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Year end Tax Planning is Complicated by the Unknown

Year End Tax Planning

Tax planning at the the end of 2009 is a little more complicated than in recent years due to pending legislation that we have to consider.  Regardless, as this year comes to a close it is still a good idea to review your tax situation before the end of the year to determine if there are any moves that you can make to lower your 2009 tax bill before it is too late.

Congress is considering many items now.  All of the following items are on the table and have to be factored into your plan:  Health Care Reform, Additional Stimulus Bills, Extension of Tax Breaks.

Congress is working feverously to figure out a way to fund health care reform.  A surtax on higher-income taxpayers is one proposal, another proposal is to charge a tax on high-dollar health care plans.  Further, changes are being proposed to Flexible Spending Arrangements and Health Saving Accounts.  Flexible Spending Arrangements are likely to be capped at $2500, and the additional tax for HSA withdrawals before age 65 that are not used for qualified medical expenses could double.  Other changes are proposed to these plans, so we will have to watch them closely.

Congress will most likely extend unemployment benefits before year end.  They have already extended the new home buyer credit.  Many other extensions are in the works.

These items have to be factored into your tax plan.  You also need to consider the effects of the Alternative Minimum Tax in your plan.  Not to mention possible tax ramifications of debt restructuring, or debt relief.

The sooner you address these issues the better chance you will have to lower your tax bill.

Lower Self Employment Taxes for LLC Owners

We have developed a technique based on a proposed IRS regulation that allows for the bifurcation of the LLC interest, whereby each owner would own a managing member, and a member (investment) interest.  Rather, than just a managing member interest.  This requires that the company be a non-professional type business, and that the allocation of the member/managing member interests have substantial economic effect.

If this is the case and the managing members receive guaranteed payments that are reasonable compensation for services provided to the LLC, then the managing member interest would be subject to self employment tax and the member interest would not be subject to SE tax.  This is much the same way that an S-Corporation works.

But remember, that this is based on a proposed regulation, and is not without risk.  It would not be subject to judicial review, but the IRS could not charge penalties if you relied on it.  If you own an LLC as a managing member, and would like to structure it such that you could lower SE tax, please contact our office for an appointment at 714-708-2593.

Tax Deadline is October 15, 2009

It is now upon us.  If you extended your individual income tax return prior to April 15, 2009, the day has come to file.  October 15, 2009 is the last day to file, and there are no additional extensions available.  If you file past this date you will be late and incur a late filing penalty.

If you cannot possible make your filing by October 15, 2009, you need to file as soon as possible after that date as you can.  It is a crime to not file an income tax return.  President Obama has proposed raising the criminal penalty for non-filing to that of a felony.  That tells me that the government is taking non-filing very seriously.

Bottom line, file on time if at all possible.

Home Mortgage Interest Deduction

How Much of My Mortgage Interest Can I Deduct?

So just how much interest can you deduct from your home loan?  This is a basic tax question that is often answered incorrectly.  You may not deduct interest on more than $1,000,000 of home acquisition debt for your main home and secondary residence. Home acquisition debt means any loan whose purpose is to acquire, to construct, or substantially to improve a qualified home. The limit is reduced to $500,000 if you are married filing separately.

Just because you receive a Form 1098 from your lender, it does not mean that you get to deduct 100% of the interest indicated.   If you refinance your home in an amount greater than the original acquisition loan, you cannot deduct the interest that is represented by the loan amount that exceeds your original acquisition loan.  Also, you can only deduct the interest if you are responsible for the debt, and actually pay the interest.  However, the U.S. Tax Court has allowed a joint obligor to deduct their payment of interest on behalf of another obligor, if the payment was made to avoid loss of the property, and the payment was made from the separate funds of the obligor claiming the deduction.  This can become important in this economic environment where so many mortgages are going into default.

Further, you can deduct interest on an additional $100,000 of loan amount for a home equity loan.   The home equity debt limit is reduced to $50,000 if you are married filing separately.  Your deduction for home equity interest may be reduced even below the $100,000 limit if your indebtedness exceeds the fair market value of your home.  

