Deductions or Credits?

One of the most confusing components of the Internal Revenue Code of the United States of America is the difference between deductions and credits. Let’s explore a few of these differences and provide you a guide as to how to select the appropriate approach to lower your income taxes for 2021.

Many younger, married couples desire to own a home. In 2021, due to the effects of the pandemic on supply chains and logistics, the cost of the various materials to build a home has risen significantly. A good method of lowering the overall cost of the home is to take advantage of any credits that may be available to you for home ownership. For example, when renting a personal residence, you receive no income tax benefits for your monthly rental payments. However, when you are investing in a personal residence, the current law allows deductions for ad valorem taxes and mortgage interest. 

Notice in the previous sentence I used the word “deductions”. What if you had a more advantageous means of benefitting from home ownership? The First-Time Homebuyer Credit is available for those individuals who have not owned a principal residence in the 3-year period ending on the date of the purchase of the principal residence to which this credit applies. To many millennials, this is an incentive to invest in real estate for potential growth in the future.

The credit amount for purchasing your home, for tax year 2021, is limited to $8,000 or ten percent of the purchase price of the residence.

Additional considerations must be examined to determine qualification for the credit such as purchase price limitations of the home, modified adjusted gross income of the taxpayer (buyer) and the location of the property. Claiming this credit may sound confusing but the benefits exceed the time involved to determine qualification. Consult with your tax adviser or Certified Financial Planner™ professional prior to purchasing your first home to determine if you qualify for this generous credit.

The benefit of a tax credit as opposed to a tax deduction is that a credit offsets your tax liability dollar-for-dollar. For example, lets assume, in a very simplistic example, that you calculated your tax liability for the year 2020 and you owe $15,000 of tax and had $6,000 of federal income tax withholding from your paycheck. This would require you to pay the $9,000 deficiency out of your savings when filing your return. However, if you had qualified for a credit that would offset the deficiency of $9,000, say the First-Time Homebuyer Credit of $8,000, you would only need $1,000 of your savings to completely pay your tax bill.

The deductions for mortgage interest and ad valorem taxes are opportunities to save additional taxes but credits are more valuable to you due to the ability to offset the tax burden directly. Further, you may not accumulate a sufficient amount of itemized deductions for the year in which you buy your first home. The mortgage interest and associated taxes would not be helpful in lowering your income taxes if you can’t exceed the allowed standard deduction.

One of the bedrock principles of tax planning is to take advantage of legal opportunities to lower your tax burden to the lowest possible amount legally owed. Judge Learned Hand’s quote of patriotism in taxation comes to mind – “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” 

Well said, Judge Hand. I’ll see you on the jogging trail!

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Your Philosophy of Taxes is Critical to your Success

It is time to file your 2020 individual income tax returns. Many people face this task with trepidation and stress. To help you focus on this important obligation of all Americans, I am providing you some simple, yet effective, strategies to reduce this process to its simplest form.

First, do not procrastinate until April of each year to begin preparing for this required activity. Too many of us dislike the process of gathering and organizing our information to perform the task of preparing our returns. Do you remember the question about tackling big projects? You know, “How do you eat an elephant?” The answer for the previous query, as well as the approach to your organization of tax information is the same, “one bite at a time”.

Every month, when you receive your bank and credit card statements, review them and highlight the line items that may be an income or deduction for your returns. Take a blank piece of paper and record the line items in their respective categories you determine on the paper. This sheet of paper will be your accumulator of all the monthly items of income or deductions for you.

Provide the sheet along with all your information returns received from your employer, banks, payers, investment accounts, etc. to your tax preparer as soon as possible in the month of February. Why so early? Keep in mind that most tax preparers work on a First-In-First-Out Method of completing returns for their clients. Also, by providing this information early in the term of tax season you will be gaining access and services from your preparer before the fatigue and craziness of tax season sets in.

