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Sometimes people ask me to predict changes in the Tax Laws of the US. Since what actually hits taxpayers is first negotiated between the White House and the Congress, with its two parties in each of two Houses, and then interpreted by the IRS and at times the Courts, this is a difficult task. I will only venture to say that before the Bush Tax Cuts we were at historically average rates and then with those cuts we went to historically low rates. My guess is that the President and the Congress will focus primarily on things other than taxes in 2009 so as far as I can see there probably won’t be major tax changes in 2009. The Bush Cuts are already set to expire at the end of 2009 and President Obama will favor letting that happen. I think and the NAEA thinks that he will most likely get his way so that rates in 2010 are higher than they are today.

What does this mean for tax planning?  You obviously need more tax savings in higher income years. So if your income in 2009 seems to have been more than you expect it to be in 2010 then go on and take it this year. If your income in 2010 is as great or greater than in 2009 I believe that you will be glad for any tax savings you were able to pass forward because I believe that rates for many taxpayers will be higher in 2010 and subsequent years. I know that the President has promised that he will not increase the tax burden on people with incomes below a certain point but I believe that he is going to have to go back on that promise.

My best advice in this whole piece would be to sit down with a tax professional at your earliest convenience and lay before this individual your entire financial life and most of the rest of your life and get some personal one on one tax planning.  Let me whet your appetitie with a few examples of what may be possible.

Let’s say that you have a large medical bill that you were planning to pay in December. Before you do that, total up the bills you have already paid. If they are so high that you clearly exceed the 7.5% of agi threshold to be able to claim medical expenses on Sch A or if they are so low that even with the December bill you won’t be able to claim your medical expenses this year, then it makes sense to call the Doctor and ask if you may pay on the first business day in January without causing a problem. Doctors pay taxes also and the ones who do not demand payment in full at the time services are rendered generally will help you out in this way.

If you need more itemized deductions this year than you will next year you can always prepay your January Mortgage payment any time in December. That will raise your mortgage interest for 09 and reduce your principal but unless you also make 12 payments in 10 your interest for 10 will be decreased. I do not recommend that someone who thinks that they need more in 10 postpone the December payment unless their payment due date is in very late December and 1/2 is still within their grace period. The problem here is the non tax consequences of a late mortgage payment including but not limited to bad impact on your credit rating, late payment fees, and a possible increase in your mortgage interest rate.  Your Mortgage Lender is not generally as easy to get along with as your Doctor.

If you don’t have the money in 09 for your contribution to your Traditional or Roth IRA, never fear. You may count the contribution for 2008 as long as you  make it by 4/15/10 and as long as the custodian agrees that you clearly told them you wanted to do that. In these cases it is best to get a letter from someone that the contribution will count for 09.  Then in 10 you can work on raising the money for your 10 contribution and keep up your progress toward a comfortable retirement.

If you are covered by an employer pension plan and do not contribute the maximum allowed or at least the amount that gets the maximum matching from the employer, then consider contributing more in December. I know that right now the economy is down but if your pension is invested in solid stocks and solid debt instruments, it will come back eventually.

Let me close by reminding you to sit down with your tax professional asap to talk about such moves as these. If you do not have a tax professional or you are dissatisfied with that individual I would be most pleased to sit down with you soon.

Tags: Federal, General Information, Tax Planning, Uncategorized // Add Comment »

Most Americans believe that the current Federal Income Tax needs to be reformed. There is less agreement over what the reform should look like.  For example, some  believe that wealthy people pay too little tax while others would further reduce all tax rates or only those of the middle and upper classes. It has even been proposed that we scrap the Income Tax and replace it with a tax on consumption. Other people simply want to reduce the complexity of the income tax code in various ways. The problem with all of these plans is that every tax savings has a Special Interest Lobby dedicated to saving it and all of the other complexities in the code were put there to stop what was perceived as abusive employment of one or more of the tax saving complexities. What do you believe would constitute real tax reform?

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I believe that it makes sense to file your taxes electronically rather than on paper as long as you make sure to avoid sending your data overseas. As I mentioned in an earlier entry, that often happens and it can be a mistake because laws regarding your privacy and the safety of your data from thieves are not the same in all countries as they are here in the US. Let’s talk about what happens when you file a paper return and when you electronically file a return.

