Year End Tax Planning For Individuals

Accelerating Income

In most years, taxpayers adopt a strategy of deferring income, but with the Bush-era tax cuts set to expire on December 31, 2012, income tax rates and capital gains taxes set to rise, and a 0.9 percent Hospital Insurance (HI) tax applicable to earnings of self-employed individuals or employee wages in excess of $200,000 ($250,000 if filing jointly) effective January 1, 2013, it might make more sense to accelerate income into 2012 instead of deferring it to 2013. Here are some of the ways you can do this:

  • Sell any investments on which you have a gain this year and take advantage of the zero percent long-term capital gains tax rate if you’re in the 10% or 15% tax bracket, or a 15% tax rate for higher tax brackets.
  • If you are expecting a bonus at year-end, try to get it before December 31. However, keep in mind that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file a tax return for tax year 2013.
  • If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2013. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
  • If you’re self employed, send invoices or bills to clients or customers this year in order to be paid in full by the end of December.

Caution: Keep an eye on the estimated tax requirements.

Accelerating Deductions

  • Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in year 2013, by year-end. This does not apply to mortgage escrow accounts.
  • Try to bunch “threshold” expenses, such as medical expenses and miscellaneous itemized deductions. Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.

    For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Tip: Now is the time to bunch deductible medical expenses. Medical expense deductions are 7.5% of AGI this year, but in 2013 increase to 10% of AGI.

In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2012, depending on your situation. The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.

Tip: Accelerating income into 2012 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year.

Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.

On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.

If you have any questions about estimated taxes, please call us.

Caution: The Alternative Minimum Tax (AMT) no longer just impacts the wealthy! Do not overlook the effect of any year-end planning moves on the AMT for 2012.

Due to tax changes in recent years, AMT impacts many more taxpayers than ever before and, the tax is not indexed to inflation. As a result, growing numbers of middle-income taxpayers have been finding themselves subject to this higher tax.

Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions.

Note: The AMT “Patch” expired in 2011. As such, AMT exemption amounts have reverted to 2000 levels. For example, the AMT exemption amount for married filing jointly is $45,000 in 2012, down from $74,450 in 2011.

Unless Congress takes action and enacts an AMT “patch” before year-end, AMT exemption amounts for 2012 are as follows:

  • $33,750 for single and head of household filers,
  • $45,000 for married people filing jointly and for qualifying widows or widowers,
  • $22,500 for married people filing separately.

Please call us if you’d like more information or if you’re not sure whether AMT applies to you. We’re happy to assist you.

Strategize tuition payments

The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires.

Residential Energy Tax Credits

The Residential Energy Efficient Property Credit is available to individual taxpayers to help pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and residential wind turbines. Qualifying equipment must have been installed on or in connection with your home located in the United States.

Geothermal pumps, solar energy systems, and residential wind turbines can be installed in both principal residences and second homes (existing homes and new construction), but not rentals. Fuel cell property qualifies only when it is installed in your principal residence (new construction or existing home). Rentals and second homes do not qualify.

The tax credit is 30% of the cost of the qualified property, with no cap on the amount of credit available, except for fuel cell property.

Generally, labor costs can be included when figuring the credit. Any unused portions of this credit can be carried forward. Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

What’s Included in the Tax Credit?

    • Geothermal Heat Pumps. Must meet the requirements of the ENERGY STAR program that are in effect at the time of the expenditure.
    • Small Residential Wind Turbines. Must have a nameplate capacity of no more than 100 kilowatts (kW).
    • Solar Water Heaters. At least half of the energy generated by the “qualifying property” must come from the sun. The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. The credit is not available for expenses for swimming pools or hot tubs. The water must be used in the dwelling. Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.

 

  • Solar Panels (Photovoltaic Systems). Photovoltaic systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.
  • Fuel Cell (Residential Fuel Cell and Microturbine System.) Efficiency of at least 30% and must have a capacity of at least 0.5 kW.