Second, think about the types of deductions you can perform that allow you keep control of your money. Of course, I am referring to contributions to your employer-provided retirement plan, Traditional Individual Retirement Accounts and Roth Individual Retirement Accounts. What a great opportunity you have available to increase your security for the future while taking a current tax deduction on your returns! 

Because of the pandemic, you have an additional month to contribute to your IRA or Roth IRA. If you wish to contribute to these tax-qualified accounts and claim the deduction on your 2020 income tax return, you must do so by May 17, 2021. The maximum contribution for individuals under age 50 is $6,000 for the 2020 tax year. For those of us 50 years of age or older, $7,000 is the contribution limit. The question becomes “how much should I contribute?” Of course, the answer may differ for everyone based on his or her particular facts and circumstances. However, I do have an answer that applies – as much as you are allowed by law! 

Once your tax year has lapsed, your available deductions are limited. It is imperative that you take advantage of the provisions within the Internal Revenue Code and maximize your tax savings each year. A wise, old proverb found in the Bible guides us about managing our money properly: “Of what use is money in the hand of a fool, since he has no desire to get wisdom.” A friend asked me why money is so important to me. I informed him that money is not important to me, it is the freedom it affords me that is priceless.

Your philosophy toward filing and paying taxes should be one of gratitude. There are many people in countries without basic living needs such as running water, highways to drive on, food that is edible and medical care for the elderly and children. How are these programs funded in the United States of America? With our tax dollars! One of my favorite quotes of Judge Oliver Wendell Holmes, “Taxes are the price we pay for a civilized society.” Be grateful you pay income taxes each year. This act of filing and paying taxes means that your family had a means of support and enjoyed far more of life than many others may.

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Tax Relief For Recent Disaster Victims

The Internal Revenue Service (IRS), a branch of the U.S. Treasury Department in which we are all familiar, issued a news bulletin today that described the tax relief provided Oklahomans whose lives were significantly disrupted by recent snow and winter storms. President Biden declared the State of Oklahoma a disaster area availing the leaders of our state, counties and municipalities to receive Federal Emergency Management Agency assistance for housing and other human needs. Taxpayers are entitled to relief, too!

To avail yourself to the relief granted by the IRS, you must live or have a business in the affected disaster area. All of Oklahoma’s seventy-seven counties were declared disaster areas allowing all citizens that need tax relief may receive it. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines. For example, any business or individual tax returns, and related payments, required between February 8, 2021, and April 15, 2021, will now be due on June 15, 2021.

This relief will generally apply to most types of tax returns and payments. For example, if you are an individual or joint filer, your return would typically be due on April 15, 2021. Considering the relief granted by the IRS, your return is now due on June 15, 2021, without the filing of an extension of time to file or the payment of any tax owed. For those individuals subject to estimated tax payments, primarily self-employed or those with non-wage income, you will not be required to remit your first quarter tax payment until June 15, 2021. 

One word of caution. Quarterly tax payments are due on April 15, June 15, September 15, and January 15 for calendar-year filers such as individuals. This would mean that your estimated tax payment due on April 15 and the second quarter tax payment due on June 15, 2021, are both due on the same day. Therefore, you are liable penalties should both payments fail to be remitted timely. 

Some good news is found in the emergency relief declaration! For individuals who wish to contribute to an Individual Retirement Account (IRA) or Roth Individual Retirement Account (Roth IRA) they have until June 15, 2021, to make their contribution for a possible 2020 income tax deduction. This is the time to take advantage of the two-month period for reducing your taxes and contributing to your future for qualified individuals!

For those taxpayers who suffered a casualty loss caused by the disaster, the option to claim the loss on the return in the year the casualty occurred or claim on the preceding year (2020) is available. This election, which must be claimed on a timely filed return, and may help relieve the tax burden some taxpayers would otherwise have been required to pay on June 15, 2021.

