Taxpayers Should Act Now to Take Advantage of IRS Changes

Feb. 23 Taxpayers Should Act Now to Take Advantage of IRS Changes: Ginny Grimsley sent me this article.  It’s from 2013, but it’s still relevant now:

By: Rick Rodgers, CFP

Unlike last year, tax planning for 2013 is not hampered by uncertainties over alooming fiscal cliff. Unfortunately, there is always some uncertainty and a few expiring provisions to warrant special attention by taxpayers.

Managing income taxes at year end involves techniques designed to address three issues:

• Accelerating or deferring income: If a taxpayer expects to be in the same or a lower tax bracket next year, it's best to defer as much income as possible until after the yearend.

• Accelerating or deferring deductions: If a taxpayer's overall tax rate is the same in both years, accelerating deductions achieves tax savings this year rather than waiting for those tax savings to materialize next year.

• Take advantage of tax provisions scheduled to expire at the end of 2013. There are several temporary tax provisions which can only be used this year.

Tax planning begins by projecting income and deductions for the year to determine your tax bracket and income thresholds that trigger higher and/or additional taxes, or limits the effectiveness of deductions.  One of the impacts of the American Taxpayer Relief Act of 2012 (ATRA12) is the reintroduction of the Pease limitation, which can greatly limit itemized deductions.  Once a taxpayer knows what his or her income taxes will look like, it’s time to evaluate which techniques will help the most.

Strategies to accelerate or defer income:

 

• Adjust your elective deferral plans at work: Taxpayers who participate in 401(k), 403(b), most 457 plans, or in the Thrift Savings Plan can defer up to $17,500 this year.  Taxpayers age 50 and older can defer up to $23,000.

• Harvest capital gains or losses: Long-term capital gains are taxed at 0 percent for taxpayers in the 15 percent bracket.  Capital losses can be used to offset capital gains and reduce other income up to $3,000.

• Use the IRA. Taxpayers age 59 ½ and older can accelerate IRA distributions in 2013.  Contributions may be deductible depending on your income level and whether you’re covered by a retirement plan through work. Taxpayers under age 59½ can convert traditional IRAs to Roth IRAs to accelerate income.

• Health-care assistance: People with health savings accounts – available with some high-deductible health insurance policies -- can save up to $3,250 tax-deferred for an individual and $6,450 for a family.Those who are 55 and older can save an additional $1,000.  Flex spending contribution limits are capped at $2,500 this year.

Strategies to accelerate or defer deductions:

• Medical expenses: The Affordable Care Act (ACA) raises the income threshold this year to 10 percent of adjusted gross income for taxpayers under age 65.  The threshold remains at 7.5 percent for those 65 and older.  Taxpayers may need to prepare or defer medical bills to lump expenses in a single year to get the deduction.

• Gifts to charities: Use a donor advised fund (DAF) to maximize the tax savings from charitable giving.   A DAF makes gifting appreciated securities easier.  The DAF can be funded in tax years when the deduction will have the most impact.  Distribution to charities can be made at any time without tax consideration. 

• Qualified Charitable Distribution: This year only, taxpayers age 70½ or older can choose to direct up to $100,000 of their IRA-required minimum distribution to charity.  By doing so, the distribution does not show up as taxable income, which can lower taxation of Social Security benefits and help reduce other threshold levels to further minimize taxes.

ATRA12 extended—but did not make permanent—several tax incentives for individuals.Taxpayers should consider whether they can benefit from these incentives this year and plan accordingly.  The following provisions are set to expire on Dec. 31 unless extended again:

• State and local sales taxes deduction.  Taxpayer can choose between deducting state and local income taxes or the sales taxes they’ve paid through the year.

• Deduction for teacher expenses. Eligible educators can deduct up to $250 of any unreimbursed expenses.

• Deduction of mortgage insurance premiums. Payments of Private Mortgage Insurance premiums can be treated as deductible home mortgage interest in 2013.

• Discharge of principal residence indebtedness. This can be excluded from gross income this year.

• Qualified Charitable Distribution. Taxpayers can make tax-free charitable donations from their required IRA distributions.

2013 is certainly an exciting year for tax planning. Start now in order to minimize your tax bill in April. 

About Rick Rodgers: Certified Financial Planner® Rick Rodgers is president of Rodgers & Associates, “The Retirement Specialists,” in Lancaster, Pa., and author of “The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning.” He’s a Certified Retirement Counselor and member of the National Association of Personal Financial Advisers. Rodgers has been featured on national radio and TV shows, including “FOX Business News” and “The 700 Club,” and is available to speak at conferences and corporate events (www.RodgersSpeaks.com).  

