Roth & Company, PC Tax Update Blog

Tax Update Blog: 2008 Filing Season Tip Archives

Extreme year-end tax planning: tie (or untie) the knot

December 24, 2008

As nice it is to save taxes, some folks consider other things more important. If you can believe that. But if your tax life is everything for you, extreme year-end planning strategies may come to mind

For example, your marital status on the last day of the year is your tax status for the whole year. Many one-income couples will save taxes filing a joint return. And this is such a romantic time of year. Why wait until June for a big wedding when you can tie the knot now for a tax break?

Alternatively, marriage can still be costly for two-earner couples. A quick trip to Vegas might enable you to file singly for 2008. As a practical matter, though, I think divorce takes more paperwork than marriage (I wouldn't know personally), so it may be a bit late to do this for 2008. They don't say "marry in haste, repent at leisure" for nothing.

Now either of these strategies require a certain amount of, well, cooperation, and I'm sure they aren't for everyone. I have no good advice on how to broach the subject ("Honey, I know how we can pay for that new vacuum cleaner you need!"). But if taxes are that important to you, maybe your future (present?) spouse deserves the warning.

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GAME OVER. GAME ON.

April 15, 2008

Today's the day. There isn't a lot to add to what I've already said about this filing season, but a few reminders can't hurt:

- Today's the deadline
- If you don't e-file, certified mail is a great way to document timely filing.
- E-file is good.
- Extensions are your friend.
- If you claim a SEP deduction or an IRA contribution for 2007 and are filing today, make sure you have it funded by the end of the day.

If you have found the process of paying taxes painful, I understand. Sometimes the pain is unavoidable. Remember the painful parts, and start now to ease them. It's mostly the little things:

- If you always end up short on April 15, you may be underwithheld.
- If you have a lot of income not subject to withholding, keep up on your estimated tax payments.
- If you have a 401(k) plan at work, use it.
- If you are self-employed, it's easier to fund your SEP or Keogh plan a little at a time, rather than at tax time when you need to come up with a tax payment too.
- If you qualify for a health savings account, fund it.
- Keep your records in order so tax time next year isn't a debacle.
- Review your tax situation in the fall so you are ready for what happens next April.

Finally, be a good citizen. Tax simplification starts with maiking Congresscritters do their own returns live on the internet. Write your lawmakers!

This is the last installment of our 2008 filing season tips. Thanks for reading!

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WHAT EXTENDS, WHAT DOESN'T

April 14, 2008

Everyone knows that tomorrow is the deadline for filing your 1040. Most taxpayers are probably aware that you can extend this deadline six months with Form 4868. You can extend other returns due today for six more months too. Form 7004 extends both Form 1041, the estate and trust return, and Form 1065, the partenrship return.

Extending your tax return extends some other important deadlines for six months, including:

- Funding a 2007 qualified pension or profit-sharing plan contribution, including a Keogh plan.
- Establishing and funding a SEP, or Simplified Employee Pension.
- Recharacterizing a Roth IRA contribution as a regular IRA contribution.
- Withdrawing excess IRA contributions for 2007.
- Filing Form 3115 under an automatic procedure for changing accounting methods.
- Many elections, such as the partnership "Section 754" election to step up the basis of assets after a sale of partnership interest, are timely when made on an extended return.

Folks with section 1031 like-kind exchanges entered into after October 18 of last year can get extra time to close the acquisition of replacement property, but the extended deadline is 180 days after the old property was given up - not 180 days from April 15.

Some deadlines aren't extended at all with a return extension. A few examples where April 15 is the do-or-die deadline:

- Paying your federal tax due for 2007 (though no penalties, only interest, will accrue if you are 90% paid in when you extend your 1040).
- Funding an Individual Retirement Account for 2007
- Funding a Health Savings Account for 2007
- Paying your first quarter federal estimated tax for 2008
- Making a Section 475 "mark-to-market" election for securities trading.


So: extensions get you more than just time to get your return right. They can also help with cash management. But be careful about what can't get extended, and act accordingly.

This is the penultimate installment in our daily series of 2008 filing season tips, and perhaps the ultimate opportunity to use the word penultimate here.

