Year End Tax Planning?

Buffalo got six feet of snow the other day. I understand Santa has put a change of address form in at his local post office deciding to move his operation to New York State. With all the snow flakes as a real reminder, it is time once again to begin receiving the “ things you absolutely must do to save taxes by year end”. I get those magazines, newsletters and articles too. Lots of them. The ideas range from the obvious to the bizarre. Most all of the strategies depend on tax rates staying about the same next year. That remains to be seen with both houses controlled by Republicans. With that said and not intending to become just another list of must do’s, here are some basic tax planning ideas that may actually work. If you are in control of your income it may make sense to simply put some off until next year. A tax deferred may be a tax saved. Even if the tax must be paid next year it simply feels good not paying it now. So for lawyers, skip billing your clients until next year. Of course, one must weigh whether delaying billing results in the client not paying. The tax rates don’t go to 100% so sometimes it makes more sense to just take the income and pay the tax. As to deductions, should you possess a reasonably accurate crystal ball, consider accelerating deductions into the current year. This obvious mismatch will come back to haunt you next year when those accelerated deductions will not be available on that tax return. Then comes the matter of state and local income tax. This one can be managed and manipulated by simply sending in any estimate of taxes for this year before the close of the tax year. This game can also be played with regard to mortgage interest again remembering any deduction you accelerate will be missing next year. Charitable deductions may be a fertile area for tax planning year end at least according to most of the newsletters that are written during this season. If in fact you are charitably minded, you can move deductions from one year to another depending upon when the gifts are made. It is also possible to give a gift of appreciated stock and deduct the fair market value and thereby walk away from any capital gain that would have been due had it been sold. Oh yes, there is one flaw in many of the plans. It's called the alternative minimum tax. Congress and the IRS got wise to the potential manipulation of deductions by creating this sneaky version of the tax rates. What happens is some of the deductions a person can claim are simply added back to calculate the AMT. A taxpayer pays either his regular tax or the AMT, whichever is greater. By the way, one suggestion I thought was bizarre, was deciding to move up your elective surgery so that medical expenses could be accelerated. Nothing like a hospital stay during the holidays. My advice is to take these “must do” planning ideas with a grain of salt and perhaps a hot toddy.

When You Just Can't Pay IRS- Code 53

    Some IRS collection officers are part time magicians. With the wave of a ball point pen it is possible for a taxpayer’s tax debt to be placed in a category called “Currently Uncollectible”. The inside jargon for this designation is called “Code 53”. This code is placed on a taxpayer’s tax transcript and suspends IRS enforced collection action. Now here comes the magic: the IRS collection statute continues to run. The normal tax statute for tax collection is 10 years from the date a tax is assessed. Note this is not the date a tax return is due or filed but rather the date the IRS assesses the tax. Therefore, it is possible that a taxpayer will never pay a tax debt if the Code 53 status continues for the duration of the collection statute of limitations. When placed, parameters are usually set to tickle the IRS collection system if the taxpayer's income rises sufficiently to entertain payment of the tax debt. Now the bad news. IRS inspectors have determined that many IRS collection agents dealing with smaller tax debts have been writing off these debts without adequate research to determine if a taxpayer owns real or personal property from which tax payment can be made. What this means for all tax cases is that IRS will begin using this code 53 designation sparingly in the future thus making it more difficult to resolve tax cases of this nature.

The Tax Season Filing Mess

This coming tax filing season taxpayers will be going more nuts than usual. You can just hear the grinding and mashing of teeth as the population tries to figure out the penalties and taxes for having inadequate health insurance. If it means anything, the IRS itself will be stretching its resources to try to piece together the web created by health care reform. Let's start with the easy stuff. Tax filers with health coverage all year for themselves and their dependents simply have to check a box on their returns. For most people this will include employer provided health insurance so long as it meets minimum federal standards. Also included will be Medicare, Medicaid, Tricare and Veterans coverage. Done. But for those who go without health insurance dealing with potential penalties, taxes and exemptions is required. The exemptions include people who simply can't afford coverage. These are employees whose share of premiums exceeds 8% of the household’s  AGI ( Gross Income less certain deductions =Adjusted Gross Income) The same is true for people who are not eligible for employer coverage if the cost of the basic bronze level plan in an exchange, less any tax credit for buying insurance, exceeds 8% of household AGI. Another exemption is for persons whose household incomes are below the threshold for filing a tax return. For single taxpayers $10,150 for joint filers $20,300. Lastly are hardship exemptions which prevent coverage. Fourteen qualifying circumstances exist. They include natural disasters, filing for bankruptcy, major property damage, shut off notices from utilities, foreclosure or eviction. Taxpayers will be required to file form 8965 to claim their health coverage exemptions. A worksheet will be provided on form 8965 to calculate taxes and penalties. Tax return preparers will be spending a good deal of their time wading through the forms and responding to questions in this area.