With the coming new year comes tax season again.  Don’t wait till just before the April 15 deadline to plan your taxes.  The time to take action is now.  Here are some invaluable advice on how to plan your taxes for next year so that you pay not more than you should.

1. Make charitable donations

If you contribute to charity before December 31 this year, your contributions will count towards this year’s taxes.  Besides gifts of cash and kind, you can also contribute stocks that have performed well this year.  By contributing the stocks, you will not be taxed on your gains.  You can also go the conventional route by contributing in cash.  If you charge your contribution to your credit card, your contribution is counted as this year’s expenses even though you only pay towards your credit card next year.  Checks issued this year also count.  But you have to make all your contributions by December 31 this year.

1. Contribute more towards your IRA

If you have an Individual Retirement Account (IRA) like a 401(k) or 403(b), you can choose to contribute towards your account up to a maximum limit.  Check your withholding and see if you are already contributing to the maximum.  If not, you can increase your withholding and contribute as much as you can towards the maximum allowed.  By doing so, you increase the deductible amount from your taxable income and you pay less for this year’s taxes.

If you do not have a retirement account, there is still time to set one up because some types of accounts can be set up by December 31 whereas others can be created by April.

1. Work from home

If you are an independent business owner of some sort, you may want to consider moving your operations to your own house.  If you have a room or section of your house that is used as your permanent place of business, you can deduct 10% of the expenses such as rental, utilities and housekeeping expenses from your taxable income.  And you do not necessarily have to meet clients at your home office, either.  For example, you may be a plumber or electrician that makes house calls.

1. Claim Energy-saving credits

If you improve your home by installing energy-saving materials such as better insulation, windows or heating, you can claim a Nonbusiness Energy Property credit for 10% of the cost of such materials (installation costs may not count) up to a $500 lifetime maximum.  If you install only windows, the limit is $200.

If you install certain alternative energy producing equipment such as geothermal heat pumps, solar panels and wind turbines, you are entitled to claim 30% of its costs under the Residential Energy Efficient Property Credit.  But be sure to check the manufacturer’s tax credit certificate before making purchases of these materials and equipment.

1. Do not inflate 2012 income unnecessarily

In efforts to defer paying taxes, many taxpayers would push investment income from this year to next year while claiming deductions this year.  But such a move may backfire if the tax rates increase in 2013 (which is likely).  Tax rates on long-term capital gains and qualified dividends could jump from the current 15% to as high as 35%.

I will continue with another 4 tax tips in my next article tomorrow.  Stay tuned.

2,600 North Carolinians due for Tax Refunds

2,621 taxpayers in North Carolina are due to receive tax refunds totaling $2,795,614 making it an average refund of $1,067 per person, according to Mark Hanson, IRS spokesman for North and South Carolina. However, these checks are unclaimed because of mailing address errors.

A breakdown according to counties shows that in Onslow County, 81 people are owed tax checks totaling $18,563.27. The average refund is worth $893. Carteret residents are owed $15,150 averaging $561 per refund while in Duplin 55 residents are due to be refunded $251,864 averaging $4,579 per person and 13 Pender residents are owed $18,563 averaging $1,428. In Jones County, 6 residents are due for refunds. The IRS does not keep statistical information of counties where less than 10 people are owed refunds.

If you think that the IRS owes you a refund which you have yet to receive, you should visit the IRS website and check the “Where’s my refund?” tool. Using this tool, you will be able to track your refund and in some cases receive instructions on how to resolve delivery problems. Alternatively, you can access “Where’s my refund?” through the telephone by dialing 1-800-829-1954. You will receive instructions on how to update your address.

Want to put an end to tax refund delivery problems? Choose direct deposit when filing your tax returns. You can do so whether you file electronically or physically. Even better is to file your returns electronically, which would eliminate the possibility of your tax return getting lost. Last year, more than 70% of taxpayers filed their tax returns using e-filing.

Bear in mind, you will never receive a notice from the IRS saying a refund is due neither would the IRS request for your personal banking information to deposit your refund. If you do receive such notices they are highly likely to be phishing scams and you should not respond to such mails (electronic or physical), neither should you open any attachment or click on any link in such email notices. Phishing scams are designed either to obtain your personal information to steal your money or send malicious software that could damage your computer.