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IT'S BETTER TO EXTEND THAN TO AMEND

April 13, 2008

If you are scrambling to wrap up your 1040, and you don't know how you can get it right by April 15, maybe you shouldn't even try.

The tax law is hard. From bitter experience, every practitioner knows how easily mistakes can happen as you rush to get stuff filed by April 15. That's why extending your return is often the wise choice.

Filing an extension is easy. All you need to do is file your Form 4868 to get another six months to finish and file your 1040. You can also e-file an extension. If you have at least 90% of your final liability paid, you will have no penalties when you pay the rest; you will have to pay 6% interest on any amount due.

If you are a quarterly estimated payment filer, it's wise to gross up your extension payment to cover your first quarter payment. That gives you some cushion on your 2007 taxes, and you can apply your overpayment to your 2008 taxes when you file the final 2007 return.

Last year we mentioned two common arguments we hear against extensions. Our feelings towards these arguments are unchanged:

"I'm more likely to be audited." Nonsense. I have seen no evidence that extended returns attract IRS attention. It is clear, though, that returns with errors do attract IRS attention. If taking an extension means you file a more accurate return, you actually reduce your chances of an audit. That's especially true if you would other wise have to file an amended return to fix an error.

"I want the statute of limitations to run." This is actually has some merit, if you have a controversial position on your return. It also rarely applies in real life. While I'm sure it happens, I've never seen a client have to pay extra taxes because they kept the three-year statute open an extra few months by extending a return. Again, if by extending you make your return more accurate, you probably reduce the chances of the IRS looking at you.

Keep in mind: an e-filed return may never be seen by an actual human, while every amended return has to get at least some review from an IRS agent with the ability to refer it for examination. That shouldn't keep you from amending a return if you need to correct an error or collect money the IRS owes you. It does mean that if the choice is to extend and get it right or amend later to fix an error, better to extend than amend. And if you are paying to have your return done, amending is more expensive than extending.

Tomorrow: What you can extend, and what you can't.

Link: IRS Tax Topic 304, Extension of Time to File Your Tax Return.

This is another in our series of daily 2008 filing season tips. Only two left!

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DON'T CHEAP OUT AT THE POST OFFICE!

April 12, 2008

An entrepreneur's tax return isn't necessarily cheap.  One relatively prominent entrepreneurial couple filed a 2005 tax return with three schedule Cs and K-1s from a bunch of partnerships.  Their return fee was a cool $16,535.

Maybe you spent hundreds of dollars to have a preparer do your business return. Or maybe you spent the 30.3 hours the 1040 instructions say is the average estimated time it takes to do your own return. Either way, your tax return represents a substantial investment in time and/or money.

Now isn't the time to cheap out. Unless you are filing electronically, you ought to spring for the extra $4.80 to file your return "certified mail, return receipt requested."

It's well worth the time and trouble of going to the post office to get that postmarked receipt. The tax law is full of sad stories of taxpayers who lost thousands of dollars because they didn't have a postmark to document that they filed on time. Don't let it happen to you!

If there's no post office open or handy, you can also use a mailing receipt from one of the designated private delivery services authorized by IRS for timely return shipment. As they don't use P.O. boxes, you'll want to refer to Russ Fox's handy list of service center street addresses.

And don't procrastinate, because Jiffy Express isn't a designated private delivery service.

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This is the fourth-to-last installment of our series of 2008 filing season tips.
(Cross-posted from IowaBiz.com)

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CAUGHT SHORT?

April 11, 2008

It happens. Sometimes, for some taxpayers, April 15 comes and there isn't enough cash on hand to cover what the IRS wants. What to do?

DON'T BLOW IT OFF. The worst thing you can do is to just put your head in the sand. If you don't file anything, you start to accrue a monthly penalty of 5% of any amount you owe the IRS. 60% APR almost makes LoanMax look reasonable (though the total penalty maxes out at 25%). Interest also accrues on the unpaid taxes and penalties. Once you start digging this kind of hole, it can take years to climb out.

