Thursday, March 14, 2013

Tax Planning

Tax Planning


University of Missouri Extension and the Department of Personal Financial Planning operate a Volunteer Income Tax Assistance site on the MU campus (times and locations). In this tip, I want to share with you some ideas I have gleaned from my interactions with clients over the years. Some of these may run against conventional wisdom, but before you call me crazy, consider what I am proposing. If you still think I am crazy, let us know by sending an email or commenting on our blog.


Never rely on your refund to save you

The vast majority of returns process correctly. However, that means that a sliver of returns do not process correctly. Over the years, client’s refunds have been delayed for several reasons. The IRS may decide to look closer at a return, the return may have been prepared incorrectly, or other unique problems may arise. I remember one taxpayer who came in and was counting on the refund to make a payment on a vehicle loan. The money didn’t come through in time, and he lost his vehicle.


There are avenues to explore if your refund is taking longer than expected. The Taxpayer Advocate is your voice at the IRS, and this agency within the IRS can sometimes accelerate or investigate refunds that have become ‘stuck’. However, the Advocate has tightened what cases it will accept, so you shouldn’t automatically expect the Advocate to step in and help you either.


Receiving a refund by direct deposit or check may be inferior to the third choice

Checks can be stolen from mailboxes. Direct deposit routing and account numbers can be entered incorrectly. Both of these problems can eventually be fixed, but the process can take several weeks. The third option is to use your refund to pay next year’s taxes. I first really considered this option when I looked at the tax returns for the leaders of our country:


President Obama’s 2011 tax return:


President Obama’s 2008 tax return:


President Bush’s 2005 tax return:


There is an option on the 1040 page 2 for your refund to be applied to next year’s tax bill as an estimated payment. You are letting the government keep your money (which is not optimal), but you can offset this by changing your withholding so that you have less taken from your paycheck.


W4s can be confusing, so you might try an online calculator to help you plan:

IRS calculator:

ADP calculator: 


Or get no refund at all

Vice President Biden’s return demonstrates this point:

Vice President Biden’s 2011 tax return:

With an adjusted gross income of $379,035, he paid taxes of $237 with the filing of his tax return. The rest of his tax bill was paid through withholding. Good tax software (including those at the free tax assistance sites) can often calculate what your tax picture looks like next year. Owing a small amount lets you keep your money all year instead of letting the government hold onto it interest free.


Bring four years of returns with you when you prepare your taxes

You don’t have to bring everything, but bring at least the tax forms you filed. Several items on your current tax return will reference your past returns.


The Non Business Energy Credit includes lookbacks to prior tax years. The credit’s lifetime limitation for 2012 is $500. If you claimed over $500 in those prior years, then you get no credit this year.

The American Opportunity Credit for higher education can only be claimed in four tax years, and the IRS has revised form 8863 to ask taxpayers explicitly if they have claimed the credit in four prior years.

First time homeowners that claimed the First Time Homebuyer’s credit  in 2008 and 2009 (but not 2010!) must repay the credit over 15 years. The max amount of the credit was $7,500; over 15 years, that ends up being $500 a year.

If you sold capital assets in a prior year at a loss, but you were not able to use the entire loss to offset income, then you may be able to carry the loss forward to decrease income in future years.


Never destroy your tax returns

Tax returns tell stories. We often don’t consider them as family scrapbooks, but they actually are. They hold clues to who we worked for, when we were married, the birth of children, buying or selling a home, the organizations we donated or belonged to, and other small details.

I picture myself sitting with my grandchildren on a rainy day going through old tax returns and telling stories: here is when your grandmother and I were married; this is when we bought our first house and paid the interest; here is when we made some energy improvements; here is when we sold the house and moved; we made our first deductible contribution to the symphony society; here is when we first claimed your parents; etc…


In addition, old tax documents can help correct errors that could crop up in the future. For example, if your Social Security and Medicare wages are reported incorrectly in one year or several, it would be useful to have the documents to correct the error instead of scrambling to find replacements. The IRS can also audit you within six years of the due date of that year’s tax return.


Bonus tip: When you call the IRS at their main hotline, 1-800-829-1040, be patient and do not press any buttons on your phone

The automated phone tree at the IRS relies on touch tone phones. Almost all phones are touch tone, but some individuals still have their rotary phones. To allow people with rotary phones to talk to someone at the IRS, the IRS has left a secret way to get in touch with the operator who can connect your call. If you call the main number, 1-800-829-1040, and do not press any buttons, then the IRS assumes that you are calling from a rotary phone and will connect you to the operator. You will have to listen to many lists of options, but it is still easier than navigating the tree to speak to a human.


1 comment:

Edward Vance said...

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