Reducing your Chances of an IRS Audit

Over the holiday weekend, my YouTube team shot another new episode for our YouTube tax tips video series. In this episode, host Edward Lester explains a few ways to reduce your chances of an IRS audit. You can watch the embedded video below but be check out my YouTube channel to subscribe to my videos.

How To Avoid The 'Death Tax'

Earlier today CNNMoney.com posted a helpful tips list on how to avoid the death tax. The article aims to help taxpayers understand how to pass on the most possible to their future heirs. You can read a clip of the story below, or read the full post here.

If 84-year-old Bob Sievers of Pacific Palisades, Calif., had his way, Congress would scrap the estate tax altogether when it considers an Obama administration proposal on the future of the controversial tax. As co-owner of a lumber business for 40 years, Sievers built his wealth from scratch and paid taxes on his earnings every step of the way.

"What we have, we earned, and we paid tax on everything we earned, and we don't want to be taxed again when we die," says Sievers emphatically. Sievers, along with his wife, Carol, first set up an estate plan in 1982, and they have updated it numerous times over the years to reflect changes in the value of their nest egg and the expansion of their family, which now includes five children, 11 grandchildren, and four great-grandchildren. They quickly discovered they would need to establish an intricate network of trusts and other tools if they hoped to pass along the bulk of their hard-earned assets to their children without Uncle Sam taking a sizable chunk in taxes.

The estate tax - known as the "death tax" among its detractors - will be a hot topic in coming months. The tax-cut package enacted in 2001 called for it to be phased out over 10 years. This year, for example, only the portion of estates that exceeds $3.5 million for an individual and $7 million for a couple is subject to tax; the rate is 45%. This exemption is far bigger than in 2008, when the tax applied to estates valued above $2 million. But the 2001 tax cuts expire after next year. If Congress doesn't act, the estate tax will disappear in 2010 but will return in 2011 at the pre-2001 level of $1 million with a tax rate of 55%.

President Obama has said that he wants to keep the estate tax where it is today: at 45% on amounts above $7 million (for couples). Estate-planning experts speculate Congress will pass a new law before year's end to prevent 2010 from being a tax-free year. "They can't suffer the revenue loss" from removing the tax for a year, says Jay Adkisson, an attorney and founding partner at Riser Adkisson LLP. (One thing that's not expected to change: A spouse can inherit an unlimited amount tax-free through the marital deduction.)

Regardless of what happens in Washington, creating an estate plan and keeping it updated is critical. A smart plan uses tools, ranging from life insurance to trusts, to lower or even eliminate the estate tax and to prevent strife and bitter feuds among beneficiaries after a death. "Poor planning can destroy a family," says Les Kotzer, an attorney who is the author of "Where There's an Inheritance - Stories From Inside the World of Two Wills Lawyers." If no plan is in place or if terms are not explicitly spelled out, chaos can ensue, he says. Kotzer recalls a man who made a handwritten will leaving "all his personal stuff" to a son. A bitter court battle erupted as a daughter claimed "stuff" meant his power tools and personal possessions, not gold and diamond rings that their mother had owned. The son vowed to fight her to the gritty end, claiming he hoped his sister's legal fees would cost more than the jewelry was worth. Here are some tools you and your lawyer or estate planner can use to avoid such disasters.

The joy of giving. Let's start with a couple of simple techniques. For example, giving away money during your lifetime can reduce the value of your taxable estate. Here are the basics: You can give any number of individuals up to $13,000 each year without any tax consequences. Amounts above $13,000 are subject to the gift tax, but you also have a tax credit that allows you to give up to $1 million during your lifetime without incurring taxes. In addition, there is no limit on how much you can give tax-free when you pay someone's higher education or medical expenses directly.

As far as how you make those gifts, you can simply hand the money over to the recipient, but you have other choices. One popular method is a so-called Crummey trust, often used for a child, which allows you to impose conditions on how and when the beneficiary can get access to the money.

Life insurance. If you're planning to leave property, a business, or other non-cash assets to your heirs, life insurance can be a lifesaver. If you purchase a policy that will cover the taxes on your estate, your heirs won't be faced with having to sell assets to pay the taxes. "Mom and Dad give money to the kids to take insurance out on their lives," says attorney Jeffrey Condon, author of "The Living Trust Advisor." "When they die, the insurance company will write a check tax-free to the kids." You can also set up a life-insurance trust to be the beneficiary of the policy: That way, the death benefits won't be taxed as part of the estate.