BORROW (but not from a car-title or payday-loan shop. The IRS is a better creditor). If you have a home equity line, tap it. The IRS accepts credit card payments. If you have a good credit rating, your friendly banker might be able to do something. If you have a gullible sympathetic relative or significant other, take advantage.

FILING BUT NOT PAYING. Getting an automatic extension with Form 4868 gives you until October to file a timely return. Even if you can't pay your tax, an extension can turn the 5% monthly failure-to-file penalty into a 1/2% montly failure-to-pay penalty. That is, it can if you ultimately file your completed 1040 and pay your taxes by the extended due date.

Also, the tax regulations don't impose the failure to pay penalty if you have 90% of your tax paid in by the original due date. In that case, you just have to pay the interest on the remaining balance due at the IRS rate for underpayments - currently 6%. If you are coming up just short, you should pay in what you can with an extension and pay the rest as soon as possible.

BORROW FROM THE IRS. Many taxpayers can set up an installment agreement with the IRS online. You can also apply for an installment agreement by filling out Form 9465 and filing it with your timely-filed tax return, along with a check for whatever you can afford to pay now.

If you get an installment plan in place, live up to it. Once you fall behind, things can get ugly quickly.

Remember, too: The Iowa return and payment isn't due until April 30, so you have time to come up with cash for them.

And whatever you do, don't bounce a check. They really don't like that.

Link: IRS release on "Payment Options Available for Those Who Can’t Pay in Full"

This is part of our daily series of 2008 filing season tips running through April 15.

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THE ROTH IRA

April 10, 2008

The Roth IRA is a nice option for personal retirement planning. Contributions to a Roth IRA are not deductible, but earnings form them are permanently tax free at retirement. This contrasts with the traditional IRAs we discussed yesterday, which are tax-deductible (within strict limits) at contribution, but fully-taxable on withdrawal.

The choice between a Roth IRA and a traditional one involves a bet. If you forego the deduction, you are wagering that the benefits of having income permanently tax-free outweighs the value of a deduction today. That's most likely to be true if you expect to pay higher tax rates at retirement. This makes the Roth IRA especially attractive for younger workers, who are busy climbing up the tax brackets while they climb the career ladder. But given that the markets predict higher rates in just a few years, a Roth IRA might be a good bet for higher-income workers, too.

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intrade 2011 tax rate prediction market at 7:45 am 4/10/08

The contribution limits for Roth IRAs are generally the same as traditional IRAs for 2007: $4,000 per taxpayer or $8,000 per couple, but limited to the amount of compensation income. The ability to fund a Roth IRA phases out for high-income taxpayers under the following schedule:

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You have until April 15 to fund your 2007 Roth IRA. It won't reduce your taxes now, but it could do great things for you down the road.

Link: IRS publication on Roth IRAs

We're posting a new 2008 filing season tip daily through April 15. Catch them all!

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TRADITIONAL IRAS: STILL A GOOD DEAL

April 09, 2008

The Individual Retirement Account became a red-headed stepchild of the tax law when Congress limited deductions for such accounts mostly to people with no money to save in them. Like all high-income phaseouts, the limitation of IRA deductions is bad policy and adds foolish complexity to the tax law.

But even within its limits, the traditional IRA can be a good deal for taxpayers. First, many taxpayers can deduct their IRA contributions. Your deduction is limited only if you are covered by another employer pension plan. Even if you are covered, your spouse may be eligible for a deduction. And even if you can't deduct an IRA contribution, money saved in an IRA can earn tax-deferred income from otherwise taxable investments.

You have until April 15 to make your 2007 IRA contribution of up to $4,000, or $5,000 if you were age 50 by the end of 2007, if you have at least that much 2007 compensation income.

You can deduct the contribution if:

- You and your spouse (if you have one) are not covered by any employer retirement plan during the year. Most of us can tell whether we are so covered by looking to see if the "retirement plan" box on our W-2 is checked.

- If you are covered by a retirement plan, you can use this chart to determine whether your 2007 contribution is deductible:

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-If you aren't covered by a retirement plan, but your spouse is, use this chart:


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IRA contributions can also qualify you for the savers credit, if your income is low enough. And the math is compelling: If you start young, you can build a terrific IRA nest egg through annual contributions.