The number of undeliverable refund checks is small in comparison to those that are successfully delivered and many of them belong to military personnel who may be transferred to another post before their refund checks could arrive. For such taxpayers, the most viable thing to do is to opt for direct deposits.
“If you’re using E-file and direct deposit, you don’t have to worry about whether that check is going to arrive in the mail before you leave,” Hanson said.

Some area newspapers have a list of local residents due for a refund in their online portals. Taxpayers should check for their own names and those of anyone else they know and alert them accordingly. Hanson said, “We’re trying to reach out and find these people,” he said. “You might know a friend, a coworker, a relative, an acquaintance.”

Tax Submission Deadline Extension for Some Tax-exempt Groups

The IRS has extended the tax submission deadline for tax-exempt organizations with January and February filing due dates, specifically those whose normal filing deadlines are either January 17 or February 15. Ordinarily, these deadlines would apply to organizations with a fiscal year that ended on August 31, 2011, or September 30, 2011, respectively. The deadline has been extended to March 30. If your tax-exempt organization has already obtained an initial three-month filing extension and now has an extended filing deadline that falls on January 17 or February 15, the extension also applies to you.

Most of the tax-exempt organizations will not be affected by the extension as they have their deadline for filing taxes on May 15. But if your organization has filed Forms 990, 990-EZ, 990-PF, or 1120-POL, then this extension applies to you. You do not have to fill up any form to obtain the extension.

This special extension of deadline is given because the part of the system that processes these specific electronically filed returns will be off-line during January and February. However, the rest of the e-filing system will continue to operate as normal so individuals and businesses should file their tax returns electronically to speed up processing. E-filing also facilitates tax refunds.

In order to avoid receiving a notice for a late filing penalty, a reasonable cause statement should be attached to the tax return. If your organization receives a late-filing penalty notice, you should contact the IRS so that these penalties might be abated.
Another 3,200 Orange County Charities Lose Tax-exempt Status

In June this year, the IRS conducted a massive deregistration exercise that revoked the tax-exempt status of thousands of previously tax-exempt organizations. Now in its latest exercise, the IRS has struck off another 3,200 or so charities in Orange County alone from its tax-exempt status list. Nationwide, the IRS has deregistered hundreds of thousands of such organizations for not filing their tax returns for 3 consecutive years.
In Orange County, the number of charities that had their tax-exempt status removed was 3,197 an increase of 2,738 in August and 2,222 in June. In the latest deregistration drive, some of the charities affected were the Laguna Hills Community Association and the Laguna Hills Lawn Bowling Club, American Legion Auxiliaries in several cities, the National Fuchsia Society in Garden Grove, and lots more.

These charities include school booster clubs, friends of the library clubs. swim, skating and soccer clubs, Toastmasters clubs, arts and theater groups, pet-related clubs, garden clubs, veterans groups etc. with their deregistration, all your donations and membership fees to these affected charities will no longer be eligible for tax deduction.

The IRS says that this exercise is to clean up the list of tax-exempt charities by removing those that are defunct and make the ones that remain more accountable. However, if any charity that has been struck off the list wants to reapply for tax exemption, the IRS is willing to help.

A federal court judge has granted permission for a John Doe summons requested by the IRS to be served on California’s Department of Equalization (DOE) seeking information on taxpayers who allegedly tried to evade taxes when transferring property to other family members without paying (or not paying enough) taxes between 2005 and 2010. Under the tax code, a person is allowed to transfer up to $5 million (previously $1 million) worth of assets over a lifetime to another family member without paying taxes. Any amount above the $5 million ceiling is subject to tax. Furthermore, a taxpayer is allowed to transfer up to $13,000 worth of assets to another person per year without having this amount counted towards the $5 million. Anything above $13,000 a year is counted towards the $5 million.

In order for the IRS to keep track of these transfers, taxpayers must fill up Form 709 United States Gift (and Generation-skipping transfer) Tax Return.

So far, the IRS has received data on these transfers from county or state officials in Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington state and Wisconsin. However, California’s BOE declined to submit data from their state because California State law does not allow the disclosure of such information without a court approved summons.