Should you receive a notice of penalty for late payment of your 2020 income taxes or estimated tax payments for those filed on June 15, 2021, the IRS will provide abatement of the penalties by calling the telephone number provided on the notice. It is wise to consult with your CPA or tax preparer to determine what steps should be taken to achieve the relief sought from this declaration.

Other types of taxpayers are allowed additional time to file returns, too. For example, if the entity is a corporation, partnership, trust or exempt organization, with an original due date for the 2020 tax return between February 8 and April 15, the due date is now June 15, 2021. However, any Forms W-2 or 1099 that are due by February 28, 2021, should be filed in a timely manner or an extension of time filed with the IRS. 

If your records were destroyed during the disaster, the IRS will provide, free of charge, copies of previously filed tax returns for affected taxpayers. What can be better than that?

For two consecutive years our state, and its wonderful citizens, have been subjected to significant disruption caused by natural disasters. Let us hope Mother Nature is not serving up a trifecta! 

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Last-Minute Strategies To Lower Your Taxes

It’s that time of year when the sand has almost passed to the bottom of the hourglass. Most individual taxpayers are calendar-year filers which means that many opportunities to reduce your 2020 income tax bill will lapse after midnight on December 31, 2020. To help you achieve your goal of paying the least amount of income tax as possible, you may want to consider some simple, yet effective strategies

Taxes for personal property and real estate may be deducted on your individual income tax return if you elect to itemize for 2020. If you own property, you will have received a notice of taxes due on the property from the previous assessment by the County Assessor’s Office. You may wish to pay the full amount of taxes every other year to “bunch” up the deduction allowing you to accumulate deductible expenses in excess of the standard deduction. 

Income taxes paid to state and local governments are included in your itemized deductions. If you are self-employed, or receive income from sources that do not withhold taxes for you, you may be required to remit income taxes on a quarterly voucher. Typically, your fourth and final state income payment for 2020 is due on January 15, 2021. However, you may elect to remit payments in December to the state and local governments and claim the expense in 2020. The Tax Cuts and Jobs Act of 2017 limited the amount of state and local income taxes for deduction to $10,000.

Charitable contributions to qualified charities will increase your itemized deductions for 2020. Consider those charities that you typically support and be generous this year. As long as the charity is a qualified exempt organization and you remit payment before December 31, you should be allowed to include the deduction on your return. Don’t forget that you should request a receipt to document your charitable intent and the receipt of the payment by the organization.

Have you thought about cleaning out your closet or gifting your old car to a worthwhile charity? Good news! You may qualify for an in-kind donation. Additional rules and requirements must be followed to document the deduction but you will have helped a great cause and your closet or garage may look better, too.

Another easy method of lowering your tax bill is to defer any income that is possible. If you are self-employed, you may delay your billing for services until January, 2021 and, thereby, deferring payment to be earned income until the next tax year.

Remember in 2020 that personal exemptions are no longer allowed. Instead, a much larger standard deduction is availed to individuals and married filing joint taxpayers of $12,400 and $24,800, respectively. If you are a single parent with a child in your household, you may qualify for a little larger standard deduction of $18,650.

The key to tax reduction is to be proactive. Don’t procrastinate on this important task. By spending a few minutes planning, you may significantly reduce your tax bill for 2020. One statement we share with our clients is that “you should always seek to pay the least amount of income tax you legally owe”. 

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Gifts, Charitable Donations and Taxes

It is the time of year that we think of others. By “others” I am referring to our favorite charities, loved ones and the IRS. Sounds interesting to place the IRS in the same sentence as charities and love ones, doesn’t it? I offer that this particular government agency should always be a part of any discussion for gifts and donations.