Geoffrey VanderPal, of Elite Financial Planning Group of America in Las Vegas, recalls one client who had a $40 million financial services business that he wanted to pass on to his son. The client ignored suggestions that he set up an estate plan with a life insurance trust to cover the taxes on the estate. When the client died, the son couldn't afford the $18 million in taxes and had to liquidate the business.

Bankruptcy for Chrysler Likely Averted as Banks Cave on Debt

It seems Chrysler may be able to avoid filing bankruptcy as was suspected earlier in the week, according to BusinessWeek.com. You can find a snippet of their post below, but the full story can be found here.

Chrysler LLC and the U.S. Treasury Dept. have reached an agreement with banks and private equity firms holding $6.9 billion of the automaker’s debt. Those firms have agreed to take $2 billion and a small equity stake in the company, paving the way, it seems, for Chrysler to avoid bankruptcy and with Italian automaker Fiat.

The deal, first reported by Washingtonpost.com, was confirmed by a Treasury official who said: “The agreement from Chrysler’s principal banks is an exceptional accomplishment in line with the President’s firm commitment that all stakeholders sacrifice to make this deal succeed.”

Details of the deal may come officially from Chrysler or Treasury officials later today.

Banks, including J.P Morgan, Citi, Morgan Stanley and Goldman Sachs, had been holding up the deal for weeks, insisting on more cash and equity. But a deal struck with the United Auto Workers Sunday night, said one executive familiar with the negotiations, put additional pressure on the debt holders to strike a deal.

Those banks are holding secured debt. And one of the issues confronting them is that Chrysler’s assets—Jeep, minivans, factories, Dodge Ram pickup and real estate—all have limited value in the recession, and few potential buyers [see Chrysler’s Looming Tag Sale].

The possibility of a Chapter 11 filing is not completely off the table for Chrysler. But it is far less likely.

Chrysler was to have filed a new restructuring plan to the White House auto industry task force by April 30, so that the Obama Administration could determine if Chrysler has restructured its business extensively enough to merit an additional $6 billion in loans on top of $4.5 billion it has already received.

A deal with Fiat is now expected to go forward, with the Italian automaker owning 35% of Chrysler, while the United Auto Workers will own up to 55%, and the Federal government up to 10%.

The Obama Administration has already said that Chrysler’s only viable future was one involving a merger with a stronger company. Its commitment to the further loans has been contingent on the Fiat deal. And the Fiat deal was contingent on big concessions from the union and bondholders.

How to Avoid Owing Back Taxes on Unemployment Benefits

At the end of last week I posted an entry on the RoniDeutch.com Tax Relief Blog with advice on how to avoid owing back taxes on unemployment. Check out the text of the entry below.

Taxable Income

Believe it or not, the money you receive from unemployment benefits IS taxable income. Which means you are going to owe both federal and state income taxes on it (if your state has an income tax). At the end of the year you should expect to receive IRS Form 1099-G, which will show the total amount you received in benefits.

Withheld Taxes

When collecting unemployment benefits you are not required to have any taxes withheld, but it is an available an option, and a good one at that! By having income taxes automatically withheld from your checks, you can avoid having to write a big check come next April. When you apply for unemployment, you can select to have a 10% federal income tax withheld, as well as a state income tax (the exact percent will vary per state). It is also highly recommended that you take a thorough look at your first unemployment check stub to make sure that the correct taxes have been withheld.

First $2,400 is Tax Free

Although you do have to pay income taxes on unemployment benefits, in 2009 you will not have to pay taxes on the first $2,400 in unemployment benefits you receive. Confused yet? Well, it only gets more complicated. The change is part of the new 2009 American Recovery and Reinvestment Act and only affects the 2009 tax year. All benefits from the year 2008 and before are fully taxable. For more information, check out this IRS news release on the topic.

Severance Pay

Do not forget that any severance payment you might receive is also considered taxable income. This includes any one-time payments, as well as payouts for accumulated vacation or sick leave benefits. It is considered regular income, and should be taxed at your appropriate tax rate.

