In my previous article, I wrote on some tax moves you can make to reap some cool tax benefits next year. But these moves must be done before December 31, 2011. Here are those I have shared in my previous article:

1. Energy efficient home improvements
2. Giving
3. Contribute more to an IRA
4. Take up the minimum IRA distribution

Here are other things you can do to save some tax money next year.

5. Sell off losing shares

Go through your investment portfolio and identify losing stocks and sell them at a loss (to cut your losses). These losses can be deducted from your capital gains tax by up to the amount of gains plus $3,000 extra.

6. Deduct your sales tax in lieu of state income tax

If you live in a state where there is no state income tax, you should consider buying large assets like motor vehicles or mobile homes and itemizing your deductions when you file your tax returns. You are allowed to add state and local sales taxes you paid in 2011 to the deductions from the IRS sales tax tables. In addition to motor vehicles and mobile homes, other major asset expenses like renovations to your home and a house extension also qualify.

7. Revise your tax withholding

Most taxpayers overestimate their tax withholding and end up receiving a substantial refund check a year later. Why not reduce your tax withholding and receive more in your salary? If you are an employee, go to the IRS website, www.irs.gov and use the Withholding Calculator to calculate the amount of withholding you should make. If the amount of withholding you have been making is substantially higher than necessary, you may want to submit a fresh W-4 Form to your employer next month. If you are not an employee, you can increase or decrease the estimated tax payments you make to the IRS for 2012.

8. Update name and marital status changes with the SSA

You should inform the Social Security Administration (SSA) of any changes in your marital status and name so that their records are in synch with that of the IRS before you file your tax return. If the records do not tally, whatever tax refund you are entitled to will be delayed. Likewise, you should inform the SSA, IRS and your employer of any change in your address. For more information, visit the SSA website at www.socialsecurity.gov.

9. Make arrangements with the IRS to pay your taxes

If you have found it a burden to pay last year’s taxes, do contact the IRS now to make arrangements for payment next year. Recently, the IRS announced the new Fresh Start program in 2011 that offers relief to many individuals and small businesses struggling to pay their taxes. Find out more at www.irs.gov by searching “Fresh Start” in the search box.

As the year draws to a close, you have two weeks left to make your tax moves that will make you eligible for various 2011 tax benefits when tax season reopens next month. According to IRS spokesman Dan Boone, “In order to claim certain benefits on your 2011 taxes, you must take action no later than December 31st. Action now could save you money later.” Here are some tax moves you can make to reap the tax benefits next year.

1. Energy efficient home improvements

By installing energy efficient windows, doors and other fittings, you can claim 10% of the costs up to a maximum of $500. If you install geothermal, solar and other alternative energy generating equipment, you can claim even more. These home improvements will not only reduce next year’s tax bill but save you dollars in energy consumption in the long run as well. But these installations must be made by December 31, 2011. For further details, visit www.energystar.gov.

2. Giving

There are two ways giving can qualify you for tax benefits. The first way is giving up to $13,000 as a gift in cash or kind to anyone. You can do this and not have to file a gift tax return.
The second way is to donate to charity. To prove your giving, you need to show a cancelled check, bank or credit card statement or at times a written confirmation from the charitable organization showing the name of the charity, the amount donated and the date of donation (which must be before December 31, 2011). Credit card contributions are tax deductible even if the payment is made in 2012. If you give gifts in kind to the charity, they must be in good condition and you require an official receipt from the charity organization.

3. Contribute more to an IRA

There are many Individual Retirement Accounts (IRAs) in existence. There is the 401(k) employer-sponsored plan, the 403(b) plan for employees of public schools and certain tax-exempt organizations, the 457 plan for state and local civil servants and the Thrift Savings Plan for federal civil servants. Contributions to all these IRAs made by December 31, 2011 are tax-exempt. But if by April 17, 2012 you set up new IRA or add money to an existing IRA you can gain more tax exemptions for 2011. For 2011, you can contribute up to $5,000 to a traditional IRA, up to $11,500 to a Simple IRA and up to $16,500 to a 401(k) employer plan. Contributors 50 years old and above can contribute more due to the ‘Catch Up’ provision.

4. Take up the minimum IRA distribution

If you are aged 70 and a half and above with an IRA, you must take a 2011 required minimum distribution (RMD) from your IRA before January 1st, 2012 to avoid a penalty. This requirement was recently reinstated last year and this year.

I will continue with more tax moves to benefit you in my next article so stay tuned!

For a man who serves on the finance committee overseeing the expenditure of billions of tax dollars, it’s incredulous that Marion Barry cannot keep his own tax liability current. According to the District of Columbia Office of the Recorder of Deeds, the IRS has filed a tax lien against Barry for unpaid taxes of $3,200 in 2010. This tax lien is not the first. There was another one prior to this filed two years ago for $15,000 unpaid taxes between 2005 and 2008.

On top of these two liens, former mayor Barry pleaded guilty to misdemeanor in another case involving more than $500,000 in unpaid taxes derived from his earnings as a consultant from 1999 to 2004. In March 2006, Barry was sentenced to three years’ probation as a result. The latest lien was worded in a similar way as the last one – “As provided by … the Internal Revenue Code, we are giving a notice that taxes (including interest and penalties) have been assessed against the following named taxpayer (referring to Barry). We have made a demand for payment, but it remains unpaid.”

Last year, the IRS filed tax liens against about 1.1 million taxpayers. Pete Sepp, vice president of the National Taxpayers Union said, “When it comes to tax liens, the IRS is not always on the side of angels, nor is it completely unheard of for the tax agency to pursue high-profile figures.”