 

Do You Live in Fear of an IRS Audit? 5 Red Flags to Avoid on Your Return: Ginny Grimsley sent me this article, by the same author as above:

By: Rick Rodgers, CFP

 

It is no secret that one of the biggest fears people have is receiving an audit notice from the IRS. It ranks right up there with being diagnosed with a life-threatening illness. Of course, the IRS does nothing to alleviate this fear because the more frightened you are, the less likely you will be to cheat on your taxes.

 

The IRS audited one out of every 104 tax returns in federal fiscal year 2013. It’s becoming increasingly evident that the greater your total income, the more you’ll attract the agency’s attention. Last year, the IRS audited about 10.85 percent of taxpayers with income greater than $1 million. The audit rate dropped to 0.88 percent for those with income less than $200,000.

 

Some of the audits were taxpayers pulled at random. The rest of the returns are selected for examination in a variety of ways.

 

Lowering your IRS profile will help minimize your chances of being audited.  Here are five ways to help you stay off the audit list.

 

1. Large Itemized Deductions: The IRS has established ranges for the amount of itemized deductions based on a taxpayer’s income. Deductions that exceed the statistical “norm” for a given state and region may be red-flagged for a closer look. This does not mean that you shouldn’t take legitimate deductions. Your deductions could exceed the IRS range due to high medical expenses and large charitable contributions. Take all valid tax deductions – just be sure you keep your backup documentation.

 

2. Self-Employment Income: The IRS believes that the vast amount of underreported income occurs among the self-employed. Self-employed taxpayers are audited by the IRS far more frequently than those who receive a W-2 for wages. People who are employed by others and receive W-2 income but also run a business that reports a loss are especially high on the IRS radar screen. You will need to be able to prove you are operating a business with the intention of earning a profit and not just trying to write off the expenses of a hobby. You will need to be able to pass both the “passive loss” and “hobby loss” rules in order for the deductions to stick.

 

3. Business Expenses: Big deductions for business meals, travel and entertainment are always ripe for audit. A large write-off will raise red flags if the amount seems too high for the business.  Taxpayers claiming 100 percent business use of a vehicle is also a huge red flag. The IRS knows it’s extremely rare for an individual to use a vehicle strictly for business.  The IRS looks for personal meals or claims that don’t satisfy the strict substantiation requirements.

 

4. Rental Properties: The IRS is scrutinizing rental real estate losses for those who claim to be real estate professionals.  You must meet two requirements:  1. More than half of the personal services are performed in real property trades or businesses in which you materially participate, and 2.You perform more than 750 hours of services in real property trades or businesses in which you materially participate.

 

5. Home Offices: Taxpayers who operate a business from their home are entitled to deduct the portion of their home that is dedicated to operating the business. The IRS believes that many taxpayers use this deduction as a means of writing off personal expenses and carefully scrutinize tax returns that claim the home office deduction.

 

Claiming this deduction greatly increases the chances that your tax return will be audited. You should consult a tax expert to determine if you are entitled to claim this deduction. If the tax savings are minimal you may opt not to claim the deduction simply to avoid the scrutiny. For details, see IRS Publication 587.

 

There is no way to completely audit-proof your return, and if you do get an audit notice from the IRS, don’t take it personally. It does not mean the IRS believes your return is fraudulent. When you get a notice, pick up a copy of IRS Publication 1 “Your Rights as a Taxpayer.” Be courteous and helpful without volunteering more information than what is requested. Plan ahead so that you are organized and can answer questions promptly. Ask for a postponement if you need more time to prepare.

 

If you are a self-employed taxpayer or have unusual circumstances that place your return outside of the statistical norm, let a professional prepare the return. Self- prepared returns are themselves more likely to be audited. The IRS believes that a non-professional has limited knowledge of the 4,000 pages of tax code.

 

Tax law is complex. The fee charged by an Enrolled Agent or CPA can be easily justified by the peace of mind they bring if you get the dreaded audit notice.

 

About Rick Rodgers: Certified Financial Planner Rick Rodgers is president of Rodgers & Associates, “The Retirement Specialists,” in Lancaster, Pa., and author of “The New Three-Legged Stool: A Tax Efficient Approach to Retirement Planning.” He’s a Certified Retirement Counselor and member of the National Association of Personal Financial Advisers. Rodgers has been featured on national radio and TV shows, including “FOX Business News” and “The 700 Club,” and is available to speak at conferences and corporate events (www.RodgersSpeaks.com).