Tomorrow: The Roth IRA

Link: IRS publication 590 on IRAs

This is another installment of our daily series of 2008 filing season tips running through April 15.

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ONE WEEK TO FUND AN IRA

April 08, 2008

The 2008 filing season ends a week from today. That means you have eight days, counting today, to fund an individual retirement account for 2007. if you haven't already done so.

There are several kinds of retirement IRAs: The traditional deductible IRA, the traditional non-deductible IRA, and the Roth IRA. While they differ in important details, they share common contribution limits and deadlines and the ability to shelter earnings that would otherwise be tax exempt.

You have through April 15 to fund a 2007 IRA. IRA contributions are limited to the lesser of your compensation income or $4,000 ($5,000 if you were at least 50 years old by December 31, 2007). If only one spouse has compensation income, the other spouse can use that income to meet these limits. If husband has $50,000 in 2007 wages and wife has $0, for example, both spouses can make a full IRA contribution.

But what kind of IRA? More on that tomorrow.

Link: Publication 590 (2007), Individual Retirement Arrangements (IRAs)

This is another installment of our daily series of 2008 filing season tips - a tip a day thorugh April 15.

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TAX TIP: SAY NO TO REFUND AND REBATE LOANS

April 07, 2008

The Tax Update believes Refund Anticipation Loans should be legal, just like other stupid forms of finance, like car-title loans and payday loans. Adults should be allowed to commit finance with other consenting adults, as long as the terms are all disclosed. They should then be allowed to face the consequences of their own foolish choices. Same goes for people who bought too much house and their foolish lenders.

But just because it's legal, say, to go to the bar, line up 10 shots of Jagermeister, and see if you can drink them all before "You Shook Me All Night Long" finishes on the jukebox, it's still not a great idea. Refund Anticipation Loans are in the same league.

Why are they so stupid? Let's start by looking at the IRS refund cycle chart, which tells you how quickly your refund will come for different filing dates:

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What this means is that if you e-file and have direct deposit, you will have an 8 to 15-day wait to get your refund. A Refund Anticipaton Loan charges you a lot of money to get your money at most 15 days earlier -- at interest rates that run from 40% to over 700%.

There are always people willing to sell you a chance to do something stupid. When they try to sell you a Refund Anticipation Loan, take a pass.

The Tax Update is counting down filing season with a daily 2008 filing season tip through April 15.

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TAX TIP: YOU CAN FUND AN IRA WITH YOUR REFUND

April 06, 2008

We will discuss the different flavors of individual retirement arrangements, or IRAs, this week. Some IRAs are better than others, but they are all good. Even the least of them enable you to earn the higher interest rates of fully-taxable investments in a tax-deferred vehicle.

Yet many people don't bother with IRAs -- often because they never set aside any cash to save.

For many folks, their tax refund is their biggest source of free cash available all year. This is a great opportunity to fund an IRA by having your refund deposited directly into one. Based on the IRS refund-cycle chart, it's too late to fund a 2007 IRA with your 2007 tax refund, as the IRA has to be funded no later than April 15. But if you haven't filed yet, you can use your 2007 federal refund to get started on your 2008 IRA. And if you have a SEP (simplified employee pension) and you extend your return, you still can use your 2007 refund to help fund your 2007 SEP.

You can use Form 8888 to have your refund deposited in your IRA. You have to make sure:

- The IRA is with an institution that can accept a direct deposit. A bank IRA can do so.
- You have to be sure they will accept it.
- You should tell the institution what year the IRA is for (but unless it's a SEP, at this point it has to be for 2008).

The maximum contribution for non-SEP IRAs is $5,000 for 2008, or $6,000 for taxpayers who will be age 50 or older by the end of 2008. If your refund is larger than than that, you can use Form 8888 to split the refund between your IRA and your other bank accounts.

This is part of a series of 2008 filing season tips the Tax Update is running through April 15. Stop back for a new one daily!