Estimated Payments

If for any reason you do not choose to have taxes withheld on your unemployment, you should still consider making an estimated quarterly payment. It can be somewhat confusing to calculate and file these payments, but it beats getting hit with an underpayment penalty at tax time.

Check State Laws

Do not forget that your state is also going to tax your unemployment benefits! If your state has an income tax, then you will likely have to pay income taxes on your unemployment benefits. However, every state is different so before making any decisions, check out your state’s website, or ask a professional for help.

Continuous Job Hunt

One of best ways to avoid tax problems is to build up allowable deductions and credits. Luckily for the unemployed, the tax code provides a cornucopia of tax savings for job hunters. From education deductions and credits, to the job-hunting expenses deduction, to the moving deduction, the code is set up to help you avoid owing taxes while unemployed so long as you are actively seeking employment. In addition, most states provide similar deductions and credits. So, please do some research—you can start by checking out my blog entry on the topic here —or meet with a tax professional to find out how Uncle Sam is willing to help you on your job hunt.

Get Professional Help

Just because you are unemployed does not mean the IRS is going to let you get away without filing a return. In addition, your return is certainly going to look a little different now that you are receiving unemployment income. Having professional guidance through this financial change may prevent you from making some major mistakes on your tax return.

How to Avoid an Extension in 2010

Wednesday was the tax deadline and thousands were scrambling to request an automatic extension from the IRS. Although you will not be penalized for filing a tax extension – as long as you pay all required tax liabilities – it is a good idea to get in the habit of getting your return prepared and filed before April 15^th. By planning ahead, there are plenty of easy things you can do now to prevent the need for a tax extension in 2010.

1. Organize your documents

By keeping your tax documents in one place throughout the year you will always be one step ahead of the game. As you get closer to next tax season, begin to review your financial documents and make sure you have everything you will need to do the actual filing. You could even make yourself self a tax checklist, to make sure you do not forget anything.

2. Start early

Start the compilation, organization, and calculation process as soon as you can. All tax forms are available on the IRS’ website year-round, so it’s never too early to begin. In addition, you should start receiving all income and expense statements from third-party reporters (e.g. employer, bank, investments, etc.) by mid January. The sooner you start, the more you can spread out the task, making it easier to do. Depending on how complicated your return is, you could do a little bit every week leading up to the deadline.

3. Make estimated payments

If you are self-employed, or a small business owner, then you need to make quarterly or monthly estimated tax payments. Never evade these necessary taxes, as the penalties will be far worse come tax season—especially if you did not pay enough during the year. If you make enough through your self-employment, then you might want to consider having a professional help calculate your quarterly payments to make sure you are always ahead of the game.

4. Have Internet available

Having a computer with Internet capability will also help immensely during tax season, because you can use it to easily research tax information. You may be surprised how much information about taxes there actually is online these days. Instead of calling up your accountant or tax preparer every time you have a question, try doing a Google search to see if you can find the answer online. Or visit my company’s blogs at www.ronideutch.com/blog and www.rdtc.com/blog.

5. Determine if you will need help

Never be too shy to enlist a little professional help if you are not fully about preparing your tax returns by yourself, or simple do not have the time to do so. Determining early on whether or not you plan to hire help will allow you to take your time choosing the right tax prep specialist or accountant for you. You may also be able to get a better deal, as many tax preparation offices run specials early during tax season.

6. Change your withholdings

If your payroll withholdings are off, then it can make things more difficult when you go to prepare your returns. Moreover, there is nothing worse then being surprised to learn you owe the IRS a huge tax payment come April 15. If you have been over or underwithholding throughout the year, by adjusting your withholdings now, you can make things easier for yourself come next tax season.

7. Find more deductions, make adjustments

Many people put off filing their taxes because they are scared of paying up any money they might owe the IRS. To offset what may be a big payment, take the time now to carefully research the current tax laws to see what deductions you qualify for. If you have already claimed all available credits and deductions, then see if there are any small adjustments you can make in your life to claim some that you may not have qualified for this year.

8. E-file

A lot of people simply do not want to drive to a tax preparation office to file their returns. If you prefer to do things from home, you could try e-filing this year, or look into over-the-phone services. If you have all your info together, both options are quick, easy, and can prevent you from needing to file an extension.