While these residential energy credits don’t expire until 2016, why not take advantage of the credit this year and start saving money now? Give us a call today. We’re happy to help you sort out the tax credits available for your “green” home improvements.

Make Charitable Contributions

You can donate property as well as money to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses however.

Keep in mind that a written record of charitable contribution is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.

Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.

Investment Gains And Losses

Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35% in 2012, but scheduled to rise to 39.6% in 2013) than long-term gains.

If your tax bracket is either 10% or 15% (married couples making less than $70,700 or single filers making less than $35,350), then now is the time to take advantage of the zero percent tax rate on qualified dividends and long-term capital gains. Even if you fall into a higher tax bracket, the maximum tax rate on long-term capital gains in 2012 is only 15%.

Consider where feasible to reduce all capital gains and generate short-term capital losses up to $3,000 as well.

Tip: As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.

Tip: After selling securities investment to generate a capital loss, you can repurchase it after 30 days. If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., another mutual fund with the same objectives as the one you sold.

Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free, your original investment is restored and you have a higher cost basis for your new investment (i.e., any future gain will be lower).

Note: Starting in 2013, a 3.8 percent Medicare tax will be applied to investment income such as long-term capital gains. This information is something to think about as you plan your long term investments.

Please call us if you need assistance with any of your long term tax planning goals.

Mutual Fund Investments

Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.

Example: You invest $20,000 in a mutual fund at the end of 2012. You opt for automatic reinvestment of dividends. In late December of 2012, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.

Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.

The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.

Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.

Tip: To find out a fund’s ex-dividend date, call the fund directly.

Call us if you’d like more information on how dividends paid out by mutual funds affect your taxes this year and next.

Year-End Giving To Reduce Your Potential Estate Tax

It may be time to reevaluate your estate plan. Unless Congress takes action before the end of the year, the federal gift and estate tax exemption, which is currently set at $5.12 million, drops to its pre-2010 level of $1 million ($2 million per couple) in 2013. In addition, the maximum estate tax rate is set to increase in 2013 from 35 percent to 55 percent.

Gift Tax. For many, sound estate planning begins with lifetime gifts to family members. In other words, gifts that reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.

Gifts to a donee are exempt from the gift tax for amounts up to $13,000 a year per donee.

Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2012, you must make your gift by December 31.

Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $26,000 ($13,000 each). Though what’s given may come from either you or your spouse or from both of you, both of you must consent to such “split gifts”.

Gifts of “future interests”, assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don’t qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.

Tip: If you’re considering adopting a plan of lifetime giving to reduce future estate tax, then don’t hesitate to call us. We can help you set it up.

Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.

You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings, and built-in gain on sale.

Gift tax returns for 2012 are due the same date as your income tax return. Returns are required for gifts over $13,000 (including husband-wife split gifts totaling more than $13,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $13,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed”.

Tip: Call us if you’re considering making a gift of property whose value isn’t unquestionably less than $13,000.

Income earned on investments you give to children or other family members is generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced 5% dividend rate.

Caution: In 2012, investment income for a child (under age 18 at the end of the tax year or a full-time student under age 24) that is in excess of $1,900 is taxed at the parent’s tax rate.

Other Year-End Moves

Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. (It doesn’t need to actually be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.)

If you are an employee and your employer has a 401(k), contribute the maximum amount ($17,000 for 2012), plus an additional catch up contribution of $5,500 if age 50 or over, assuming the plan allows this much and income restrictions don’t apply).

If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,000 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch up contribution of $1,000 if age 50 or over.

Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.

In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 7.5% of AGI). For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA.

To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2012, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,200 ($1,250 in 2013) for single coverage or $2,400 ($2,500 in 2013) for a family.

Summary

These are just a few of the steps you might take. Please contact us for help in implementing these or other year-end planning strategies that might be suitable to your particular situation.

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Sounds like you are the most connected tax guy I know….let’s stay in touch….I may need some tax help down the line…..if I have 10K outstanding with the IRS, what is the chance of me calling them up and saying “hey, will you take 5K” and them accepting? Or do you need an attorney….?

