Questions for the Tax Lady: October 11th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply. I will do my best to get an answer for you!

Question #1: Is it better, tax-wise, for married couples to divorce and cohabit, or is this an urban legend?

Answer: Ah, the marriage penalty, this myth continues to circulate even though it’s largely untrue. Years ago, if both spouses worked, it may have been more beneficial to be divorced and filing taxes separately.

However, years of tax adjustments have removed the marriage penalty from all but the most unique tax circumstances. By and large, the tax code allows married couples equal benefits to single people. For example, the standard deduction for filing single is $5,700. For a married couple filing jointly, the standard deduction is $11,400. Exactly double the amount for single.

Don’t go rushing to a divorce lawyer to save money on your taxes. If you really feel like filing jointly is costing you more money, talk to a tax professional and see if you would do any better by filing separately.

Question #2: I filed an automatic six month extension last April, but have not finished preparing my return yet. Is it possible to request another extension?

Answer: Unfortunately for you, the six-month extension is the end of the line, tax-wise. (Unless of course you are living out of the country). October 15 is the very last deadline before the IRS will start slapping you with failure to file penalties. If you are struggling with preparing your tax return, you may want to enlist the aid of a qualified tax professional.

My recommendation would be to do whatever it takes to get that return mailed or electronically submitted by midnight, October 15. Then immediately start getting ready for the next filing season so you can avoid this problem next year.

Money Makeover: Married Couple, Separate Finances

Earlier today, I came across this interesting article from CNN Money.com on Michelle Spranger and Scott Zuckerberg. The article discusses the story of a couple that has been married for eight years, but maintain separate finances. According to the article, they finally decide to merge their finances to make their lives a little easier.

Scott, 43, has a full-service broker, variable annuities, and a union pension, while Michelle, 42, uses a discount brokerage account and IRAs. Neither knows what the other is doing.

"The only thing we have together is a checking account," Michelle says. "We need to merge and have a common goal."

Troy, Mich., planner Warren McIntyre agrees. For starters, the couple isn’t even sure how much they're saving annually. Both are self-employed: Michelle is a freelance producer, meeting planner, and writer earning $90,000 to $115,000 a year; Scott makes $60,000 to $75,000 as a lighting and rigging technician for films.

With fluctuating incomes, they must be really diligent about saving. McIntyre's advice: Sock away at least 15% of their pay. That, plus Scott's pension and their real estate, should get them to a comfortable retirement.

Continue reading at CNN.com…

Talk Tax With Your Partner

Maybe you’ve already met the one for you and are either in or on your way to marital bliss. If so, congratulations on being so lucky-in-love! When you have decided to spend the rest of your life with someone, please find the time to have a discussion about finances—including taxes. You’ll be doing your love life a favor for years to come. And you’ll ultimately be doing yourself a favor knowing beforehand exactly what financial situation you are getting into.

Here are five tax topics to discuss with your partner:

1. Tax Debt. Have a candid discussion with your partner about whether they currently owe or will owe the IRS. Really, you and your partner should have a number of conversations concerning finances and debt, but just make sure that one is focused specifically on tax debt. This will also help you determine whether or not you will file jointly or separately.

2. Compliance. Has your partner filed all required tax returns? Failing to file a tax return can result in penalties and ultimately a hefty tax bill. It also is a good clue as to who should and shouldn’t be in charge of taxes moving forward.

3. Easy Money. Weddings can be expensive and the temptation to pull from a retirement account to assist with the cost can be difficult to resist. However, there are serious tax consequences for doing so. Another important question is whether or not your partner has already borrowed from a 401K or IRA account. They will likely have to pay taxes (or even a tax penalty) on this amount.

4. Other federal obligations. The IRS has the authority to collect back child support, alimony and federal student loan obligations. The IRS has the ability to withhold all refunds due and apply the funds to the back obligation; so if your partner owes other federal obligations you may want to file separately.

5. Filing status. Jointly or separate. Again, this is an important talking point. Although, the most advantageous filing status for married individuals is married filing jointly, there are instances in which spouses should opt to file separately. See the chart below:

File Married Filing Jointly if:

• All of your financial information is comingled and easy to access
• Neither spouse has a preexisting tax debt or other federal obligation
• You want to take advantage of every tax credit and deduction available

File Married Filing Separate if:

• One or both spouses have pre-existing tax debt or other federal obligation
• Both partners earn equitable income
• One partner has significant itemized deductions that are subject to the AGI floors (e.g. medical expenses, casualty losses, miscellaneous itemized deductions
• One partner has a tendency to use questions tax-filing decisions

Couple Convicted in Tax Shelter Scheme

Recently, a married couple from Oregon was convicted of running a tax shelter scheme in which they “marketed tax trusts to clients, filed lawsuits against IRS employees, and prepared a $108 million tax lien against former Treasury Secretary John Snow.”

As this article from Web CPA explains, Tony and Micaela Dutson defrauded the U.S. government of approximately $7 million.

The couple were convicted of conspiring to defraud the IRS, obstructing the IRS, causing clients to use bogus financial instruments in an attempt to pay their taxes, failing to file tax returns, and aiding and advising a client to file a false tax return. The couple used Micaela Dutson’s law office in Tigard, Ore., to promote and sell tax trusts for several years before moving to Arizona in 2003. The couple made over $1 million from the scheme and paid no income tax.

The investigation was launched after the Internal Revenue Service discovered that multiple taxpayers who had followed advice from the Dutsons were being audited for failure to file tax returns despite a prior history of filing and paying their taxes. The IRS initiated an audit of Micaela Dutson after it received notice from the State of Oregon that she had been paid out-of-state funds to provide indigent legal services but had never filed a tax return reporting that income.

Micaela Dutson resigned from the Oregon State Bar in 2002. For several years, the IRS tried unsuccessfully to stop the Dutsons from selling abusive tax shelters before eventually referring the matter to IRS Criminal Investigation. In 2006, at the request of the IRS, a federal court in Phoenix ordered the Dutsons to cease their activities. After the investigation revealed extensive fraudulent activity, the case was referred to the U.S. Attorney’s Office for prosecution.