Many people confuse the requirements that qualify charitable donations for deductibility purposes. A particular section of the Internal Revenue Code specifies the types of recipients (donees) that qualify for charitable deduction. Typically, a contribution to your local church may qualify for a charitable deduction in the year it was given. This means that you can generally contribute to your church’s building fund or other designated use funds for your church and claim the contribution on your individual income tax return for the year. Substantiation should be received from the charitable organization, in written form, that discloses the date of receipt of the gift, the amount received as a gift (unless it is other than a check or cash which would require the donor to assign a reasonable fair market value), the name and address of the charitable organization and a statement as to no services or goods given to the donor for the donation.

Unique for most taxpayers, that do not itemize deductions on their individual returns, the tax law changes signed by President Trump in March, 2020, allows for a deduction of $300 of charitable deductions for cash contributions to qualified charities. This deduction is claimed “above the line” which will lower the adjusted gross income of the filer resulting in lowered taxes owed. Highly recommend everyone to take advantage of this opportunity to help qualified charities during this difficult pandemic.

You may not realize but your Christmas gifts to loved ones actually fall within the requirements for reporting purposes to the IRS. You guessed it – gift taxes may apply! Talk about Scrooge, right? Consequently, the IRS wishes to know of any transfers of property for less than full value to another party to determine the amount of gift given to the party. Good news is that the IRS doesn’t require that you report the clothing, toys or other gifts given to your children if the total given for the year is less than $15,000 per donee for 2020. 

If you add up all of your gifts to Cousin Eddie, a reference to one of my favorite Christmas movies, and the amount is greater than $15,000 for 2020, you will need to consult with your tax advisor as to the filing of a gift tax return by April 15, 2021. Although a gift tax return may need to be filed, you will, generally, not remit any tax due to a unified gift and estate tax exemption of $11,580,000 per person. So, be generous this year!

Individuals are typically calendar-year taxpayers. This means that you lose some opportunities to lower your 2020 income taxes after December 31, 2020. It is critical that you review your current tax deductions for 2020 and accumulate those needed receipts to provide your tax preparer. Be proactive this year and contact your tax preparer now to book your appointment for receiving tax preparation services.

Lastly, remember those that have suffered during the pandemic. Families in our community may have little to enjoy the basic living needs of life much less Christmas with their loved ones. Disregard the IRS for a moment and let’s focus on our community. Reach out to families that may need a hand up, not a hand out, this Christmas Season. Put some joy in your life by giving to those in need.

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Do You Qualify For A Penalty-Free Distribution From Your IRA?

Many people possess an Individual Retirement Account (IRA) or employer plan that holds assets for their future financial security. Due to the substantial economic impact caused by the coronavirus, the IRS provided relief to individuals in the form of more liberalized distribution options for these types of accounts.

However, the misunderstanding of many citizens is that anyone under the age 59½ can take a distribution from their IRA without incurring the typical 10% additional tax (or penalty) for premature withdrawals. This misunderstanding could cost you a significant amount of money, including additional penalty and interest, if you fail to pay the correct amount of tax on the distribution.

To qualify for relief from the premature distribution penalty, you must be a “qualified” individual as defined in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020. A qualified individual is one that has met one of the following criteria:

  • You have been diagnosed with COVID-19 or SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention (CDC);
  • Your spouse or dependent is diagnosed with one of the above viruses;
  • You suffered adverse financial consequences as a result of being quarantined, furloughed, laid off or had work hours substantially reduced due to the pandemic;
  • You have been unable to work caused by a lack of childcare due to the pandemic; or
  • You suffered adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to the pandemic.

As an individual with evidence of one of the criteria applying to your situation, and the proof would be required of you, the 10% additional tax on early distribution would not apply. However, federal and state income taxes would apply in this instance. Relief is provided by the IRS in the payment of the income tax due on the distribution by reporting one-third of the income on your individual return over a three-year period beginning with 2020 or the year you receive your distribution. For example, if you requested and received a $12,000 distribution from your IRA, you may include $4,000 of the distribution in each of the next three tax returns filed beginning with your 2020 return. Of course, if you wish to report the entire distribution in the year of receipt, you may do so and pay the total amount of tax due.