The IRS does have a program called Offer in Compromise which is basically call them up and say I will pay this much.  Only thing is you file a form and you probably need someone with some expertise to fill in the form.  Here’s the catch, the IRS is not stupid and they have the best collection agency in the world.  They are not going to deal unless they think that they are never going to get paid or that you don’t really owe the tax.  They have a long time to collect from a young guy like you and I assume you owed the tax?

So here’s what happens.   You call up some guy on TV like Tax Masters and they say “sure for $2,500 we can knock you tax down to a grand”.  You write the check, they fill in the form.  You get rejected, they say “sorry”.  The IRS got probably 20% of what you owe with the form so they have that much less to go after you for.  Everyone but you wins.  The rejection rate is in the high 80’s or above 90%, I can’t remember for sure.

So you are going to pay.  The better idea is to figure out how to screw them out of next year’s tax- that is more do-able.

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on this information to make important financial and tax decisions.  The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence.

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I do have a tax-related question – be careful what you ask for! Just simply, do you know (or know how I can find out) how many hours you have to work in New York State to be subject to State and NYC tax, when you live out of state (in this case, CA)?

That is a great question, thank you really, I will probably use it in one of my blogs one day.  Here’s the 411.  If you are physically present in NY when you are working you owe tax to NY (NYC too if you are working there).  If you are a California resident you also owe tax to California.

Enough bad news?

Okay here’s the good stuff.  You will get a credit on either CA or NY for the tax you paid in the other state.  Usually CA but some states are different I would have to look that one up.  The point is you won’t pay tax twice.

Good enough?

I have more.  Probably whoever you are working for pays most of your expenses out of pocket.  Any out of pocket expenses you incur you can deduct.  Usually in these things you would get a hotel room and a food allowance?  However just as an example if you have to wear a suit to do your job, don’t get them dry cleaned in CA.  If you take them dirty back to NY and get them cleaned it is a travel expense and deductible.  Hmm don’t tell the IRS I said that.  Anything you spend money on while in NY that is not reimbursed, keep track of.  There are some limits so depends on how much time spent but there is a good chance it will save you tax.

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on this information to make important financial and tax decisions.  The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence.

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Thanks, Ray. Quick question. My 83 year old father-in-law owns his home in Anaheim (he’s the only one on title). My wife is an only child. What is the best way to “protect against (future) probate” (tax-wise)? Have him create a Living Trust? Just add my wife to title as Joint Tenants? Do you have a recommendation? Thanks…(

It is sort of a legal question more than a tax question, so I will start out with saying I am not giving you legal advice.  My clients ask me questions that seem to be legal all the time so I will tell you what I know, but not give you advice or tell you what you should do.

If it were my father-in-law I would take him down to an attorney and get him a trust.  In fact, I think I have a friend on LI that has done some work for my clients in OC I can forward you.  A couple reasons I would want a trust.  A tax reason is when he passes you will get a step up in basis on property that is inherited.  If you put your wife on title and if your father-in-law had a big enough estate (which doesn’t seem like it from your email) the IRS would say you inherited when you filed an estate tax return.  However on your side they would, if the question came up the IRS, say you received the property as a gift and were not entitled to the “step-up” so when you sold the property you would have a gain and pay tax.  A trust makes it cleaner.

I believe there are some liability issues too.  I am in over my head this morning as far as explaining those to you but I do recall a few times in the past where an attorney was hesitant to add additional owners on a property because of liability.  Also, had a client one time years ago that filled out quit claim deeds and gave them to their kids.  One kid pre-deceased the parents.  The parents intended to give the daughter-in-law her share when they passed but she didn’t want to wait.  The daughter-in-law squandered a big part of her inheritance on attorney fees to get her share early.  Parents spent a lot more.  Doesn’t sound like an issue for you.  I bring it up because I have found it is the stuff you don’t know that kills you.  A trust is good protection against that.

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on this information to make important financial and tax decisions.  The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence.

