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Tax Tips


IRS, Not
Certainly no one wants to send his hard earned dollars to Washington, at least no one yet has confessed such to me.  Most people complain about the high taxes they pay.  But more than taxes, I hear people complain about the IRS.  

For many, the IRS represents punishment and pain, for some fear and anger.  Rarely (actually never) have I known of someone who liked to talk to the IRS, much less meet with them.  But from time to time it is necessary to communicate with the IRS. Sometimes two minutes on the phone answering a question can forestall and audit.

There are however a couple of strategies that will serve to drastically reduce your exposure to the IRS.

First, have your return prepared by an experienced, qualified, professional return preparer that is familiar with IRS’ policies and procedures.  As this person is preparing your return, he/she will keep the IRS in mind and produce a product that will withstand scrutinizing by the IRS computers and auditors.  Should it be necessary, they can also represent you before the IRS, usually up to tax court.  Under most circumstances, you’ll never need to encounter the IRS personally.  Your representative will meet with them and talk with them in your stead.

Secondly, for you die-hard self-preparers who love to torture yourself at this time every year by doing your own returns, there is the strategy of “Audit Proofing” your return.  To audit proof your return, you would be sure for example that:

  • You have a receipt and an invoice for every allowed expenditure with your name and the date and the vender’s name clearly readable.

  • You will have prepared the IRS’s own worksheets for all positions on your return for which there could possibly be an argument. (For example, a valid dependency deduction for a relative or qualifying for the earned income credit.)

  • You will have available for inspection all bank statements and cancelled checks for the tax year. (Remember, not all banks return cancelled checks.  Those carbon booklets fade and are easily marred by simple handling.)

  • For all charitable contributions, you will have a valid receipt with the information (including IRS tax id number) on the charity, date and amount clearly legible.

  • You will send all quarterly or voluntary tax deposits and the return itself by certified mail, return-receipt-requested and retain proof of postage.

  • You will have justification for all income reported on the return to include W-2, 1099’s, broker statements, pension 1099’s, self employed 1099’s, settlement statements for reality sales, K-1’s, and royalty income statements (monthly and annually).

  • You will keep a daily calendar for the whole family documenting your business meetings, medical appointments and other tax-related matters.

  • You will have absolute proof of the date of purchase and amount paid for each asset sold.

  • For all mileage deductions, you will have a complete log or calendar supporting your miles driven, business purpose, date and place.

  • Lastly, you will take no position on your return that you have not thoroughly and totally researched, understood, and documented before hand.

  • Remember, record keeping, receipts, and research will defeat an IRS Audit.

Tax Breaks
What can kind of tax breaks are available to lower your 2000 taxes?
  • Put the maximum allowed into a SEP, Keogh or Simple plan.

  • Make a $2000 deductible IRA contribution if you are eligible.

  • Take the child tax credit of up to $1,500 for each qualifying child under 17 (subject to phase out for higher income). 

  • If you pay for childcare, take the child care credit of up to $720 for one child or $1,440 for 2 qualified dependents. 

  • Deduct up to $2,000 of interest paid on student loans. Itemization not required. Check to make sure your loans qualify.

  • If you paid for qualifying education expenses, the Hope or Lifetime learning credit may be available to you. The Hope allows $1,500 max credit per student per year for their 1st 2 years of college.

  • The Lifetime Learning Credit allows $1000 max credit per taxpayer per year for an unlimited number of years. 

  • If you donated to Goodwill or a similar organization, look up the IRS allowed rates. Most taxpayers under estimate the value of their inkind donations.

  • Take the earned income credit if you qualify. Be sure to look at the income levels of eligible taxpayers. Only low-income taxpayers qualify. This credit is available to childless taxpayers as well as taxpayers with children.

Tax law changes affecting small businesses and individuals
None of them are knock-your-socks off changes, but all are in your favor and even a little bit helps: 
  • The business mileage ratio is 32.5 cents per mile for all miles driven in 2000, up from the crazy 1999 year where part of '99 was at .31 and the other at .325. For year 2001, it rises to 34.5 cents.