Lastly, what happens if you decide to return or repay the distribution to your account? Additional relief is provided in this instance. If you have reported one-third of the distribution on your tax return for 2020 and 2021 but decide to return the funds to your IRA in 2022, you may file an amended income tax return for 2020 and 2021 to receive your refund of taxes paid in these years associated with the pandemic relief. The repayment of the funds would be treated as if they were repaid in a direct trustee-to-trustee transfer and no federal income tax would be due on the distribution.

In most cases, the perception of relief is far different than its actual purpose. Too many people hoped that a carte blanche relief approach would be offered and anyone, for any reason, could take a penalty-free distribution and that would be the end of the matter. Our tax code is not an area of law that is easily amended or comprehensive enough in its nature that revenue generation may be left out of the analysis.

Tax law is not simple to understand. To help your family and you make sense of these complex laws and regulations, seek out the advice of a CERTIFIED FINANCIAL PLANNER™ professional for an analysis and planning meeting to reduce your tax burden. Judge Learned Hand remarked, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that platform which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Now, that alone should help you enjoy a Happy Thanksgiving! 

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The Importance of Year-End Tax Planning

This is an optimal time to review your potential income tax liability for 2020. Most individual filers under U.S. jurisdiction are calendar-year, cash-basis taxpayers. This means that many of the options to lower your tax liability for 2020 are eliminated simply by the passage of the year. Just like Cinderella in the historic Disney movie of the same name, your world immediately changes for tax filing purposes at the stroke of midnight on December 31 each year.

A few simple strategies you should consider before the end of the year are presented in this article. First, review your withholding on your year-to-date pay stub to determine if adequate amounts have been withheld. This is a simple fix if you need additional withholding before the end of the year. Provide your employer or Human Resource Department a new Form W-4 to reflect your additional or less withholdings. Also, consider that you may experience a refund for federal taxes and owe a balance for state taxes. To mitigate this issue, provide your employer with a Form W-4 specific to each tax agency. This would be accomplished by conspicuously marking one of the Forms W-4 with “Oklahoma Only” or the name of your appropriate state at the bottom of the form below your signature. 

Another area of planning that is simple, yet considerably effective, is your deferral to your retirement plan, Health Savings Account or IRC Section 125 “Cafeteria Plan” to lower your current federal and Oklahoma taxable incomes for withholding purposes. Remember, most plans provide a matching component for your employer-retirement account that aids in the growth of your retirement assets without consideration of market activity. 

If you are utilizing a cafeteria plan for pre-tax qualified medical expenses, consider making an appointment with your medical providers to determine if you could schedule any procedures before the end of the year to mitigate the need for paying more deductible after the start of a new year. Many families have met, or are close to meeting, their insurance deductible by this time of year. Don’t allow this opportunity to pass if you are needing a medical procedure. Be proactive and seek out your medical providers’ attention to complete the procedure prior to December 31. The keys to success is to complete the procedure and the billing date of the procedure is properly noted in 2020.

Personal strategies such as increasing your tax deductible charitable donations may help you reduce your current year tax liabilities. Review your current level of itemized deductions and see if you can “bunch” your deductions every other year to allow you to itemize when you can exceed the standard deduction. By itemizing your deductions you may save additional state income taxes, depending upon your particular state’s law.

If you are wishing to reduce your estate by making inter vivos gifts to heirs, consider completing the gifts prior to yearend. You can gift each heir or donee $15,000 without the requirement of filing an annual gift tax return (Form 709). This is good news for both the donor and the donee. The donor will reduce their gross estate by the amount of the gift, provided the person lives for three years beyond the date of the gift, and the recipient owes no tax on the receipt of the gift. This is a win/win!

