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Over the years we have seen people spend hours fighting over a $100 over charge by their credit card company, yet spend little to no time learning how to reduce their tax bill by thousands of dollars. This little 10 page guide will take you less than 15 minutes to simply read from end-to-end. It will take you a little longer to figure out what applies to your situation, but in the grand scheme of things it will still only be a few minutes. But if you do the above two things, you may be able to literally shave thousands, if not hundreds of thousands of dollars from your future tax bills!
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What’s even better is that we’re 100% positive that you can find something in this guide that you can use. Furthermore, these aren’t just some “foo-foo” list of tax strategies that you can find out on the internet. No, these are proven strategies developed/researched over many years that are often overlooked, forgotten or simply not implemented. Want a sample of what’s inside? Here is just a taste of what you’ll get:
Business Start-Up Costs: Start-up costs are amounts paid or incurred for: (a) creating an active trade or business; or (b) investigating the creation or acquisition of an active trade or business. The fees you pay for can be written off/amortized over a period of 60 months or more.
Alimony: You may deduct the amount of alimony or separate maintenance in the year paid BUT, you must include in income the amount of alimony or separate maintenance you received.
IRS Statute of Limitations: Did you know the IRS only has 10 years from the date the tax is assessed to collect it? But the IRS won’t tell you to stop paying them if the statute has expired; you’ll just have to know that you don’t have to pay them anymore. Learn more in our post here.
Employing Your Children: You can hire and pay your children a reasonable salary to work in your business. Just make sure the job is within their ability and documented with a job description. What’s more is the first $6,100 in wages (in 2013) will not create a tax liability for the child AND you can still claim them as a dependent on your tax return!
Business Clothing: Are you required to wear certain clothes as a condition of performing your job? If they are not reimbursed by your employer AND not suitable for everyday wear, then the expense is tax deductible. Wear a suit to court as an attorney? Sorry, the IRS will probably disallow the expense if you claim it.
Exemptions to the Obamacare Penalty
The public debate over the Affordable Care Act (a.k.a Obamacare) continues to rage, despite the fact that the law has already kicked in. While businesses have been granted an extension for complying with the law, individuals must be in compliance by having health insurance from the beginning of 2014 forward.
In this post we discussed the penalty called the individual responsibility payment; since many think it’s only $95 (hint: it could be more). This penalty is assessed against a taxpayer who failed to obtain health coverage and was “required” to. However, this penalty has a number of exemptions that will permit numerous people to avoid actually paying it. Listed below are the three broad exception categories.
Hardship. Examples of situations that apply to the hardship exemption include a recent bankruptcy, the death of a family member and having medical expenses you were unable to pay within the past two years. Thus, if you’ve experienced a hardship that kept you from obtaining insurance, chances are you will qualify for the exemption.
Statutory Exemptions. The penalty won’t apply if your income is too low to require you to file a tax return, or if you’ve been uninsured for less than three months out of the year. You can also avoid the penalty if the lowest priced health insurance that is available to you would cost more than 8% of your income. If you’re an expat, and not lawfully present in the United States, then the penalty also will not apply.
Exempt Persons/Groups. Members of federally recognized Native American tribes, members of recognized health care sharing ministries, and members of recognized religious sects with religious objections to insurance are not required to obtain coverage.
With these extensive exemptions available, combined with the fact that the ACA prohibits the IRS from using it’s otherwise extensive collections authority to actually collect the penalty, it’s unclear how much of this penalty money the government will actually collect. For a full list of exemptions available to you, check out this link.
If you need assistance with determining whether or not one of the exemptions applies to your particular situation, be sure to give us a call at 773-239-850 or shoot us an email at the address below.
The Obamacare Penalty
A few days ago we got an email from one of the big tax chains telling us how the Affordable are Act (a.k.a. Obamacare) was going to be a game changer next tax season. It said we should consider joining their team because their world class organization was going to be prepared to deal with the fallout.