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SAVING FOR COLLEGE? DON'T FORGET TO DEDUCT YOUR 2007 COLLEGE SAVINGS IOWA CONTRIBUTIONS

April 05, 2008

20071222-1.gifIowa has a pretty good state-sponsored Section 529 plan, College Savings Iowa. It uses low-fee Vanguard Funds and has a reasonable range of investment choices. It also has one factor that clinches the deal for many Iowa taxpayers: you can get a deduction for CSI deductions on your Iowa 1040. For an Iowa top-bracket taxpayer, this is like a 6% negative load on the investment.

For 2007 you may deduct up to $2,595 per donor, per donee, in contributions made during 2007 to CSI. That means a couple with two children could deduct up to $10,380 in CSI 2007 contributions. This number goes to $2,685 for 2008. You can, of course, make additional contributions over the deductible amount subject to the normal limits for contributions for Section 529 plans.

You take the deduction on Iowa 1040 line 24.

This is today's installment of our daily series of 2008 filing season tips -- a new one daily through April 15.

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PROM-TIME TAX TIP

April 04, 2008

200080404-1.jpgAs the high-school kids get ready for the annual prom rites, worried parents can console themselves with the possibility of a tax break. Prom tickets are among the unlikely items that qualify for the $250 maximum Iowa Tuition and Textbook Credit. This arises from a unique definition of "Tuition and Textbooks" in Iowa. From the Iowa Department of Revenue:

"Tuition" means any charges for the expense of personnel, buildings, equipment and materials other than textbooks, and other expenses that relate to the teaching of only those subjects legally and commonly taught in Iowa’s public elementary and secondary schools.

"Textbooks" means books and other instructional materials used in teaching those same subjects. This includes fees, books and materials for extracurricular activities.

Examples of extracurricular activities: sporting events, speech activities, musical or dramatic events, driver’s education (if paid to a school), awards banquets, homecoming, prom (clothing does not qualify), and other school related social events, etc.

Well, yes, you can learn a lot about extracurricular activities on prom night.

The credit is 25% of up to $1,000 of qualified expenses per dependent. For a more comprehensive list of what does and doesn't qualify, keep reading.

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TAX TIP: READ YOUR RETURN!

April 03, 2008

This might seem like a self-serving thing for a tax preparer to say, but it's true: no matter how much you pay somebody to do your return, it's still your return. You are responsible for what's on it, and if it's grossly wrong, it's your problem.

A dentist from Sonora. California learned this hard lesson yesterday in Tax Court. Ronald Neufeld gave his business records, which he kept using the Quicken software program, to a preparer recommended by his brother in law. Something must have gone badly wrong. Mr. Neufeld's returns reported federal tax of $35,668 for 2001 and 2002, but the IRS figured it at $181,145. In imposing over $21,000 in penalties on Mr Neufeld, the judge spelled out the rules taxpayers are held to in relying on preparers (citations omitted, emphasis added):

The case law sets forth the following three requirements in order for a taxpayer to use reliance on a tax professional to avoid liability for a section 6662(a) penalty: (1) The adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the tax adviser, and (3) the taxpayer actually relied in good faith on the adviser's advice. However, by itself, unconditional reliance on a preparer or adviser does not always constitute reasonable reliance; the taxpayer must also exercise "diligence and prudence."

...

With respect to the third prong of the [requirements], petitioners did not rely in good faith on Mr. Fisher's advice. Petitioners did not meet with Mr. Fisher or otherwise discuss with him their 2001 and 2002 joint Federal income tax returns or 2002 amended return, and they did not examine their returns before signing and submitting them to the IRS. Taxpayers have a duty to read their returns to ensure that all income items are included. Petitioners did not ensure that all of the income from Mr. Neufeld's dentistry business was included in their 2001 and 2002 joint Federal income tax returns.

So when your return comes back from the preparer, look it over and ask questions if something looks wrong. Preparers make mistakes too; if you don't read your return, the preparer's mistake could become your problem.