What happens if someone gifts you $1,000,000? Do you owe taxes on the gift? No! Isn’t the U.S. Tax Code a beautiful thing? As a recipient of a gift, of any size, where the intent of the donor was to transfer property or cash to you, without the requirement for reciprocal value or services, you will not owe income tax on the gift. I know what you’re thinking. You may have found a reason to eat Thanksgiving Dinner with your estranged, but rich, Uncle Charlie to discuss this important strategy for lowering his estate. Enjoy the giblet gravy!

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Clarifying Tax Law Confusion

Last month, President Trump issued an executive order to provide employees relief from withholding taxes. The result is additional take-home pay for the employee. This article focuses on the mechanics and results of this order. I will also opine on the impact of such order to the solvency of the Social Security Benefit Program which, as stated in my previous article, remains marginally funded through 2035.

We all wish to create greater amounts of cash flow for our living expenses but at what price does this wish come true? For example, if you are currently employed, you are contributing to your future through a withholding program titled “Federal Insurance Contributions Act” abbreviated as FICA. Two components make up the FICA portion of your paycheck withholding. The first component is the Social Security Tax, also called the Old-Age, Survivors and Disability Insurance (OASDI) Tax, at a rate of 6.2% of your gross wages to a maximum wage limit of $137,700.

The second component of the FICA is the Medicare Tax at the rate of 1.45%. This tax is applied to all wages paid to an employee. Unlike the Social Security Tax, the Medicare Tax has no annual wage limit. These withheld funds are committed, by the U.S Government, to your future for purposes of assisting with lifestyle expense. 

The president’s order requires employers to discontinue withholding the 6.2% FICA from employees’ paychecks. However, the employer continues to be responsible for the matching funds at a rate of 6.2%. To further complicate the application of the order, employees with bi-weekly income of greater than $4,000 do not qualify for the deferral of the 6.2% Social Security Tax. Based on a weekly payroll of $2,000, employees earning less than $104,000 in annual wages will be eligible for the deferral and will take home more net pay.

As with any tax benefit, the applicable period for the deferral of Social Security Tax for eligible employees is September 1 through December 31, 2020. The desire of the Executive Branch of our government is to develop a law that will allow the deferred balance of Social Security Tax to be eliminated instead of repaid by the employee.

To remedy the confusion on which party, employer or employee, pays the deferred Social Security Tax, the IRS issued on August 28, 2020, Notice 2020-65. The notice directs employers to remit the deferred Social Security Taxes ratably over the period January 1, 2021 through April 30, 2021. Failure to remit the taxes deferred from 2020 will subject the employer to interest and penalties.

One could argue the additional cash flow required to pay both employee and employer shares of the Social Security Tax places a burden on the employer. What will be the tax deduction allowed the employer if both shares of the tax are paid by the employer? Tax policy would dictate the fairness of allowing the employer the deduction since the economic impact is actually borne by the employer. However, tax policy in the United States is not based on equality but rather revenue generation. Who knows what will happen until we receive additional guidance from the Treasury Department?

Until then, keep smiling, enjoy your extra cash and I’ll see you on the golf course! 

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Selling the Farm? Think About This Tax-Saving Election!

You worked your entire life and a significant amount of your family’s wealth is tied to the family farm. This scenario is experienced by many families in the U.S. How do you obtain your value from the land and pay the least amount of income tax? There is a way.

The income tax laws, referred to as the Internal Revenue Code in the United States, provides for families to retire from the farm without paying current income taxes on the transaction. As you can imagine, there are a few caveats and requirements to performing such a transaction. This type of land transfer is known as a “like-kind exchange”. In recent years the regulations governing this type of transaction have been refined to allow property held for productive use or investment (i.e., the farmland) to be exchanged with other investment property to defer the tax on the potential gain in the land.

Think about this approach. Mr. Jones has a farm which consists of 640 acres of pastureland. He purchased the land 40 years ago. His basis in the land is $100 per acre or $64,000 for the total parcel. However, Mr. Jones is ready to retire and decides he wants to sell the property. Today, the land is worth $1,000 per acre or $640,000 for the total parcel. Mr. Jones visits his CPA to discuss his decision to retire and sell his land. The good news is that Mr. Jones is retiring. The bad news is that his federal tax bill on the sale of the could be as much $128,000! 