Earlier this year in May, an affidavit was filed by the Department of Justice that requested for a summons on California’s DOE but the request was declined by Eastern District of California’s Judge Morrison C. England Jr. who said the government had not shown that the IRS could not obtain such data from each of California’s 58 counties.

But in October, Josephine Bonaffini, the Federal/State Coordinator for the IRS’ Estate and Gift Tax Program re-filed the affidavit and this time, the judge noted that some California counties might not have kept accurate records of family transfers of assets thus making it “most reliable and least burdensome” to obtain the data directly from the DOE itself.

So now the arrangement would go like this – the counties will compile the data and send it to the BOE so that the BOE can administer California’s Proposition 13, an initiative passed by voters in 1978 which limits annual property assessment increases to 2% or less unless a property is sold. Subsequently two other initiatives, Propositions 58 and 193 were passed that permit property transferred to children and, in certain circumstances, grandchildren, to retain the 2% cap on condition that the requisite information is sent to the BOE where it is entered into a database. After the data has been processed by the BOE, they will submit the information to the IRS.

A John Doe summons is a summons that is not for any specific named person but is meant for all taxpayers who are of a certain group of people the IRS suspects might have broken the law. Recent examples of John Doe summonses were for information on taxpayers who allegedly used their offshore bank accounts in UBS Bank and HSBC Holdings to evade taxes.

Have you heard of the “Basis Step Up Rule”? This is arguably one of the tax provisions in the tax code that is least known and least taken advantage of. But if you understand what this rule is, you can potentially save tens of thousands of dollars in capital gains tax. Let me explain.

The “Basis Step Up Rule” has to do with inherited property. Obviously, inherited property in turn has to do with estate duty tax. When a taxpayer passes away, the government may tax his or her estate with the estate duty tax, also known as the “Death Tax”. However, estate duty tax only applies if your estate is worth more than $5 million at the time of death. This provision applies till the end of the 2012 tax year. It is important to bear in mind this ceiling of $5 million because it has an effect on the “Basis Step up Rule”.

This is how the “Basis Step up Rule” works. Basically, the rule allows the heir of any inherited property to base any capital gains tax when a property is sold on the market value of the property at the time of death (i.e. the time the property is passed down) and not at the time the property was purchased.

Suppose John Doe buys a house for $100,000 in 1980. He passes away this year (2011) and in his will, he passes the ownership of the house to his son, Joe. If Joe subsequently sells the house, he ought to be subjected to capital gains tax. But with the “Basis Step up Rule”, this capital gains tax could be lowered to zero. The “Basis Step Up Rule” allows the house to be appraised according to current market value at the time of death. Suppose the house is now worth $250,000 in 2011. If Joe were to sell it at $260,000 he would only have to pay capital gains tax on the $10,000 profit ($260,000 – $250,000) and not on $150,000 (i.e. the selling price of $250,000 in 2011 – the purchase price of $100,000 in 1980).

Now if Joe sells the property at the price of $250,000 (the price it is appraised at the time of death), then Joe pays zero capital gains tax. Needless to say, this rule results in hefty savings in taxes.

This means that the appraisal of the property at the time of death is very important. Without a clear understanding of estate duty tax, an appraiser may value the property wrongly. Using the example above, suppose an inexperienced appraiser values the house Joe inherits at $200,000 instead of $250,000 to lessen the overall estate duty tax due on John Doe’s estate. Then if Joe sells the house for $260,000, then he has to pay capital gains tax on $60,000 (instead of $10,000 like in the example above).

This is why it is important to bear in mind the $5 million ceiling in estate tax. If John Doe’s estate is not worth anywhere near $5 million even if the house is valued at $250,000 (its actual market value), then the appraiser should declare its value as $250,000. And even if John Doe’s estate is worth more than $5 million if the house is valued at $250,000, it is worth calculating if the estate duty payable is more than the capital gains tax payable if the house is sold at $260,000.

That is why it is important to consult a tax attorney in cases like this so that you can receive the best advice that will save you the most amount of money in taxes.

If you need help in sorting out your estate taxes to take full advantage of the “Basis Step Up Rule”, call us at (813) 229 7100 for a free consultation.