citizens raise our voice and let the politicians hear that we are not going to stand for this type of double taxation.