To defer the tax bill to its latest due date, Mr. Jones’ CPA informs him of a structure that allows Mr. Jones to exchange his farm land for other land that is held for investment. Perhaps Mr. Jones would desire to own rental properties that would generate cash flow to supplement his retirement?

This area of law is very specific but can provide significant benefit to taxpayers. Two important timelines are required to be met to treat the property received in the exchange as “like-kind” property: 1) The property to be received must be identified within 45 days after the taxpayer’s property is relinquished in the exchange; 2) The property transaction shall be closed within 180 days after the relinquished property is transferred to the other party.

Additional parties are involved in this type of transaction. A qualified intermediary is utilized to transfer the deeds, hold the deposits and to execute the transaction on behalf of the two exchange parties.

Before you simply decide to sell your farm, think about other opportunities to mitigate the tax bill. You will be glad you did. 

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How Long to Keep Tax Records?

If you are like most individuals, you have a drawer in your home or a box in the garage that contains all of your tax returns and supporting information from 1987. It is the sacred box of “all things to defend myself from the IRS”. Today, I am providing you some guidance that will help you clean out that drawer or box as well as relieve your mind from future inquires of taxing agencies.

There is no other word that strikes fear in the hearts of citizens worse than “Internal Revenue Service”. You go to mailbox and open it with a smile hoping that Ed McMahon has sent you the winning ticket to a sweepstakes only to find an ominous envelope from the IRS. Before opening the envelope, your mind races through a myriad of circumstances and outcomes. Survival instincts fire in your brain that you should seek a lawyer or CPA, transfer assets to other relatives or some other ridiculous plan to counter the attack by this federal agency.

Would you believe that most correspondence from the IRS is clerical in nature? The complicated system of revenue collection in the United States does not process without mistakes. A few years ago, one of our new clients came to the office, looking white as a sheet, and holding a rather large, white envelope. Her introduction omitted pleasantries and she immediately initiated her case of fearing the IRS and now “I will lose my house!” After speaking with her for a few minutes, providing a nice cold drink of water, and opening the envelope to read its contents, we disclosed some good news to her. She didn’t owe the government any money, she was actually receiving a refund. She looked at me with her eyes as big as silver dollars and exclaimed, “What?” Her previous tax returns, prepared by someone else, had omitted one of her estimated tax payments and she was receiving a refund of almost $21,000. 

The moral of this story is that many citizens do not understand the role, authority and power of the IRS. This agency is one of the most powerful of our government. However, in my 33-year career of interacting with the IRS, I have experienced very few instances where I was treated unfairly or unprofessionally.

Maintaining proper and complete records of your financial transactions reported on your tax returns is critical to good outcomes. The statute of limitations for most individual income tax returns is three years from the date you filed your return or two years from the date you paid the tax owed. This means that any of your individual income tax return forms can be destroyed or scanned to electronic storage. You should keep all records to document income, expenses, gains and losses from the three years’ of returns so that you may properly defend your tax returns should you be selected for audit. Wow! That sounds like a sinister word – audit.

Certain documents should be retained indefinitely such as property deeds, birth certificates, gift tax transactions, stock certificates, bonds, and marriage licenses. Most of these documents can be reclaimed but the process is rather time consuming.

The key to a pleasant and happy life is to understand the role government plays in our lives. Too often myths and speculation rule our minds when the actual facts are much less menacing. If you receive a notice from any taxing agency, contact your CPA or tax preparer to determine the appropriate response. As citizens, you have appeals rights, amendment capabilities and other actions you can take to mitigate or eliminate your tax matter.

If you have a question about filing your individual income tax returns, click this link for information that may be helpful. Until next week, stay safe and well.

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