Personal Finance: Uncle Sam had to say uncle

Michelle Singletary
Thursday, February 18, 2010; 10:08 AM

I'm always telling people not to mess with the Internal Revenue Service, given the power the agency wields for taxpayers who step outside the bounds of the tax code.

But Lori Singleton-Clarke, of Bryantown, Md., fought with the IRS and won.

The IRS audited Singleton-Clarke and disallowed almost $15,000 in deductions for educational expenses related to her Masters degree, according to report by Erica Mitranio in St. Mary's nurse challenges findings of IRS audit, and wins. (Feb. 11)

Educational expenses are deductible only if the degree isn't used to pursue a new career, according to the tax code. The nurse went to court, represented herself and persuaded a judge that as a manager, she needed the business degree to deal with the doctors at her institution.

"I'm not trying to cheat the government," Singleton-Clark said. "I just felt this was something I was entitled to."

The judge handling the case said in his decision that "'under any realistic 'interpretation' petitioner's new duties as a personnel manager did not constitute a new trade or business because she was already engaged in the same type of work."

Here's the judge's full ruling.

This being the tax season, this is a great story that some times you should stand up the IRS if you believe you've acted within the law (and I'm not talking about tax dodgers who try to argue they aren't required by law to pay taxes).

Let's Talk

It's just you and me today. Join me at noon ET for a free-for-all discussion about personal finance. Submit a question now or during the chat.

Mark your calendars for my next online chat on Thursday, March 4 at noon ET. My guest will be Thomas J. Stanley, the author of one of my favorite books, "The Millionaire Next Door." Stanley's latest book, ""Stop Acting Rich . . . and Start Living Like a Real Millionaire" was my February Color of Money Book Club selection.

Book Signing

Are you interested in meeting some incredible authors in person? Say yes.

If you live in the Washington, D.C. metro area, come by The Washington Post on Thursday, Feb. 25 from 6 p.m. to 7:30 p.m. for what will be a very interesting and lively Black History Month event called Reflections On The Experience: A Conversation With Washington Post Authors.

The book lecture and signing will feature Post writers DeNeen Brown, Michael Fletcher, Lisa Frazier, Kevin Merida, Lonnae O'Neal Parker, Robert Pierre and of course, yours truly.

The event will be held at The Washington Post, 1150 15th Street NW Washington, D.C. 20071. For more information, call 202-334-7969 or go to the Post's Contests and Events page.

Tickets are $10 per person.

Tax Time

Speaking of taxes, here's a tip for this tax season. If you are an employer trying to trim your tax bill by designating people and "independent contractors," this move could land you into tax trouble. And don't count on an escape like Singleton-Clarke had.

The Associated Press is reporting that the IRS and 37 states are cracking down on this tax-avoidance strategy.

By classifying workers as independent contractors, businesses can save as much as 30 percent of payroll - avoiding unemployment insurance and workers' compensation payments, as well as the employer's share of payroll withholding. The IRS and states take exception with the practice because it deprives the federal government and local coffers of much needed revenue.

If you know that you are an employee and allow the employer to treat you as a independent contractor, be forewarned. This tax practice can hurt you financially because you won't be able to collect workers' compensation for an injury or unemployment benefits if you are laid off.

The Government Accountability Office estimated that employee misclassification cost the government $2.72 billion in Social Security taxes, unemployment insurance taxes and income taxes in 2006, the most recent year for which figures are available.

Collect Call

Nothing makes some people ignore a telephone call faster then seeing a number from a debt collector pop up on their caller ID. The image of the debt collection industry has been rightfully tainted by class action lawsuits, a high complaint rate with the Federal Trade Commission and hefty fines for using racial epithets and profanity.

The American Collections Enterprise is hoping to change the tarnished image of the debt collection industry reports the Post's Christian Davenport in Debt collectors want you to know they're here to help. (No, really). (Feb. 14)

Read how this one debt collection is trying to treat debtors with more dignity.

Color of Money Question of the Week

My inbox was flooded with comments when I asked: "Do you think President Obama has lost his connection to the middle class?"

The question was inspired by Eli Saslow's recent story Despite his roots, Obama struggles to show he's connected to middle class. (Feb. 3) Much like what the polls show, the responses were split pretty evenly between those who are not happy with Obama's first term and those who still give their full support.