  • There's another change (in a long line of changes) in the home office deduction. They have expanded the definition of "principle place of business". If you presently have an office in your home and do not take the deduction for a home office, review the new rules and see if you qualify. 

  • The maximum amount allowed for Section 179 expenses for 2000 is $20,000, up from $19,000 in 99. 

  • The deduction for self-employed health insurance is 60% for 2000. 

  • The definition of "foster child" for the purposes of dependency has changed. Be sure to look into the change if you have a dependent foster child. 

  • For senior citizens who reach age 65 (or full retirement age) in the year 2000, you can earn an unlimited amount of income and lose none of your Social Security benefits. 1999 earnings limited to $17,000 without limited benefits.

  • Some of you are or will know a clergy person who “elected out” of the Social Security system. They would have done this early in their careers and for some that was a long time ago. There is now and until April 2002, a window of time to “elect back” into the Social Security system. Form 2031, when attached to a timely filed or amended return for 2000 or 2001 will make it official.

  • Before taking this step, a clergy person should carefully analyze his/her financial situation, most particularly his/her retirement provosions. Consideration must be given to many issues before proceeding.

  • This same careful consideration should also be given to the decision to “elect out”. This opportunity to rejoin the Social Security system is rare and may never roll around again. As in all such important decisions, consult someone who can give you professional advice on this matter.

  • You will notice, in the signature area, a check box that will give the return preparer authority to answer questions regarding your tax return (Form 1040).  This provision can be great. It could possibly prevent an audit. The only power ticking this box conveys to your return preparer is the power to answer questions relative to items on the return. If you have a trusted tax return preparer, be sure to check the box. It could save everyone time, money and hassle.

Tax smart money management
  • Interest earned on Series EE savings bonds is not taxable if the interest is used for qualified education expenses.

  • Look for "tax advantaged" mutual funds. They are managed to generate a smaller current period yield. The intent is to hold them long term and realize a gain at a later sale. 

  • If you qualify be sure to contribute to a Roth IRA. When held for the proper time, neither the original contribution nor any of the earnings will be taxed. This is potentially an extremely incredible tax savings. 

  • Gains accumulated inside an annuity or life insurance policy are deferred from current period taxes and come out tax-free under certain circumstances. Be sure to get advice from a professional before you invest.

  • Many of you trade in stocks and (hopefully) generate capital gains. Beginning in years after 2000, a lower capital gain rate will apply to assets held more than 5 years. For these amounts, the usual 20% rate is reduced to 18%; the usual 10% is reduced to 8%.

  • What is the hitch? Taxpayers in the 28% bracket have to have acquired their assets after year 2000, and hold for 5 years to get the 18% rate.

  • Taxpayers in 15% bracket can acquire the amount in any year to qualify but must hold for 5 years and the sell date must be after 2000. 

  • Many of you who are holding assets (stocks, etc.) will never be able to qualify for the lower tax because of your purchase date. A really great provision has been made to allow the 28% taxpayer to convert his presently owned assets.

  • An election is available allowing a taxpayer to treat the asset as if it was sold on Jan. 1, 2001 at Fair Market Value. Taxpayers would report and pay tax on a “pretend” sale of the stock. Taxpayer then adds the gains to his/her basis in the asset and Voila! He/she then has transformed the asset into one qualifying for 18% rate in 5 years or more at the date of sale. Consider such “pretend” sales for your currently held stocks and mutual funds.

  • For those of you with potentially taxable personal estates, consider setting up a gifting plan. A systematic plan for gifting can help to reduce the exposure to federal inheritance taxes. Gifting programs frequently include gifts to both individuals and institutions. Colleges, churches, and many other fine charities can make excellent use of the monies that would otherwise be paid in taxes. Some really good financial planning could integrate a gifting program into a plan containing other tax strategies and actually result in a larger estate passing to your heirs. Consult a professional before you structure such a plan or invest in an insurance policy designed to save estate taxes. And, unfortunately, there are many scams and bad schemes out there that target people who are worried about "death taxes". Ask someone you trust to refer you to a professional. Furthermore, I advise you to get started early. We never know when we will be called to our “cabin in the sky”.

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