I practiced before the U.S. Tax Court for 15 years, and have at least a modest understanding of current tax laws. Sarah Palin's recently released tax returns understate her gross income by $17,000.
Taxability of per diem expense payments are complicated, but perhaps this summary will help:
- If the employee is required to account for actual expenses, and receives reimbursement for the expense reports, then the payment is not taxable.
- If the employee does not account for actual expenses, but instead receives a flat amount to cover expenses, the payments are taxable. The employee may then file a form 2106 with the tax return, to report and calculate deductible employment-related expenses. Those expenses are then transfered to Schedule A (itemized deductions), and are partially deductible (to the extent they, and other miscellaneous deductions, exceed 2% of income).
Sarah Palin received $17,000 of per diem (flat amount per day) payments to cover expenses. That amount should have been reported on her tax returns as gross income. She then could have filed a report of deductible expenses to offset at least some of that income. (Expenses of providing an office-in-home are deductible if the space is used regularly and exclusively for business. If she used her home office to watch television, sew, do church work, do personal business, etc, then those expenses would not be deductible).
She did not report all of her income. Her returns will have to be amended. The total tax impact will likely be small.
Here's a link to IRS FAQs regarding per diem payments: http://www.irs.gov/...
Here's a link to a tax lawyer's blog on the issue: http://taxprof.typepad.com/...