What Can You Predict for Our Tax Rates in the Future?

What can you predict for our tax rates in the future?  This is a question that I get asked quite a bit.  If you remember, President Obama said in his campaign that he would raise taxes for the rich, and this was defined as those that have taxable income in excess of $250,000.  These are the same folks that are already footing about 65% of the taxes already.  In fact, if you taxed these "rich" people at 100%, it would not solve the trillion dollar annual deficit we are now expected to carry for the forseeable future.  Next thing to consider is that the people making over $250,000 are generally the same people that are providing the jobs.  When they are over taxed, they hire less and make cutbacks.  You can see where I am going here. 

How does this affect future tax rates?  Well, if we cannot get enough taxes from the "rich", and Congress does not cut spending (they have not shown a propensity to do this), then Congress must raise taxes further.  This will mean lowering the bar from the $250,000 level.  My best guess is that Congress will have to raise taxes for those that make $75,000 and above to make any headway on the deficit, and fund current programs.  Thus, your tax planning for the future should consider this as a highly probable event.  Consult with your tax adviser to determine what this means to your individual situation.

Required Minimum Distributions on Retirement Accounts

Required Minimum Distributions ("RMD"):  IRS Grants Relief with Notice 2009-82

There is good news if you withdrew required minimum distributions in 2009 without knowing that the 2009 RMD was waived by the Worker, Retiree, and Employer Recovery Act of 2008.  The IRS has extended the deadline to November 30, 2009 for you to put the money back so that you do not have to pay tax on the unnecessary withdrawal.  The authority for this is Notice 2009-82. 

Under this Notice, individuals generally have until November 30, 2009, or 60 days after the date the distribution was received, whichever is later, to roll over the distribution.

So, You are going to short sale your home.

There is a second wave of foreclosures that are in process now.  People that can afford to pay their mortgage, but choose not to, because they are so upside down on their real estate that there is little or no possibility of recovery in the near future.  One might term this a strategic foreclosure.  They typically are short sales or deed in lieu of foreclosure transactions. 

If you are considering one of these transactions, please consider it carefully with your tax adviser.  If you pay less back to the bank than you borrowed, then you have income from debt relief.  When you borrowed the money, it was not taxable.  However, when you do not pay it back the portion that you short the lender by is income.

The next question you have to ask is whether the income is somehow excluded from taxation.  The traditional relief comes under the code if you are either bankrupt or insolvent.  Some relief may also be available if the home is your principal residence, or the debt was a purchase money loan.  Your situation must be analyzed to determine if you fit within any of these exclusions.  Otherwise, you have taxable income.

What Happens if You Can't Pay Your Payroll Taxes?

You are a small business owner, and due to the current economic conditions, you used the funds that you set aside to pay your payroll taxes for other business expenses.  Now, it is time to pay your payroll taxes and you do not have the money to pay them.  This is a common problem right now.

What is going to happen and what can you do?  First, make sure you file the payroll tax return that is due, whether you can make the payment or not, currently.  Once this is done, if you do not make payment timely, the IRS will send you a letter to request payment of the taxes due.  You should attempt to pay as much as you can now, because the penalties are stiff for non-payment (approaching 50%).  Then, either you or your tax adviser needs to contact the IRS, and inform them of your situation and what you are planning to do.  Within a short period of time the IRS will file a lien for the unpaid taxes, and possibly assess a trust fund recovery penalty against all responsible parties, making them personally responsible for the taxes.  If you are going to make a partial payment on the taxes due, consult your tax adviser so that they can insure that the payments are being applied against the trust fund recovery penalty first.  Now make it a priority to pay off the balance of the taxes due.  Your tax advisor can discuss the possibility of a structured payment plan with the IRS to prevent enforced collection.

Is Tax Planning Illegal or Unpatriotic?