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I do have bit of a thorny tax question for you. I’m a professional basketball player who played overseas since 2006 (Out of college). I never filed taxes for any season, as I was told bringing home less than 70k, I didn’t need to. I just brought my fiancé here from Czech Republic on a K1 Fiancé Visa. She is here, we married and now I must prove I can sponsor her. They require at least the 2010 tax return, but suggest having 2008 and 2009 tax returns for further evidence. We’re filling out an Affidavit of Support and will be sending it in soon. I e-filed for 2010, but heard that previous years, 08 and 09, will take 3-6 months, at this present non-tax season time, to obtain an IRS receipt proving I filed. Is there a way around this? We need to start the process because she’ll get her Green Card quicker. Should I just file now for back taxes and tell them I back filed, but haven’t received the IRS tax receipt yet. Any useful information will help me greatly. It is quite thorny! Thank you for your help.

This is a really great question, thank you. 

Like so many things with taxes you only got part of the message.  Taxes are crazy with rules that are a lot more complex than they should be.  So here is the issue for you.  As aUScitizen, you are taxable on your income no matter where it is earned.  If you earned money inCzech Republicit is still taxable here. 

Where does the $70,000 come in?  There’s a foreign earned income exclusion.  An exclusion doesn’t mean you don’t have to file it means you don’t have to pay tax on the excluded amount.  So you file a return and show the exclusion.  There are two ways to qualify for the exclusion one is physical presence test.  Were you out of theUSfor 330 days?  The second is bona fide residence.  Did you intend the other country to be your home?

Even if you didn’t qualify for an exclusion you qualify for a credit for any foreign taxes you paid.  So it is not likely you would owe much Federal Tax. 

Californiais different.  I think for each year you file, it is quite likely CA will come after you for tax.  They don’t have the above rules.  It looks like you left CA to go to college, traveled a bit, and came back to CA. Californiawill try to say you are domiciled in CA the whole time.  You can fight it but I would have to know more to know if you have a chance to win.  I bring this up because it will be an important consideration in what to file. 

If you want the returns done we can do them.  The cost would be about $250 per year and it will take about a week to get them finished.  If you want to discuss more probably best to call the office 310-347-7499 and they can set up a phone conference time for a complimentary review of your situation.

 

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on this information to make important financial and tax decisions.  The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence.

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What progress did you make in determining the Provident and Desert Capital loss for 2010? I know that my father already deducted his losses of Provident in 2010 I do think that you are being way too conservative. Here’s why: I did talk to the Fraud Recovery Group and they have been filing these as section 165 theft starting in 2009. Their filings are accompanied by a lawyer’s opinion of why it should be counted as a theft loss;

On Provident, I don’t see anything that makes it seem like a theft loss to me yet.  It may be, and I might just be too conservative, but the way I am looking at it right now is it’s still in bk as far as I can tell when it comes out looks like a capital loss to me.  I don’t think that will happen this year.  As we get close to the end of the 45 days if you don’t find something to buy I would certainly consider this something that might be a better option than paying the tax.  However I am not sure it is even a good Hail Mary. 

Ditto for Desert Cap.

http://taxfraudblawg.com/2010/04/19/fraud-recovery-group-sued-for-allegedly-manipulating-the-theft-loss-deduction/

 http://www.bbb.org/centralohio/business-reviews/unclaimed-funds-retrieval-services/fraud-recovery-group-in-worthington-oh-70005800

Here are two links, took me three minutes to find by Googling the company.  They may give you some insight.  With taxes, just because someone gets a refund the IRS is not saying that it is a correct refund.  It might seem hard to believe but they don’t check to see if an amended return filed to claim a refund is correct, at least not very often. 

Here’s the deal with this company.  I have talked to them and know their way of operating.  An amended return which is what they do is the only type of return where a preparer can charge a contingent fee.  It happens that I reviewed some returns for a potential new client yesterday.  He had used this service.  In 2008 he lost a property in foreclosure and deducted a loss of $198,000 from the documents he showed me appeared to be correct.  Recently he went to this company and they amended the 2008 return claiming an additional $650,000 which resulted in about $100,000 of refunds.  I don’t know the exact percentage that they get but I have heard it is 30%.  I didn’t feel I could ask the client at this point.  Let’s assume that the percentage is 70% so the client gets $70,000 and the company gets $30,000. 