In a footnote, the Court identified a serious flaw in Mr. Neufeld's due diligence:

At trial, Mr. Neufeld stated that when he met Mr. Fisher for the first time, he thought he was a competent accountant and tax-preparer because "He had certificates on the wall and lots of them. He seemed to be really organized. It was a nice office. And so I had no reason to believe or to doubt his competence."

If a neat office were necessary to be a competent tax guy, I'd still be bagging groceries.

Check the Tax Update daily through April 15 for more 2008 filing season tips.

Cite: Neufeld, T.C. Memo 2008-79

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YEAR-END TAX TIP: DO YOU NEED TO CLOSE YOUR 1031 EXCHANGE?

April 02, 2008

One of the nastier land mines in the like-kind exchange rules is the deadline for closing on a purchase in a deferred swap. When you have a deferred exchange, Section 1031 gives you 45 days to identify the property you want to receive in the swap. The deadline for actually closing on the replacement property is the sooner of

- 180 days after giving up the property, or
- The due date (including extensions) for the tax return for the year.

This means if you entered into an exchange after October 18, 2007, you need to either close on your replacement property by April 15 or extend your return.

This is part of our daily series of 2008 filing season tips running through April 15. Don't miss a single exciting installment!

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TAX TIP: DUMP THE KID?

April 01, 2008

It's always hard to let go as the kids grow up, but the tax law might make it a bit easier.

There are two credits for higher education expenses: the "HOPE Credit" and the "Lifetime Learning Credit." These both phase-out at higher income levels (starting at $47,000 for single filers and $94,000 for joint filers).

If you are above the phase out range and are paying college tuition, it could make sense to forego a dependency exemption. If your student has income from a summer job or internship, they may have taxes of their own, taxes that they could offset with these credits. If your income is too high to use the credits, the family could be better off tax-wise if the parents forego their dependent exemption for the student. The student then may be able to claim the credits.

You may claim the credit on Form 8863. See IRS Publication 970 for more information.

This is another installment of our daily series of 2008 filing season tips.

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TAX TIP: LET THE GOVERNMENT MATCH YOUR 401(K) CONTRIBUTION

March 31, 2008

Poor Richard said "a penny saved is a penny earned." It might be a penny-and-a-half earned if you qualify for the "Saver's Credit" for retirement plan contributions.

The Savers Credit reduces your federal taxes by up to $1,000, or $2,000 for joint filers, for individual contributions to IRAs, 401(k)s, and other qualified retirement plans.

The credit is up to 50% of contributions for single filers with adjusted gross income up to $15,500 and joint filers with AGI up to $31,000. It is available at 10% of IRA or 401(k) contributions for single filers with AGI up to $26,000 and joint filers with AGI up to $52,000.

This is an easy credit to miss. Don't overlook it. You claim it using Form 8880.

This is another installment in our daily series of 2008 filing season tips. Watch for them each and every day here through April 15!

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READING YOUR K-1: EXAMPLES

March 30, 2008

In the last few days we have provided an overview of what a Form K-1 does, reviewed why your basis in your partnership or S corporation investment is important, and discussed how the at-risk rules can limit your K-1 losses. Today we will go through two simple examples on how K-1 items can go on your return.

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READING YOUR K-1: IS YOUR BASIS 'AT-RISK'?

March 29, 2008

If you have losses on your K-1 from an S corporation or partnership, there are three hurdles to clear before you can deduct them. Yesterday we discussed how to use K-1 information in when seeing if you clear the first hurdle: having enough tax basis to deduct the loss. Today we'll look at the second hurdle: is your basis "at-risk"?

The at-risk rules apply to almost all business activities. Originally enacted to deal with the first wave of marketed tax shelters in the 1970s, these rules were largely superseded by the "passive loss" rules of 1986, but they were never repealed. In fact, your losses don't even get to the "passive loss" rules unless they are "at-risk." Losses that aren't at-risk are disallowed until they can offset future income from the activity, or until the taxpayer gets other "at-risk" basis.

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USING YOUR K-1: BASIS INFORMATION

March 28, 2008

We discussed yesterday how information flows from a partnership or S corporation to your 1040 via the Schedule K-1. Unfortunately, as elaborate as the K-1 is, it doesn't necessarily have all of the information you need.