This email contained a video with a tax preparer talking all this “mumbo jumbo” to a client who was convinced that he only had to pay a $95 penalty for not having health insurance. The reality is that many taxpayers think that is the case. They are DEAD wrong! In this post we wrote about how the ACA’s penalty worked, but figured it may be beneficial for you if we just gave a quick recap in this one.
The most misunderstood part of Obamacare is the individual mandate that every American not covered by Medicaid, Medicare, or health insurance must purchase health insurance or pay a penalty known as an “individual shared responsibility fee.” This penalty, however, has a number of exemptions that will permit numerous people to avoid actually paying the penalty. We’ll outline those exceptions in an upcoming post. Now back to the penalty…
For tax year 2014 the penalty is the GREATER of $95 per adult and $47.50 per child (up to a maximum of $285 per family) OR 1 percent of taxable income. For 2015 it is the greater of $325 per adult and $162.50 per child (up to a maximum of $975 per family) or 2 percent of taxable income. For 2016 it is the greater of $695 per adult and $347.50 per child (up to a maximum of $2,085 per family) or 2.5 percent of taxable income.
Thus, let’s say that you are single and make $100,000. Your penalty for tax year 2014 for not having health coverage will be $95 or 1 percent of your income; which would be $1,000 in this example. You can learn more on how the penalty is calculated and see further examples here.
Not every tax preparer keeps up with the law, nor will they be prepared to deal with this come next tax season. Also, many will struggle to explain to their clients WHY their refund suddenly decreased.
We, on the other hand, will be thoroughly prepared to deal with this. If you have an ACA related question, feel free to give us a call at 773-239-8850 or shoot us an email via the link below. Taking good care of OUR clients is just one of the ways we stay ahead of the competition!
Taxes & Cashing In Your Life Insurance Policy
Cash-value life insurance, such as whole life and universal life, build reserves through excess premiums plus earnings. These deposits are held in a cash-accumulation account within the policy. However, when a cash value policy is cancelled (surrendered), some of the proceeds that you receive may be taxable.
Some of the tax consequences that you want to consider are:
- Cash-value withdrawals are not always received income-tax free. For example, if you take a withdrawal during in the first 15 years of the policy and the withdrawal causes a reduction in the policy’s death benefit, some or all of the withdrawn cash could be subject to taxation.
- Withdrawals are treated as taxable to the extent that they exceed your basis in the policy. Ones basis is the total premiums paid for the policy less any refunded premiums, rebates, dividends or underpaid loans that were not included in income. Thus, if you are thinking of cashing it out you will want to know how much you invested in terms of premiums over the course of the policy.
- If your policy has been classified as an Modified Endowment Contract (MEC), withdrawals generally are taxed according to the rules applicable to annuities – cash disbursements are considered to be made from interest first and are subject to income tax and possibly the 10% early-withdrawal penalty if you’re under age 59 1/2 at the time of the withdrawal.
If you’re looking for the IRS guidance on how to determine how much is taxable, we suggest looking at at the “Life Insurance” section of Publication 525 or taking a look at Rev. Rul 2009-13.
Tax Debt and 10 Year Statute of Limitations
Many taxpayers, and some practitioners, are unaware that the Internal Revenue Service (IRS) by law only has 10 years’ time to collect a tax debt. This is referred to as the statute of limitations or in IRS speak, the Collection Statute Expiration Date or CSED for short. This post will talk about what the CSED is, how to obtain it, what can change its date and how to stop paying taxes once it expires.
How Long Can the IRS Collect a Debt?
Per Internal Revenue Code (IRC) Section 6502, the limit on the IRS’ ability to collect a debt is 10 years. However, as we discuss below, most of the “popular” legal methods used to deal with tax debt also stop the CSED “clock” from running. In some cases it actually makes more sense for the taxpayer to just let the clock run.
When Does the Clock Start?
The 10-year period begins to run with the date of the “assessment” of the tax, not the tax year for which taxes are due. For example, if a return for 2012 is not filed until 2014 and the tax is assessed in 2014, the 10-year period begins to run in 2014 and expires in 2024.
