Yesterday, I mentioned a few legal tax havens. Of course, I’m not telling you names of countries where you can stash your cash overseas to avoid paying taxes. That would not be legal. I’m telling you about legal tax havens right here in the United States. These are ways to save on your taxes the legal way, without opening an offshore bank account. So here’s what we covered yesterday:

1. Your own home
2. Investment real estate
3. Exchange advantages

Today, I’m going to give you a few more legal tax havens you can tap into.

4. Business tax shelters

As long as you own a business whether full-time or part-time you can take advantage of some IRS-approved tax shelters. For example, you can deduct the cost of acquiring business assets in the tax year they are made, according to Section 179 of the tax code. If you don’t take advantage of this provision, the cost of assets like furniture, fixtures and fittings you buy for your business would have to be recovered through depreciation over several years.

If you work your business from home, you could take advantage of certain home office deductions. With this tax break, you can convert some of the maintenance cost of your home (like house repairs, householders insurance, cleaning bills etc) to tax deductions. But you have to comply with the conditions of this tax break set by the IRS. In fact, you can also hire your own family members in your business and by doing so, further save on your taxes by providing more deductions to the business.

5. Municipal bonds

Yesterday, we talked about investments in real estate. Maybe you’re not into real estate due to shortage of funds but you still want to take advantage of tax shelters through investments. I suggest municipal bonds, which are issued by state or local governments. Why? The reason is simple – some states do not tax interest on bonds issued by their municipalities. And as icing to the cake, the IRS does not tax municipal bond income at federal level.

6. Workplace tax benefits

Like most of the American tax-paying public, you are likely a wage earner. But that does not mean there are no tax havens for you. As a wage earner you can take advantage of workplace tax benefits. You can start a flexible spending account to help pay child care costs and out-of-pocket medical expenses. This pre-tax break can allow you to contribute money to your account before payroll taxes are figured. In addition this same tax benefit is also available for workplace 401(k) retirement plans.

7. Retirement plans

Other outside-the-office retirement savings can also you provide you with a tax haven. Some traditional IRA owners might get an immediate tax deduction on their returns, along with a deferral of taxes on the IRA earnings. Even your Roth IRA can help you reduce your taxes. You are not allowed to deduct your Roth contributions, but when you eventually take money out of the account, you don’t have to pay taxes on it.
If you are a business owner, you have a few retirement plans (like SEP and SIMPLE IRAs, Keoghs, Solo 401(k)s) that can help reduce your taxable business income and make life easier after you retire.

So there you have it. Various tax havens you can take advantage of right here and now. Do these and you will have more cash in your pocket at the end of the day.

Since Fathers’ Day is around the corner, I want to give you some good news (especially if you’re a tax-paying dad). I will share with you some IRS-approved legal tax havens. You never thought ‘legal tax haven’ and ‘IRS’ could be said with the same breath, did you? See? I told you this is good news. In fact, not only are these tax havens legal (for a change) they are open to almost every taxpayer to easily take advantage of. Here are the legal tax havens.

1. Your own home

As a home owner, you enjoy tax-cutting opportunities the moment you bought your house and they remain until you sell it. Among the tax benefits are deductions for all or part of your mortgage interest, interest on certain home equity loans, points paid to get the loan and your annual property tax payments. Use these tax benefits to reduce your taxes every year.

When you finally sell your house, you get tax benefits, too. You will be spared from taxes for up to $250,000 in profit for individual taxpayers and if you are a married couple filing jointly, your tax break is twice that amount. This tax shelter applies to every principal home you ever own as long as you have lived in the house at least two out of the five years prior to your sale.

2. Investment real estate

Real estate you buy for investment purposes also offers some chances for tax shelters. For example, you can write off the depreciation costs on such real estate. Furthermore, with this kind of investment, you can make a small down payment on the real estate yet base your depreciation deduction on the entire purchase price.

Besides depreciation on the investment real estate, you can also write off mortgage interest, have real estate tax deductions and maintenance costs. Obviously, when you finally sell this real estate, you are liable for capital gains tax based on the profit. But you might be able to delay that bill by taking advantage of the following tax law.

3. Exchange advantages

According to Internal Revenue Code Section 1031 you can postpone paying taxes on investment property by swapping it for another. Also known as a like-kind exchange, you sell a property and then use those proceeds to purchase another like one.

When you eventually sell the new property, you'll recognize the originally deferred gain plus any additional accrued since you purchased the replacement property. But if you don't need the proceeds and just want to get rid of the property, a 1031 exchange could help postpone an investment tax bill. In effect, you get an interest-free loan from the government in the amount you would have paid in taxes.

There are other pertinent details to this tax shelter, so if you're interested in a 1031 exchange, call us at (813) 229 7100 for a free consultation. We can help you navigate through the complex requirements you have to comply with in order to make this tax shelter work for you.
Stay tuned for more legal tax havens tomorrow.

 

The most famous (or infamous) Ponzi scheme in recent years was the Bernard Madoff scandal where Madoff lost an estimated $65 billion in investor funds. But there are hundreds of other less known Ponzi schemes that continue to victimize innocent taxpayers just looking for investment opportunities. If you have lost money on a Ponzi scheme, there’s something you should know. You can enjoy some tax breaks to lessen your tax liability. The IRS states that you can write off your losses as ordinary losses instead of capital losses.

