Glen Beck wants people to pay higher taxes

April 19, 2011

Sorry…this is a little I-need-a-break-from-taxes-for-10-minutes-for-a-rant post.

Today I spoke to the third person this season who has taken all, or nearly all, of their money out of their IRA accounts in one shot because “Obama’s gonna take it away if I don’t.” SERIOUSLY?!? What is wrong with these people?!

I don’t listen to Beck or Limbaugh or those types…though these clients made it clear that they did. And apparently there’s a meme out there promoted in right-wing circles that Obama’s got some plan to tax away all their IRA money…and you need to cash everything in NOW if you want to avoid it. Say what you will about future tax rates, but I’m talking about people who, apart from their massive IRA withdrawals, have well under $50,000 of income annually. Their tax rates are 15% or less currently, and there’s no way in the world their tax rates are going to over 30%. But thanks to cashing in six figures of IRA money in one year, they’re paying tax on their lifetime of savings at an effective tax rate of 30% or more.

Way to go, radical right-wing talking heads! You’ve convinced seniors they need to fork over 30%+ of their life savings to the IRS. (Plus another 10% to the state tax man in many cases.) Hope you’re proud of yourselves.


Top 10 loopholes for same-sex spouses in the tax code

April 4, 2011

Same-sex couples face many forms of legal discrimination, particularly around the issue of recognition of marriage. However, because the tax code was not written with same-sex spouses and Registered Domestic Partners in mind, there a number of loopholes that offer benefits to same-sex spouses. In many situations, it is possible–through careful planning in some cases–for same-sex spouses to get better tax treatment than spouses whose marriage is recognized by the federal government.  Continuing a theme from recent posts, here’s a collection of my favorite benefits I’ve found for same-sex spouses in the tax code…some new and some already covered.

  1. High income earners? If both spouses earn six-figure incomes (or higher), you’ll probably benefit from better tax brackets than married couples filing jointly. This also applies if there is one high earner in a community property state (e.g. California). More on that here.
  2. Did you take a large loss on stock or other assets? If you don’t want to sell other stock at a large gain to offset a large loss, capital losses can carry forward year over year for a very long time, with only $3,000 allowed as a deduction each year on a Joint return. If same-sex spouses held the asset as joint or community property, they can EACH take the $3,000 allowance, effectively doubling the deduction available.
  3. Do you own rental property? Married couples filing Jointly are limited to a $25,000 loss on rental property, and this is only allowed as a deduction if the Joint AGI is less than $150k. For a same-sex married couple who each file Single, a jointly owned property can generate deductions of up to $25,000 EACH, and this deduction is available for each spouse whose individual AGI is less than $150k. In a community property state, this effectively allows a same-sex couple to deduct up to $50,000 annually on rental property, and not lose this deduction completely until combined AGI exceeds $300,000.
  4. Both spouses taking grad school classes? There is a “per return” limit on education credits and deductions of $2000 and $4000, respectively. Same-sex spouses effectively double that limit by each filing a Single return
  5. Want to sell an asset to a family member without recognizing gain? This is normally very tricky to do thanks to very restrictive “related party” rules in the tax code. But for purposes of the tax code, your same-sex spouse, and family related to you through the same-sex spouse, aren’t legally related to you. So like-kind exchanges with family members are fair game. (These are complicated, so consult a professional before taking any action in this area.)
  6. Got kids? It’s usually possible for one spouse to file Head of Household while the other files a Single return. The end result of this strategy is the couple gets far more favorable tax brackets than they would if they filed with Married Filing Joint status.
  7. Got kids (part II)? Same-sex spouses get much higher income limits for claiming the Earned Income Credit. A married couple filing Joint can no longer claim EIC once their combined income reaches $50,000. But for same-sex couples who must file Single, this limit can be significantly higher, over $80,000 in some cases. And if there’s more than one child, the couple can claim a substantially higher amount of Earned Income Credit by splitting up the dependent deductions.
  8. Got kids (part III)? One of the most generous credits in the tax code is the Adoption Credit. This credit generally provides for a dollar-for-dollar tax credit of up to $13,170 (for 2010) for qualified adoption expenses. Essentially, it’s a direct reimbursement of adoption expenses. One caveat is that the credit is not available to individuals who adopt their spouse’s child. But of course that doesn’t apply here. The government will pay the adoption costs for a same-sex spouse or RDP to legally adopt their child (up to the annual maximum, of course).
  9. Need to transfer some wealth and avoid estate & gift taxes? There are ways to use trusts to transfer large amounts of wealth while only recognizing a small amount in the transfer. Some of these methods (explained in IRC Section 2702) are banned as “abusive” when practiced between family members…but the federal government doesn’t recognize your spouse, or your spouse’s family, as your family, so this opens up a variety of legal techniques for transferring huge amounts of wealth without transfer taxes.
  10. OK, I’ve been trying to finish up the “Top 10” for about a week now. Since it was actually a client that brought #8 to my attention, I’m going to open this up to the community and see if anybody else has run across a benefit in the tax code because the federal government doesn’t recognize your relationship.
  11. (Alternate #10) And if I don’t get a suggestion for #10, there’s always the fall-back of the 50% reduction in self-employment taxes for same-sex spouses. I don’t include this in the actual “top 10” because it’s almost certain to be challenged by the IRS…but it sure looks like a loophole to me. We’ll probably have to wait for the courts to decide whether this one works or not.