Ironically, Mr. Barry serves on the D.C. Council Committee on Finance and Revenue, which is responsible for taxation and revenue matters.

Mr. Barry’s more recent tax troubles haven’t impacted his criminal tax case. In 2009, prosecutors asked US Magistrate judge Deborah A. Robinson to send Barry to jail and revoke his probation. Prosecutors based their motion on the fact that Barry continually failed to file his own tax returns even after pleading guilty to misdemeanor in 2005. But the judge rejected the motion and instead extended Barry’s probation to March 2011.
Court records show that Barry’s wages were garnished to pay for his tax debts. Besides this, Barry also got into trouble with his own council colleagues last year for using his position to land a contract for his girlfriend and trying to cover up the investigations into the matter.

Nevertheless despite all his problems, Barry easily won re-election in 2008. Said Barry, “I’ve committed myself to bringing hope, resources and a big vision to the people of Washington, D.C. In these 31 years of public service, my work has touched every citizen, directly or indirectly, in the District of Columbia in a positive way.”

Since the federal government does not recognize same sex marriages, gays and lesbians are not allowed certain rights when it comes to taxes that straight couples are. For example, gays and lesbians cannot file joint income tax returns. But along with disadvantages should come advantages also. For instance, lesbians who adopt a child wishing to claim the adoption credit should technically be allowed to do so whereas straight couples cannot because the law states that you cannot claim tax credits when you adopt your spouse’s child. Since lesbians are not considered married, then the adoption tax credit is allowable to a lesbian who adopts her partner’s child.

The adoption credit directly offsets the taxes you are liable to and is a refundable credit, meaning if the credit is more than your tax liability, you get to claim the difference as a refund. For 2011, the adoption tax credit can go as high as $13,360 and is claimable only once between a couple. This makes the credit very attractive and in turn also more likely to be abused. This has caused the IRS to be extra careful in scrutinizing the claims for the adoption credit.

68% of the 100,000 or so adoption credit claims were audited by mail according to a Government Accountability Office (GAO) report. These claims came from both gay and straight couples. Generally, claims from gay and lesbian couples were denied with various reasons. But at least 2 of those reasons given to lesbian couples were highly questionable. One of them was that the birth mother did not relinquish her rights as part of the adoption. Under normal circumstances with a straight couple wishing to adopt, it is not unusual for the birth mother not to give up her rights but this is not something a lesbian birth mother would do since her partner is simply performing a “second parent” adoption. Furthermore, there is nothing in the law that says relinquishing of parental rights is a prerequisite for claiming the adoption tax credit.

The other common reason given by the IRS for declining is that the adoptive mother is the domestic partner to the lesbian birth mother. But the law does not prohibit domestic partners from claiming the credit.
According to the GAO report, the IRS did not adequately instruct its officers about these aspects of the adoption credit. As a result, they were not fully prepared to deal with claims by lesbian couples. The IRS admitted to making a mistake in an isolated number of cases and said they had rectified the errors. The agency issued a statement saying it regretted any inconvenience caused and that it has provided more training to their officers on this matter.

The IRS allows any taxpayer who feels they have been wrongly denied the adoption credit (both gay and straight) to contact the agency to resolve the matter. You will likely be required to provide appropriate documentation to substantiate your claim. So if you or your partner receive an audit notice from the IRS asking for more information in the next tax season, you should reply to them within the time frame given you. Most taxpayers have been granted the credit after clarifying matters with the IRS.

If you are living or working outside of the US and draw an income from there, you should declare your taxable foreign income by filing your tax returns and offshore bank accounts. The IRS has been cracking down on taxpayers who have taxable income outside of the US but have not been declaring them in order to evade taxes. Two months ago, the IRS concluded its most recent Offshore Voluntary Disclosure Initiative (OVDI) in which thousands of taxpayers with offshore income participated. Under the OVDI, participants who declared their offshore income were spared criminal prosecution and only had to pay the due penalties.

But if your overseas income does not make you liable for tax, then you will not bear any penalty at all, neither will you have to face any prosecution. The IRS has issued a fact sheet to say that US citizens who owe no US tax will not be subject to penalties for failure to file returns in the past. In addition, the fact sheet also states that US citizens will not be punished for failing to file Reports of Foreign Bank and Financial Accounts (FBAR) if they can show reasonable cause for not filing.

The fact sheet says, “[T]axpayers who owe no US tax (e.g. due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties. In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause.”
But even though you are not liable for tax, you still have to file your returns. Under the law, you are required to file your foreign taxes and FBARs up to 6 years back. Also, every year the foreign income earned exclusion limit is adjusted to reflect inflation. For instance, in 2011 the limit was $92,900 (USD) for individuals and in 2012 it is $95,100 (USD). This means if you earn less than $92,900, you are not taxable, but you still have to declare your income. In addition, you are also entitled to deductions and exclusions for foreign housing amounts.

The IRS fact sheet goes on to say that US citizen living in the Cayman Islands earning less than the foreign earned income exclusion amount each year can file their US income tax returns that they have not filed over the past six years and not worry about any penalties.

On the other hand, if you fail to file your tax returns, you could lose that foreign earned income exclusion and be subject to tax and penalties. Also, the penalties for failure to file and failure to pay income tax are calculated according to the amount of tax due. The amount of penalty starts from 5% of tax due to a maximum of 25% for each of the two offences.

If you possess more than $10,000 (USD) in offshore financial accounts, you need to submit a FBAR in June every year otherwise you may be subject to a penalty depending on whether your failure to submit was “willful or non-willful”. The willful penalty can go up to the greater of $100,000 (USD) or 50% of the total foreign account balance, while the non-willful penalty is up to $10,000 (USD) per violation.