The Tax Court case of Ferm v. IRS demonstrates the old adage that “timing is everything.” There, the cash-method taxpayer (money is earned as it’s actually received, expended as it’s actually paid) paid tuition for Spring 2011 semester on December 28, 2010. Following this payment, the Ferms attempted to deduct their qualified tuition expenses on their 2011 tax return. Like most lay individuals, these taxpayers probably assumed that the expenses were incurred for 2011, so their deduction should be taken that year. However, cash-method taxpayers (which all of us are) may only take deductions for expenditures in tax years when that money was actually paid. This is true regardless of when the benefits from that debt are actually received. Unfortunately for the Ferms, only about $150 of the qualified expenses were actually paid in 2010. If these expenses had been paid four days later, the deduction would have been proper on the 2011 return. See Ferm at p. 9. This “harsh result” perfectly demonstrates that, when it comes to individual income taxes, “timing is everything.”
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