Wednesday, April 01, 2009

New Tax Breaks to Be Aware Of

From The Wall Street Journal:

The millions of procrastinators now scrambling to finish their tax returns may want to watch out for a few new twists -- and several old ones.

Unless they're careful, they could wind up paying Uncle Sam more than they really owe. Even when Congress tries to offer Americans tax relief, the result is often so complex that it requires the assistance of high-priced experts trained in the translation of tax-law gibberish.

Among the major changes: The Internal Revenue Service recently issued guidance that is likely to provide relief for many Ponzi-scheme victims, including those hurt by Bernard Madoff, who pled guilty last month to criminal charges in connection with a decades-long scheme. The IRS's conclusions are "very taxpayer-friendly," for those who qualify, says David F. Earley, senior tax manager at Deloitte Tax LLP in Boston. But victims may have to consult tax experts to reap the benefits.

Separately, investors who sold the stock of insurance companies that once were owned by policyholders may be able to save on taxes, thanks to a court decision last year.

Taxpayers this year should also be aware of older laws that may have new relevance. For example, many people looking for work can deduct job-search expenses, whether or not they find a job.

Here are a few recent changes and other last-minute advice from accountants and other tax advisers:

Ponzi schemes. IRS Commissioner Doug Shulman said the Madoff scandal has affected "a very large and diverse pool" of investors. "Beyond the toll in human suffering -- as entire life savings and retirements appear to have been wiped out -- the Madoff case raises numerous tax and pension implications for the victims," he told senators recently.

The IRS defines a Ponzi scheme as one in which a fraudster gets cash or property from investors, purports to earn income for them and then reports income amounts that are "wholly or partly fictitious." Payments, if any, of the purported income or principal to investors come from cash or property from other investors. And the perpetrator of the fraud "criminally appropriates some or all of the investors' cash or property."

Much to the relief of many victims, the IRS concluded that investors typically are entitled to a "theft" loss -- and that "investment" theft losses aren't subject to the stiff limits that apply to personal casualty or theft losses. (With personal theft losses, your deduction for 2008 typically would be limited to the extent the losses exceeded 10% of adjusted gross income, after reducing each loss by $100.)

The IRS also said the theft loss is deductible in the year the fraud is discovered, except to the extent there is a claim with a "reasonable prospect of recovery." The amount of the theft loss "includes the investor's unrecovered investment, including income as reported in past years."

Blog Archive