A paper return is often sent in by ordinary First Class Mail. This does not tell you when or if the return is received and it certainly does not provide proof of delivery. Services that do tell you when your return was received and provide proof cost extra. With electronic filing, you know that your return was received, you know when it was received, and you know when it has passed checks for the most common sorts of errors. If it does not pass these checks it comes back to the preparer where it can be easily fixed.  I do not often have a return rejected and in most cases when I do I find that neither the bottom line or anything I printed for the client needs to change.  In the rare event that anything the client would care about changes, I get in touch with them before I re file. With an electronically filed return you know that the return you or your tax professional prepared is the return the Government has in its computer systems. Paper returns must be manually keyed in and while this is generally done correctly, errors can and do occur and when they do the taxpayer gets a letter from the government. Nine out of every ten clients surveyed preferred not to receive letters from the government about their taxes.

So for all these reasons I believe that Electronic Filing is the safest and easiest way to file your taxes as long as you do not send your data outside the US. My clients do not have to worry about that because their data stays safely in the US.

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Before you decide who will electronically file your return or choose software or a website to do it yourself, be sure to find out the location of the center, if any, where your data will be sent before it goes to the IRS and your State. Many of these filing centers are overseas. The use of an overseas filing center will be disclosed to you in something you have to sign but this bit of information may be easy to overlook. The problem with sending your data overseas is that laws differ from country to country and while overseas your data may not be treated with the privacy and security protections you expect. I have always used filing centers in the US. The center I will use in 2010 is in Franklin North Carolina and if I prepare your return your data never leaves this country.

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Broadly speaking there are five kinds of Tax Professionals. There are Unenrolled Preparers, Enrolled Agents, Accountants, Certified Public Accountants, and Tax Attorneys. Certainly there are very competent and ethical individuals as well as incompetent and unethical individuals in all of these categories.

An Unenrolled Preparer is one who does tax returns without qualifying for any other title. Not all states allow these individuals to sign returns as paid preparers but most including North Carolina do. If you know one of these individuals or have a recommendation of one from someone you know and trust, you may be very happy with the individual. Generally they charge the lowest fees of any Tax Professionals. The only problem is that their designation tells you nothing about the individual’s training, experience, or ethics.

In North Carolina, the same things I said about the Unenrolled Preparer apply to Accountants because in this state anyone who pays the Secretary of State $50 per year may use this title. In many other states there are educational or other requirements to be met before claiming this label, but not in NC.

Unenrolled Preparers and Accountants can represent you in an audit if they prepared your return. They cannot represent you if your case moves to Collections or Appeals or to the Courts.

Certified Public Accountants have received graduate degrees in accounting, passed a rigorous examination covering both taxes and other accounting matters, and done a period of satisfactory work under the direct or indirect supervision of a CPA. They can prepare your return and represent you in front of the taxing agencies. If a case goes to the US Tax Court as a “Small Matter” they can represent you there as well but they cannot otherwise represent you in Court. They are generally the most expensive of the Tax Professionals we have discussed so far.

Tax Attorneys have done Bachelor’s degrees of one sort or another, followed by JD Degrees and usually an LLM in taxation. They have passed the bar examination, usually in the state where they practice. They possess great knowledge. Not only can they prepare your returns and represent you in front of the taxing agencies, they can represent you in court. They are the most expensive Tax Professionals around.

Enrolled Agents have demonstrated their knowledge of the tax code and they are required to do continuing education so that their skills and knowledge remain current. They can prepare your returns, represent you in front of the taxing agencies, and handle a US Tax Court “Small Claim”. Let’s face it,  most taxpayers who are not in the top one or two percent of all incomes do not find court fights with the IRS to be in their best interests. I would argue that for most taxpayers, an Enrolled Agent can prepare your returns and give you all the representation you will ever need and do it for a very fair price.

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An Enrolled Agent is a Federally authorized Tax Professional who is able to represent taxpayers before the Internal Revenue Service for audits, collections, and appeals.

Although they are not required to do so, all State and Local Income taxing agencies allow Enrolled Agents to represent taxpayers before them as well.

There are two ways to become an Enrolled Agent. The first is to work for the IRS for five years in a position that regularly involves interpreting the tax code. The second is to pass the rigorous Special Enrollment Examination. After completing either of these steps the candidate must pass a rigorous background examination and allow all of his or her own previously filed returns to be audited. I passed the Special Enrollment Examination in 1996 the first time I took it.

The Title Enrolled Agent was created by the Congress of the United States in 1884. There was felt to be a need to limit who could represent taxpayers before the US Treasury Department because unscrupulous advisors were helping people submit false claims of loss developing out of the Civil War.

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