When the K-1 shows nothing but income items, reporting the information is usually simple. When the K-1 shows losses, things can get complicated.

There are three limits that apply to the use of K-1 losses, applied in the following order:

1. You can't deduct losses in excess of your basis.
2. Even if you have basis to deduct losses, the basis has to be "at-risk," and
3. Even if the basis is "at-risk," losses that are "passive" might be limited.

Neither the 1065 (partnership) or 1120-S (S corporation) K-1s are well designed to tell you what your basis is. The taxpayer or the tax preparer for the K-1 have to do that, year-by-year.

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FILING SEASON TIP: READING YOUR K-1

March 27, 2008

One fun part of doing the Tax Update is seeing what web searches get people here. Sometimes it's not clear why a search ends up here (if you got here by searching the word "girls" or "adult bookstore," I think you are on the wrong track). Sometimes its very clear. "How do I read K-1" gets internet seekers here pretty often - probably because the K-1 can be confusing:

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One of the most common misconceptions about K-1s is the belief that issuers are under the same January 31 deadline that applies to 1099 forms. They are not. A Form 1120-S K-1 for a calendar-year S corporation is technically due March 15, but that deadline can be extended until September 15. Partnership and Estate and Trust K-1s are due April 15, but that deadline can also be extended for six months.

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THE AUDACITY OF PAYING MORE TAXES THAN NECESSARY

March 26, 2008

For a pair of high-powered lawyers, Mr. and Mrs. Obama seem a bit careless about their tax planning. We can draw a money-saving lesson for your 2007 1040 from the Obamas' 2006 1040.

20080326-3.JPGSelf-employed taxpayers can take advantage of "Keogh" retirement plans and SEP plans. Keogh plans are simply ordinary retirement plans for a single self-employed taxpayer. A "SEP," or Simplified Employee Pension, is basically a special kind of deductible individual retirement account for a self-employed taxpayer (UPDATE: this means earnings on the accounts accumulate tax-free until they are withdrawn for returement).

While Keogh plans have to be set up before year-end to be effective, you can set up and fund a SEP as late as the due date of your return. The only documentation required is a Form 5305-SEP for your records and a deposit to your SEP account with your friendly community banker or broker by April 15 - or October 15, if you extend your 1040.

For 2007, you can save as much as 25% of your self-employment income (on up to $180,000 in income) in a SEP, for a maximum contribution of $45,000.

Mr. Obama had self-employment income $506,618, mostly from his book. Mrs. Obama had $51,200 of what appear to be directors fees from "Treehouse Foods," which is also self-employment income. With this income, the Obamas could have contributed $54,103 to SEP plans for 2006, reducing their taxes by about $17,661.

So keep hope alive! If you have self-employment income for 2007, you can still have the audacity to open a 2007 SEP. By moving money from one pocket to another, you can still make a dent in your 2007 taxes.

Link: The TaxProf rounds up coverage of the Obama 2006 returns here and here.

This is another in our series of 2008 filing season tips.

UPDATE from the comments: It looks like the Obamas aren't exactly model savers, tax-deferred or otherwise.

UPDATE II: More From Greg Mankiw.

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IRS SPONSORS 'SUPER SATURDAY' TO HELP NON-FILERS GET REBATES

March 25, 2008

If you are one of those folks entitled to Uncle Sam's Crazy Fun Bucks Tax Rebates, but you don't usually have to file a return, the IRS has a treat for you this Saturday! They will be holding a "Super Saturday" event to help Social Security and Veterans Benefits recipients to file the returns they need to file to get their tax rebates. From the IRS press release:


WASHINGTON — The Internal Revenue Service and scores of its partners nationwide will open hundreds of locations on Super Saturday, March 29, in an effort to reach those Americans who are eligible for the economic stimulus payment but who normally are not required to file an income tax return.

Approximately 320 IRS offices will be open on Super Saturday to prepare the simple Form 1040A for people who are filing a return solely to receive their stimulus payment. IRS partners such as AARP, United Way of America and dozens of others also are making special efforts on Super Saturday to reach out to those who normally are not required to file a tax return.