Everyone is happy?  Well for now.  The problem is that the amended return is not right the client doesn’t have a $650,000 loss.  The loss was $198,000.  The $452,000 difference is money that represented a gain on the sale of a previous property which was deferred in 1031 exchange.  Since it was not taxed in that transaction it is not considered a loss.  That is black and white, no question about it.  I actually called and discussed a similar case with this company.  The difference was the case I discussed was related to a client who had not done a 1031.  They agreed that loss was limited to their basis less any recovery, which is a fancy way to describe what I said above.   

Even if you said that is BS the guy lost the money he should get the deduction you would be wrong but if you took that track then I think you would have to agree that the loss could not be more than what he invested, $650,000 right?  Well the total loss this guy claimed is $848,000.  This company’s only incentive is to get the biggest refund so they collect the biggest fee possible.  BTW, there was no attorney opinion attached to any of the amended returns or paperwork that I saw.  I don’t remember the exact explanation on the amended return but it was something like “the taxpayer lost money”. 

Bottom line, you are right I am too conservative.  If the IRS comes back and looks at this fellow’s returns, which they have a long time to do because I think they can make a case for fraud, it is the taxpayer who will be on the hook.  This company will be gone by the time that happens.  If I have a situation where I think there is a gray area and I believe I could tell the IRS with a straight face that I believe the position I am taking is correct even if the position might not be correct, I will.  In some cases this requires disclosure to the IRS and that is a factor we have to consider but basically yes I will take that position.  However, I am not aggressive enough to just flat out lie for a client.  Saying something is okay because someone else did it and didn’t get caught doesn’t make it right.  It is like saying it is okay to drive 90mph on the freeway because my uncle did it and he didn’t get a ticket.  Just cause your Unc didn’t get a ticket doesn’t mean you can’t end up in jail or 100% fraud penalty. 

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on this information to make important financial and tax decisions.  The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence.

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I would enjoy hearing more about how one can beat the IRS…

Here’s a quick stab.

Legally Beating the IRS is individual to each client but I can give you some ideas. Let’s start with the issue you are having with the IRS. Not too clear but your description sounds like the IRS wants to ignore your S status of your corporation? Let’s just assume that is the issue for this example. This happens a lot because the IRS wants to see S-Corps paying the owners “reasonable compensation”. There’s no definition of reasonable comp so when an S-Corp gets audited basically the owner is going to have issues. Like most of what I do, your current problems are history so I can help with them but really the question is how to prevent these issues in the future? Here are some things we look at for tax planning and a new client.

Is your entity the right entity? For example, if you are married a limited partnership with your spouse as the limited partner, assuming she doesn’t work in your business, will give you almost the same benefits as an S-Corp. It is also harder for the IRS to fight.

If S-Corp is the right entity the first thing you want to do is make sure you have a reason paying yourself the salary you get. Usually this means a compensation study. We have a person that does these pretty reasonable. Getting one every couple years can’t hurt.

Although there is no safe-harbor, many preparers think you want to have at least 40% of your profit as compensation to owners on the tax return for the corporation.

Talking about profit, reasonable compensation is not based on what a company makes but obviously if the company is making $60,000 it can not pay you $100,000. So one way to make reasonable comp more reasonable is to pay more other expenses. For example, if you have a home office paying rent on the home office will reduce your profit and make a lower compensation more reasonable.

Sometimes a C-Corporation is a better choice. This would be particularly true if you have a lot of medical or sometimes when your income including the business income is under $100,000.

Anyway as you can see there are a zillion ways to beat the IRS. If you’d be interested in a free consult I could get a better idea of what possibilities would work for you.

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on this information to make important financial and tax decisions.  The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence.