The difference in how taxes are calculated can be substantial. If you classify your Ponzi loss as a capital loss, you can only deduct up to the extent of capital gains for the year, plus another $3,000 ($1,500 if you use married filing separate status). Any leftover capital losses get carried forward to the following year, and the same limitation rule applies all over again. This means it can take a long time to fully deduct capital losses, depending on how much you lost in the scheme.

But if you classify your Ponzi loss as an ordinary loss, they can be written off against any type of income (wages, investment income, interest income, capital gains, self-employment income etc). If you have a big ordinary loss that exceeds what you can deduct in the loss year, the excess can potentially create a net operating loss. You can carry a net operating loss back to previous years and recover taxes you paid earlier, or you can carry it forward to shield your income in future years, which will be especially helpful if tax rates go up.

The proviso that allows you to classify your Ponzi loss as an ordinary loss is if the money you invested in the scheme was not used for its intended purposes but instead was siphoned illegally to splurge on the lavish lifestyle of the perpetrators or some other expenses.

According to IRS Revenue Ruling 2009-9 and IRS Revenue Procedure 2009-20, the ordinary loss from a Ponzi investment scheme can be written off as an itemized deduction (on Schedule A of Form 1040) resulting in:

• Full deduction without regard to the limitations that apply to garden-variety personal theft losses.

• Full deduction without regard to other rules that reduce write-offs for other types of itemized deductions.

• Full deduction under the alternative minimum tax (AMT) rules.

• Deduction on Form 1040 for the year in which you discover the loss. However, the loss must be reduced by claims for reimbursement for which you have a reasonable prospect of recovery.

• A net operating loss that you can carry back to the three previous years or forward to the next 20 years. Even better, a special rule allows you to carry back a net operating loss created by a 2008 Ponzi loss for up to five years (vs. the normal three years).

• Deduction of a safe-harbor loss amount on the return for the year that the loss is discovered. The IRS will allow the safe-harbor loss with no questions asked, thus preventing lengthy and expensive disputes about the amount and timing of losses. Just keep in mind that the safe-harbor privilege is only allowed for losses discovered after 2007.

What is Form 668(Y) and what is it used for? If you don’t already know, Form 668(Y) is known as the Notice of Federal Tax Lien. When the IRS issues one to you, it means they have placed a federal lien on one or more of your properties. A lien is a claim to the rights to a property. This means if you sell your property, the proceeds must go first to the IRS to satisfy your back taxes. Only after all your tax debts are settled, the leftover proceeds (if any) are given to you.

Also, once a Form 668(Y) is issued to you, it goes on public record and the lien appears on your credit reports, and your FICO credit falls by up to 200 points. Besides that, even after your tax liability is fully settled, Form 668(Y) stays on your credit record for 7 years thereafter. Sucks, huh? So the best thing to do is to avoid a lien altogether.

Since prevention is better than cure in this case, it’s important to ensure that you are current in your filings. You have to file your tax returns every year regardless of whether you can afford payment or not. Then if you truly cannot afford to pay off your entire tax debt, you should negotiate with the IRS to make installment payments. When you have agreed on an installment plan, stick to it at all costs. This will prevent the IRS from issuing Form 668(Y) to you.

If you default on your installments, you should immediately re-negotiate your position with the IRS, explaining to them why you cannot honor your agreement. Worse comes to worse, you can make an offer in compromise where you propose to pay less than your total tax liability as full settlement. If the IRS accepts your offer in compromise, you can then have Form 668(Y) expunged from your tax case.

But if you have already been issued with Form 668(Y), what can you do about it?

The essential thing you must do is settle your entire tax debt. As stated above, you can do so via an installment agreement. When you have fully settled your taxes, then to annul Form 668(Y), you need to fill out Form 12277 Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. On Form Form 12277, make sure you have checked the box indicating that the request was in the best interest of the government and the taxpayer. Once the IRS is satisfied with your tax settlement, they will issue IRS form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien to you.

Did you know there is an independent service within the IRS that is set up to help you resolve your tax issues? It is called the Tax Advocacy Service (TAS) and is known as “your voice in the IRS”. The TAS will help you stand up for your rights as a taxpayer. It is also completely free to use.

If you have tried to settle your tax problems through the usual channels of correspondences, negotiation and discussion but to no avail, it’s time you try the TAS. Also if the IRS has been sending you notices demanding you pay up your back taxes and it appears like collection actions by the IRS is inevitable, you should seriously consider contacting the TAS. Essentially, if you have experienced a delay of more than 30 days to resolve your tax issue, or have not received a response or resolution to the problem by the date that was promised by the IRS, you should contact the TAS.

The TAS helps taxpayers and business taxpayers whose tax problems are causing them financial difficulty, which could include the cost of hiring professional representation, such as a tax attorney.

If you qualify for tax advocacy help, you will be assigned to an Advocate who will listen to your situation, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved.

There is at least one local Taxpayer Advocate office in every state, the District of Columbia, and Puerto Rico. You can obtain the number of your local Taxpayer Advocate from your local phone book, in Pub. 1546, Taxpayer Advocate Service – Your Voice at the IRS and on the IRS website at www.irs.gov/advocate. You can also call TAS toll-free at 1-877-777-4778.

TAS also handles tax problems that may have a broad impact on more than just one taxpayer. You can report these "systemic" issues to TAS through the Systemic Advocacy Management System at the IRS website.