Filed under: Business Taxes, High Income Earners, Individual Taxes, IRA, Tax Preparation, Tax Preparers, Tax Tips, Taxes
Today I want to talk about tax planning, and why it’s so important.
I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special. She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first. So she called me.
Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined. Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole. Then we started talking.
You see, she didn’t need to make the purchase right away, she was just thinking about it. So I decided to see what would happen if we split the $30,000 between 2013 and 2014, $15,000 each year. What a difference! Instead of paying over $9000, she’ pay $688 per year total for her state and federal income taxes combined. That wasn’t a typo–six hundred and eighty-eight dollars a year. $1376 total tax for a savings of over $8000!
So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000. How cool is that?
In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well. For many people, splitting up the IRA withdrawal would not save them any taxes at all. But my point is–how do you know? By taking the time to ask–she saved $8000.
What’s going on in your life that could benefit from a little tax planning? Selling some stocks or mutual funds? Donating to charity? Do you own a small
business? Are you getting married? Getting divorced? Having a baby? Getting a new job? Buying a home? Any of these events, and many more, could use
a little tax planning.
My business card says, “If you don’t have a tax strategy, you’re probably paying too much.” It’s true. So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes. Why would you want to give the IRS more money then you need to? It’s not rocket science, it’s just common sense. The best way to keep more of your money is to make a plan for keeping it. Call me. I can help.
Wednesday, June 26, 2013 the United States Supreme Court overturned the Defense of Marriage Act (DOMA). Effective immediately, married gay couples will be able to file their federal income tax returns using the married filing jointly tax status. What does this mean for you?
The first thing to look at is: Does it make sense to amend my back tax returns? You’ll want to review your old returns as far back as 2010 to see if the married filing joint tax status would give you any tax benefit. If so, you will need to amend those tax returns.
For tax years prior to 2010, you would have had to file a protective claim to file jointly, see: http://robergtaxsolutions.com/2012/06/doma-unconstitutional-protecting-your-tax-rights/ Without a protective claim, you cannot file an amended return for years prior to 2010.
On your amended return (form 1040X) you will check the box that says Married Filing Jointly in the section that says “Amended return filing status.” In the explanation box in Part III you will write:
pursuant to US v Windsor, this return is being amended to claim Married Filing Jointly tax status.
US v Windsor is the court case that the Supreme Court heard when they ruled that DOMA was unconstitutional.
You’ll complete the rest of the amended return just as you would any other 1040X form.
You are not required to amend your back tax returns if it does not help you. Because those returns were filed using the law that was in place at the time, you are under no obligation to change your return if it would require you to pay more taxes.
Looking ahead: now that federal law recognizes gay marriage, you may need to do some tax planning given your new status. For many couples, the married filing jointly status is not beneficial. I recommend sitting down with a professional and doing some planning, just that same as any other newly married couple would. Remember, now that the federal government recognizes gay marriage, you are required to claim that you are married on your federal tax return. You will either need to claim the Married Filing Jointly or Married Filing Separately tax status when you file your 2013 federal tax return.
Issues that have yet to be resolved: We know that if you are married in a state that recognizes gay marriage, you may file a federal joint income tax return. What we don’t know yet is what happens to a couple that is legally married in a gay marriage state but moves to a state that doesn’t recognize gay marriage. (For example: a couple gets married in Illinois then moves to Missouri.) I suspect we’ll see some court cases over that in the future. I’ll post updates as I learn more.
If you’d like to read the court case, here’s a link: http://www.supremecourt.gov/opinions/12pdf/12-307_g2bh.pdf
The First Circuit Court of Appeals ruled that the Defense of Marriage Act (known as DOMA) is unconstitutional. This issue certainly isn’t settled and is going to go to the Supreme Court. The Supreme Court may or may not agree, but one thing I know is that it’s going to take some time. That’s why, if DOMA affects your taxes, you might need to act now.
If you are a gay married couple, you haven’t been allowed to file a joint federal tax return because of DOMA. If DOMA is overturned—then you can. And, if DOMA is overturned—you can go back and amend old tax returns as far as three years. You can amend a tax return from 2009 up until April 15, 2013. After that, any refund you might qualify for is lost.
Here’s the catch—the Supreme Court might not hear the case for at least another year so you’d lose out on some of your refund money just because of timing. But there’s a way to protect your interests now so that if the Supreme Court rules your way, you won’t lose out because of the timeline.
Sorry, but I’m going to get really tax geeky here. If this applies to you, you might want a tax professional’s help. Bottom line—if you would have benefitted tax wise from filing your return as “married filing jointly” then stick with me, it’s important.
You want to file amended tax returns for the tax years you were married with a “protective claim for refund”. Basically, a protective claim for refund means that your right to the refund is contingent on future events. In this case, you won’t have the right to claim your tax refund until the Supreme Court issues a decision on DOMA. For your 2009 tax return, your right to claim that refund could expire before the Supreme Court makes its decision.
Basically, a protective claim is going to preserve your right to claim your refund even if the tax deadline has expired. So if the Supreme Court makes its ruling after April 15, 2013–if you’ve filed a protective claim then you still have a right to your refund even though the statute of limitations for that refund has expired.