There are six Iowa Super Saturday locations, including the Federal Building in Des Moines. The complete list of locations nationwide is here.

This is part of a series of daily 2008 filing season tips we are running through April 15. Collect them all!

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TAX TIP: DON'T LOSE A 2004 REFUND

March 24, 2008

When tax preparers celebrate on April 15, they aren't just celebrating the end of return season. They are also celebrating the closing of the statute of limitations for 2004, which puts another year of taxpayer and preparer screw-ups permanently in the past.

Unfortunately, the closing of the 2004 statute also closes the chance to get refunds on 2004 returns. The IRS reports that it is sitting on $1.2 billion of unclaimed tax payments for 2004. If some of that money is yours, you lose it forever if you haven't filed a 2004 return or refund claim when the three-year statute of limitations closes in three weeks,

If you haven't filed your 2004 return, you still can file one and claim your refund by April 15. Any decent tax preparer can help you, or you can get your own 2004 forms and instructions at the www.irs.gov page for Prior Year Forms, Instructions and Publications.

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FINANCIAL ADVICE: PAY YOUR TAXES

March 16, 2008

The Washington Post has a timely seasonal piece about the "close your eyes and they won't be there" approach to paying income taxes. The piece lists out alternatives for getting caught up once you get behind on your taxes, including installment agreements and borrowing from other sources. They quote a West Des Moines financial planner:

You might also consider borrowing against your 401(k) retirement plan, but that too can come with tax liabilities and other fees. "I always kind of recommend that as one of those last resort items," said Dave Strege, a certified financial planner at Syverson Strege in Des Moines.

"Last resort" isn't putting it too strongly. Unfortunately, the folks who get behind on taxes tend to also get behind on all their other bills, and they are likely to get behind on repaying the 401(k); then the borrowing can become a taxable distribution, and the hole gets even deeper. The first step to getting out of a hole is to stop digging.

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DOCUMENT YOUR CLOTHING DONATIONS

March 05, 2008

If you haven't already done so, you should be getting your 1040 information together. If you donate household stuff, it's helpful to list out what you donated, along with your estimated value. Don't just tell your preparer "5 bags of clothes - $4,000." That doesn't give us much to work with in this age of enhanced preparer penalties.

This Intuit site is helpful for valuing such donations, once you get through the annoying registration process. The Salvation Army also provides helpful guides, like this one.

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FILING IN 2008: WHY YOUR PREPARER SEEMS A BIT JUMPY LATELY

February 06, 2008

It's Ash Wednesday, the day on the liturgical calendar for pondering your mortality. As long as you're contemplating death, you might as well get going on your taxes, too.

While you won't see too many drastic changes in tax computations, there is one change that will affect how you put your tax information together. Congress has stiffened the standards for positions taken on tax returns by preparers. In fact, preparers now are held to a higher standard than folks who do their own returns. If a preparer signs a return that takes a position that meats the old "substantial authority" standard, but doesn't pass a "more likely than not" standard, he faces fines and professional sanctions.

This will make your preparer more cautious about signing your return. The preparer might have more questions for you, and might be less willing to accept your word that you have full documentation for the 300,000 business miles you put on your car last year.

So if you use a preparer, here are some tips for assembling your 2008 tax information in light of the new standards:

- If you take non-cash contribution deductions, don't just say "2 bags of clothes to Goodwill: $500." You should show the preparer that you have detail for the contribution, and a receipt from the charity for the items received.

- If you take travel and meal deductions, be sure to note that you have documentation for it. If you don't, you can't expect the preparer to just take your word for it anymore.

- Don't use "same as last year" for amounts for contributions, property taxes, and so on.

- If you are taking business losses on a schedule C, E, or F, be ready to document them for the preparer. If the losses have carried over for a pattern of years, you might have to answer extra questions.

- Don't be too surprised, or alarmed, if the preparer slips a Form 8275 "Disclosure Statement" in your return. This form, which discloses risky positions, probably won't trigger an audit unless the amounts involved are large, and it will let both you and your preparer sleep better.

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