The date of assessment is the date the tax liability is assessed on a particular form at an IRS Service Center. When the applicable form is signed by an IRS official, the 10-year period for that tax liability starts to run. When interest and late payment penalties (as well as other penalties) related to that tax year are tacked onto the underlying tax debt, they too must be collected within the same 10-year period.
If you never filed a tax return, but the IRS filed one for you (i.e. using a Substitute for Return or SFR), then the statute of limitations began to run whenever that assessment was processed by the IRS on your behalf.
How Can I Find Out My CSED?
To determine when the CSED began for a particular liability, the best approach is to obtain a transcript of the taxpayer´s IRS account. Transcripts should exist for each tax year and provide basic information such as the date of assessment, date of filing, and tax liability.
Taxpayers can request account transcripts on their own behalf by filing IRS Form 4506-T or requesting them online. You can then attempt to analyze the data, perform the necessary calculations and hope you arrive at the correct answer.
Another method of calculating the CSED is to look at the “Date of Assessment” for a particular tax period if you have received IRS Form 668 (Y)(c) – Notice of Federal Tax Lien. You would then calculate out approximately 10 years from this date to see when the CSED expires.
My Tax Debt Is Older Than 10 Years But The CSED Hasn’t Elapsed. Why?
While the IRS only has ten years to collect a debt, there are certain factors that can extend or pause the CSED. This is known as “tolling the statute of limitations.” Events that stop or “toll” the statute of limitations include:
- Filing Certain Appeals – in most cases, the statute also doesn’t run the entire time an IRS Appeal is pending.
- Filing an Offer in Compromise (OIC) – the statute of limitations does not run the entire time your Offer is under review, including any Appeals that you exercise, plus an additional 30 days.
- Filing a Lawsuit Against the IRS – the statute of limitations does not run while litigation against the IRS is pending.
- Filing Bankruptcy – the statute of limitations does not run the entire time you are under the protection of the bankruptcy courts or for the six months following the discharge or dismissal of the bankruptcy.
If you exercised any of these options in the past, there was probably a period of time when the statute was not running. Said another way, during any time period in which the IRS is legally unable to pursue you for collection of the debt, the statute of limitations is not running. For a complete list of tolling events and the associated time, check out IRS Publication 594 and look at “How Long We Have To Collect Taxes.”
Will the IRS Notify Me Once the CSED Elapses?
No, the IRS is not required to notify you once the debt has expired. However, they are not legally allowed to pursue collection of the debt. Thus, you will usually just stop hearing from them if your debt has expired.
My CSED Has Elapsed – Now What?
If the CSED has elapsed, congratulations! All that remains is cleaning up the chaos that your tax problem left in your life. You will need to ensure that a TC 608 credit to zero out the debt has been entered into the IRS system. You should also ensure that a Release of Federal Tax Lien is filed so that you can begin the process of repairing your credit.
My CSED Has Not Elapsed – Now What?
If your CSED hasn’t elapsed, but it is getting close, the best thing to do might be to get a plan in place with the IRS to ensure you’re protected from aggressive collection action. This may include entering into a monthly payment plan or negotiating for your account to be placed into currently not collectible status (a “temporarily” status where you aren’t required to pay the IRS).
Do YOU Need Help With Your IRS Debt?
While you could go through the hassle of calculating your CSED, do you really want to? For a flat $150 fee, and us filing a few forms with the IRS (with your consent), we’ll look at however many years you want to analyze, and provide you with a comprehensive report that will include:
- Total tax assessment, penalty, interest and accrual amounts for each year (so you know how much you really owe)
- CSED calculations for each year requested
- Tolling events (if any) and the days your CSED has been extended
- All IRS notices sent/received for each year
- IRS account activity by year
- And much, much more (we promise)
Call us at (773) 239-8850 or click our email address at the bottom of this screen to get started.
By the way, this post (the one you’r reading) is by far the most viewed on our site. Why? Because many people have tax issues that they want to resolve. If you have old tax returns that need to be filed or want to learn how a professional can help you with your situation, why not visit our sister site File Old Tax Returns? You might be surprised to learn that we may be able to help you out for less than you are thinking. Plus, hear some valuable information on your taxpayer rights from the IRS Commissioner himself!
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