When you file your 1040x, you’re going to want to say in the explanation box that you are filing a “Protective claim for refund, contingent upon the US Supreme Court decision on the First Circuit Court of Appeals case regarding the Defense of Marriage Act, Gill v OPM.”
Generally, the IRS won’t do anything on your protective claim until the contingency is resolved—in this case, when the Supreme Court actually makes its ruling.
You will mail your 1040X with the protective claim for refund to the same address that you mail a normal 1040X. It varies depending upon the state you live in, but it will be in the form instructions.
Definitely use certified mail, return receipt requested when you send your amendment in. That’s your back up that you filed.
There aren’t that many people who will qualify to file these protective claims for refund returns. I’m in Missouri, we don’t recognize gay marriage. Illinois, next door just recognized it last year so there wouldn’t be any 2009 tax returns for gay couples. And for some couples, filing jointly doesn’t really reduce their tax burden anyway so it won’t make a difference. But if this could help you, then you need to know about it.
If you’d like to read the full case Gill v OPM, here’s a link: http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=10-2204P.01A
One of the points it specifically references is federal income tax returns.
If you Google “year end tax tips” you’ll get over 4 million entries. Granted, I’ve littered the field with a few of my own blog posts as well, but to be perfectly honest, most of those “tips” you find on the internet are pretty worthless to a “normal” taxpayer. I’m talking about regular people with W-2 type income or retirement money.
Now, forgive me if I sound a little cranky, but if you’ve waited until after Christmas to do any kind of tax planning, well, you’re a little late. Consider yourself scolded. And when you file your 2011 tax return, you’re going to plan ahead for 2012 like the intelligent person that you truly are. (I mean come on, you are reading my blog right? Obviously you’re attractive too!)
In the meantime, these are the top five last minute tax tips for non-business owners offered by the IRS. Note that the strategies are offered by the IRS, the commentary is from me. It’s not that the IRS suggestions are bad—they’re good suggestions, you just need to look with your eyes open.
- Charitable contributions – I love charities, I want you to donate to charity, but as a tax strategy, this might totally suck. If you are not already claiming itemized deductions on your tax return, then donating to charity probably will not help your taxes. Every year – seriously, every single year that I have prepared tax returns – I meet someone who donated to charity thinking it was a tax deduction and got nothing from it. The absolute worst case was a guy who donated his car, thinking he’d get everything back on his tax return. Wrong! He got nothing. Zero, zip, zilch, nada. (Although I understand that the woman at the charity who talked him into it was really pretty, although he didn’t get a date out of it either.) Donating to charity is a very good thing, but use your brain when donating. http://robergtaxsolutions.com/2011/12/charitable-donations-how-much-should-you-tithe-why-do-it/
- Energy efficient home improvements — The first thing you need to know is that the maximum credit you can get for this in 2011 is $500. If you’re doing the work anyway, great, but I wouldn’t go out of my way now to try for a tax credit this late in the game. http://robergtaxsolutions.com/2011/11/what-you-need-to-know-about-the-2011-home-energy-tax-credit/
- Portfolio adjustment — This is where you call your financial advisor and see if you need to do any tweaking before the end of the year. With the stock market being kind of crazy, you could have big gains or big loses. But don’t just go selling off stock, it’s important that you make sound financial decisions. I often have clients tell me that they sold losing stocks and they should be able to claim huge losses on their returns. Problem is, there may have been a huge loss during the year, but they’ll have a huge gain because they’ve held the stock for several years. Having your tax and financial person coordinate together is your best strategy. http://robergtaxsolutions.com/2011/08/five-tax-issues-for-these-crazy-financial-times/
- Max out 401(k) contributions — For the vast majority of us, we set up our 401(k) last November and can’t change anything. Personally, I’ve never worked for a company where you could walk into the HR department and say, “Hey, I want an extra $3,000 plopped into my 401(k) this week.” For those of you who are able to make last minute adjustments, you’ve got about 3 days. Anything going into your 401(k) must be in by December 31. http://robergtaxsolutions.com/2011/11/how-much-can-i-contribute-to-my-401k/
- Qualified charitable contributions seniors — This is for seniors who must make required minimum distributions (RMD). If you’re one of those people who takes your RMD at the very last minute, you can have your RMD go to a charity instead. This makes your RMD not taxable to you, and you don’t need to itemize to make it work. If you’re a senior and you do not need your RMD, and you have a charity that you really like, this is a perfect way to deal with it. http://robergtaxsolutions.com/2010/12/last-minute-tax-tips-for-seniors-ira-charitable-rollover/
Okay here’s the preachy part, I’m giving you fair warning. If you plan ahead, you don’t have to worry about last minute tax strategies. You’ve already figured out your best 401(k) contribution, you’d have already sent your qualified charitable contribution, and you’d have already spoken with your financial advisor about what your best strategy for the year is. It says this on my business cards, but it’s true—if you don’t have a tax strategy, then you’re probably paying too much. You don’t have to be rich and you don’t have to be a business owner to benefit from a little planning ahead. If your tax person isn’t helping you plan ahead for next year, it’s time for a new tax person.