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Do you know much about dual citizen’s Canadian and American and filling taxes in both countries and what deductions are available?

Not experienced in preparing Canadian returns and not in a hurry to learn.  About twenty years ago a fellow asked me to prepare a return for Quebec, I think.  So I said sure and ordered a book to learn the rules.  When the book came it was in French.  LOL. 

That said, I do understand the interaction of taxes between the two countries.  I have several Canadian citizens that have lived in the US for years.  When they have taxable income there they have a firm in Canada prepare it or in many cases the tax is just withheld?  So when I get the information there are two issues.  First, is the income taxable here?  For that I have a copy of the Canada – US tax treaty and it is pretty easy to determine if the income is taxable here, Canada or both countries. 

If the income is taxable in both countries you would get a credit on the US taxes for the taxes paid in Canada.  For example we had a client who sold a rental property in Canada a couple years ago.  It was taxable here too.  He got a credit here which offset most the income.

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on this information to make important financial and tax decisions.  The advice presented here is presented to give examples of the type of information you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence.

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I am a freelancer and looking for a new tax pro to prepare next year’s returns. Do you prepare returns?

I do both consulting and preparation, though truthfully mostly supervise the preparation.  I have a lot of great preparers with me.  As for costs, I generally like to have one or two visits either on the phone or in person where we get to know each other so I can understand your needs.  After we talk and I find out what is going on I can give you some prices for preparation.  I usually don’t charge my clients for email, phone, or office visits.  If I find a reason to charge clients I will tell them in advance. 

Since you are doing “freelance” work I suggest we talk soon.  It is easy to save tax before you earn the money.  Once you have earned the money basically what I do is record history.  I have good historians but most freelancers don’t realize they need a prognosticator to help them shape their tax destiny. 

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on thisinformation to make important financial and tax decisions.  The advice presented here is presented to give examples of the type ofinformation you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence

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I may need a new “tax guy.” I own a small business (LLC) and recently received a big salary increase (yes it does happen even in this economy.) I employed a CPA prior to last year’s taxes. It just seemed he was plugging the info into the same software I was plugging it into. What are your rates for doing taxes per annum?

Prices?  Don’t have enough information.  I have a lot of clients we do for around $100 and some that pay $5,000 or more.  So it is pretty hard to even guess.  Also the bigger question I would like to think is can I do anything for you?   If all you get from me is what you can do on Turbo Tax, doesn’t really matter what I charge.  I think you get a lot more for example if the IRS sends you a letter saying you didn’t report something, we answer the letters free. 

With your LLC, most LLC’s are disregarded entities.  That means you don’t file a separate return for the LLC.  If this is the case and you have a loss on the business with your situation you are walking around with a big sign on your back saying, “IRS PLEASE AUDIT ME”.  There is a big push now for auditing returns in this situation because the IRS is thinking that the business could be a sham for avoiding taxes on your wages.  There are pitfalls if you are making a profit too.  Hopefully that is the case. 

For new clients I offer a free review and free consultation.  If you show me your return I will let you know what you can do to make it look better and also let you know our price for your returns.  You can fax, email or mail your returns for me to review.  Just let us know your pleasure. 

This blog is a collection of questions from clients and the answers.  The goal of the blog is not to answer the questions you might have.  Most times the answers are based on each client’s personal situation.  Please do not rely on thisinformation to make important financial and tax decisions.  The advice presented here is presented to give examples of the type ofinformation you get as a client of a true tax professional, like Ray Simmons and the preparers he employs.  Advice regarding similar issues for you should be based on your personal situation. 

Treasury Department Circular 230 Notice. “To ensure compliance with Treasury Department Circular 230, prospective clients are hereby notified that: any discussion of Federal Tax Issues contained or referenced to in this communication is not intended or written to be used and cannot be used by the prospective client or investor for the purpose of avoiding penalties that may be imposed on them under the Code.” Such discussion is written in connection with the promotion or marketing by Ray Simmons Corporation of the transactions or matters addressed in this correspondence

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