Here are some of your responses:

"The President is in a bubble dealing with smart people, complex issues and huge numbers," wrote Michael Seidel of Ashland, Ore. "He's becoming acclimated to those matters but that leaves him removed from our concerns in the middle class."

C. Palmer of Greenville, S.C. says that, indeed, President Obama and much of the Democratic party have lost touch with the middle class. "Politicians need to keep in mind that when they enact policies and regulations that increase the cost of doing business, they are simultaneously cutting jobs and thus hurting the middle class," Palmer wrote.

Barry Borella of Center Harbor, N.H. voted for Obama but has lost his confidence in him."Lost his connections with the middle class? He never had any," Borella said. "He may have been raised poor, but his heart is with the upper class."

However, Stanton Lum of Silver Spring, Md. disagrees. "Obama has not lost his connection to me. I still believe he is the best person to be where he is at this time, including all recent and potential candidates, and all past presidents. I certainly am glad that we are not trying to maintain the policies of the previous administration."

"I don't think the president has lost touch. I think our expectations are too low after former President George W. Bush," says Karen Goldsmith-Pestana of Windsor, Conn. "Yes, Mr. Obama's manner of speaking is that of an educated person. Why are opponents insisting that's too high brow for 'ordinary' Americans? If so, then we need more money for public education so non-Harvard educated voters can understand complete sentences again."

Trinna Smith of St. Louis, Mi. said: "I am considered a middle-class citizen and I think President Obama is very connected. Without his actions the middle class probably would not exist currently."

I was struck by the insightful comments from Greg Hope of Bellingham, Wash., who wrote that the middle class of this country is not served well by the concept of a trickle-down economy or the growth of multinational corporations that appear answerable to no one.

"I am a member of the middle class, living in the Pacific northwest, and it is my opinion that President Barack Obama has been and continues to be in touch with the concerns and best interests of the American middle class," Hope wrote. "I believe that his administration is facing monumental difficulties in bringing about the changes he championed during his campaign. The obstacles included a well-financed and well-organized body of opposition in Congress, a horrific legacy of corporate-friendly legislators, policy and law left in the wake of the previous administration, and perhaps most frightening, an electorate that has been de-educated by rancorous pundits and talk show hosts to the point of comprehending public policy and the common good on the basis of sound bites, slogans and bumper stickers."

Hope goes on to say, "With barely a year in office, Barack Obama still has my support and my confidence, even my sympathy for such a grim inheritance, and I look forward to any progress he can achieve in bringing this country universal health care, in reducing the phenomenal power that corporations enjoy, in restoring the faith in government that was so shamelessly misused in recent years."

Now that's a thoughtful answer.

Still Prospering

I'm still following readers who are following the financial fast I write about in my latest book, "The Power to Prosper: 21 Days to Financial Freedom."

Here are updates from two participants:

"We are now 2 1/2 weeks into our fast," said Peter Guzzardi of Chapel Hill, N.C., "and we have broken our credit card fast twice--once to make reservations for a hotel for our June vacation, and once to pay for mailing things to our two grown sons. "

Despite going off track, Peter is seeing the difference in his bank account.

"I sense a major shift in my wife and I with regard to money," he wrote. "Both my wife and I no longer buy coffee and breakfast on our way to work in the morning; we make it at home. We no longer buy lunch every day; we bring it from home. We haven't gone to a restaurant in 2 1/2 weeks, and we don't miss dining out a bit."

Plus, he said, "Our view of the credit card has changed from something you whip out to cover anything you want in the moment to something you carry in case of financial emergency."

Michelle Bates of Denver, Colo., is ecstatic about her newfound financial freedom.

"I finished my fast last week and have been talking about it ever since!" she wrote. "The most amazing thing, I think, is that my budget is right on, down to the penny. I've been doing budgets for years and they were always just a little bit off, and as those bits added up, pretty soon my budget was way off and I had no idea how it happened. This month, though, is so exciting - I look forward to balancing both my checkbook and budget now."

Most importantly, Michelle is saving.

"We're still saving 10 percent and will be completely debt free by the time I finish my Master's Degree, so both my husband and I are very excited about that."

If you are doing the financial fast, submit a YouTube video diary of your progress. To view posted videos, click on the right advance button.

Tia Lewis contributed to this e-letter.

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