I often get the comment "Isn't tax planning illegal, or at the least unpatriotic?"  When I get this comment I love to quote the following case:  Gregory v. Helvering, 293 U.S. 465 (1935). In that case, famed Supreme Court Justice Learned Hand was quoted as saying:


"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

In fact, Congress establishes tax laws for the primary purpose of motivating our behavior.  We get reduced capital gains tax rates to encourage us to invest.  We get a deduction for home mortgage interest to encourage us to buy real estate.  We get exemptions for children to encourage us to have families.  The list is long and goes on and on.  When we are taking advantage of a tax break, we are doing what Congress is motivating us to do through the tax code. 

So, go ahead and do some tax planning and make Congress proud.

Life's short. Don't represent yourself in an IRS audit.

Have you received a letter from the IRS?  Go ahead and open it.  I can't tell you how many clients come to me with unopened letters from the IRS.  The clients simply don't want to see the "bad news."  Next, if you are being audited, do not contact the IRS yourself.  This is like representing yourself in a criminal matter.  Remember, if you represent yourself in a criminal case you have a fool for a client.  Same holds true for an IRS audit. 

Call a qualified tax attorney if you get the IRS letter.  Otherwise, if you start representing yourself you may cause damage to your case that is irreversable.  Tax attorneys know how to deal with the IRS, and can establish a strategy for your case from the beginning to get the best result possible for your particular situation.  This may include keeping you out of a criminal investigation.  In the long run your savings with the IRS may exceed what the tax attorney will charge you.

S-Corporations Can Reduce Self - Employment Taxes for Small Businesses

Is there a way to reduce the amount you pay for self-employment taxes on your small business?  An S-Corporation may be the answer for you.  An S-corporation is formed in the same manner as a C-Corporation.  However, once the corporation is formed you must elect to be taxed as an S-Corporation for tax purposes under Subchapter S of the Internal Revenue Code.  You then pass-through the income and expense items of your corporation to your personal return where it is taxed at your individual rates.

So what is the advantage of this structure over just operating as a sole proprietor?   Well, as a sole proprietor you pay self employment tax on all of the income you make fully up to the FICA limit, and Medicare on the entire amount with no cap.  However, with an S Corporation you only pay self employment taxes up to the salary you claim.  What is the catch?  You need to at least pay yourself a reasonable salary amount, which will vary for each individual/business.  Your tax advisor can help you determine this amount.  The bottom line is that you can save a significant amount with this technique.  So it is worth taking a look to see if it can help you with your own situation.

New Homeowner Tax Advantages

So you just bought your new home and you are wondering what tax advantages it is going to offer you, or everyone has been telling you to buy a home for the tax advantages.  What does this mean?  Well, as a new homeowner you will be filing a Schedule A with your tax return to take advantage of owning your new home.  On this form you will be able to deduct the interest that you pay on your mortgage for up to a loan amount of $1,000,000.  You will also be able to deduct your property taxes that you pay for the property.  These deductions will directly offset your wage income when it is deducted from your adjusted gross income in determining your taxable income. 

You may also be entitled to a first time homebuyer credit.  This credit is as much as $8,000 and is available for a limited time to first time homebuyers.  A first time homebuyer is defined as someone that has not owned a home within the last three years. All purchasers must be first time buyers to qualify.  

Net Operating Loss Carrybacks Can Enhance Your Cash Flow!

Are you looking for a way to increase your cash flow in a troubled economy?  Well, look no further -- The Federal government is here to help.  One of the favorable changes that the Obama administration made to the tax code was to allow for a five, rather than the previous two, year carryback of net operation losses.

What does this mean to you?  If you had a loss from your business in 2008, and had income in any of the previous 5 years, you may be eligible for the 5 year net operating loss carryback provisions.  These provisions allow you to make a request for a refund, by carrying back your losses to the income years.  How long does this take?  Not long.  We have averaged a turn around of about 2 to 3 months for most refund requests.  The Treasury has issued regulations that have clarified many of the issues that come up when requesting a refund.  Some of the issues can be complicated, but a tax advisor well versed in this area should be able to lead you through it.  Best of all, the refund is not taxable income.