So while it’s good news that DOMA appears to be on its way toward the dust bin of history…the down side is same-sex couples may soon lose out on some valuable tax breaks. So enjoy them while they last. And feel free to pass this on to your conservative friends as yet another reason they shouldn’t oppose gay marriage.

Sometimes it’s BETTER to file taxes late

April 2, 2011

It’s getting to that point in the year when many tax filing procrastinators start to panic about the looming deadline. And if they think about just giving up and taking everything to a professional, they’ll find many professionals have to tell clients who haven’t submitted all of their info yet that their return won’t be completed before the April deadline. This leaves people with the choices of…

  1. do their best to do their own taxes and hope everything comes out OK,
  2. take their taxes to one of the “McDonalds'” of tax preparation…the big national chains with plenty of minimally-trained, low-paid part-timers who will enter everything in a computer for you and hope it comes out OK, OR
  3. file their taxes LATE and risk being carted off to federal prison!

Well this post is to let people know that filing your taxes late is not a one-way ticket to the slammer. In fact, in many cases simply filing an extension (more on that later), and making sure you get your taxes right–even if a little late–is the wisest choice to make.

People make mistakes when they hurry and they’re rushed. It’s human nature. Whether you prepare your own taxes, or pay somebody to do it for you, chances are whoever is working on your return in early April may feel a little pressure to get things done by the deadline. I’m unaware of any studies addressing this issue, but I would consider it almost a certainty that tax returns filed in the first half of April are more likely to contain mistakes than returns filed at other times. And fixing those mistakes later can be costly and time-consuming.

If you have investments, it’s very common to receive “corrected” statements regarding your income in March or April, and sometimes even later. If you have complex investments–particularly if you receive investment income reported on a Schedule K-1–you might not want to rush out and file because there may be corrected statements coming your way.

Also, if you pay somebody to do your return, you’re probably more likely to get that person’s undivided attention, and maybe even a little bit better rate, if you’re willing to work with them outside of the busy part of tax filing season.

But what about penalties and keeping the IRS off your back? Well these are certainly legitimate concerns, but let me explain what the actual consequences of filing late are so you can make an informed choice.

Penalties for filing late are based on your tax due. If you have no tax due because you’re getting a refund, then there’s no penalty. I’ve known clients who wait a few years and then file several years all at once. (I don’t recommend that approach, but some people are comfortable with it.)

If you do owe tax, the penalties are actually fairly minor as long as you file an extension. You can avoid the penalty completely by filing an extension and making a payment with that extension. Of course, if you don’t have your return done, how are you supposed to know how much to pay, right? Well, there are tools you can use to estimate your tax liability (TaxCaster is a pretty user-friendly, free tool to use for this purpose). Aim high with your estimate, and then when you file you’ll get the excess back–often with interest!

If your estimate comes in low, but you filed the extension, the late payment penalty is only 0.5% of the amount of underpayment, per month the payment is late. So if you owe an extra $5000, and you file and pay only one month late, then your late payment penalty is a whopping $25. Two months late…$50. So even for a fairly significant tax liability, the late payment penalty is often less than the cost of a parking ticket. There’s interest as well. But at 4% annually, this is almost too low to worry about.

One other consideration is whether filing late raises “red flags” or guarantees an audit. I’ve never seen any evidence that people who file extensions and file a few months late face a higher audit risk. The only possible downside is the IRS has 3 years to audit your return from the filing deadline or when you actually file, whichever is later. So filing after the April deadline can extend the time the IRS has to review your return. But if the IRS hasn’t selected your return for audit in 3 years, I wouldn’t worry much about the chance they’ll choose you in that extra month or two.

Of course, if you owe taxes and fail to file an extension by the filing deadline, then the situation is very different. If you owe money and haven’t filed a return or extension, the late filing penalty is 5% per month…ten times the rate for simply paying late. This can add up fast. So if you don’t think you’re going to be able to file by the deadline, then just follow these Instructions and get that extension filed (it’s easy).