Posts Tagged ‘Year-End’

IRS Provided Some Good Tips this Morning

Tuesday, December 17th, 2013

The IRS sends out tax tips, and this morning’s tips are worthy of a repeat: Start a filing system, make charitable contributions, and contribute to retirement accounts.

The IRS first noted that individuals should start a filing system.

If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, or more complex like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.

The IRS is absolutely right here…except about the shoebox. Please don’t send me a shoebox (unless you want your bill to go up a lot). If you document, document, and document, you’ll be in great shape not only to prepare your returns but in case your return is audited.

The IRS then suggested making charitable contributions.

If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2013. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2014. A gift by check also counts for 2013 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. Use the IRS Select Check tool at IRS.gov to see if an organization is qualified.

Contributions are only deductible if made to a 501(c)(3) organization. I’m on the Board of a tax-exempt organization but we’re not a charity (it’s a 501(c)(7)). The IRS tool is handy. As the IRS notes, save your receipts; you need to have a written record for all donations of money to get the deduction.

The IRS last notes that contributing to retirement accounts is a good idea.

I agree: You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2013. On the other hand, you have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still have it count for 2013.

If you’re self-employed, you have even longer to start and contribute to a SEP IRA: the latter of April 15, 2014 or your timely filed return including extensions.

Once the clock turns to 2014 (and that’s in two weeks!), there isn’t much left that you can do that will impact your 2013 tax returns. So if you are thinking about making a charitable donation or starting a system to keep track of your expenses, now is a good time to act.

Tags:
Posted in IRS | 1 Comment »

Bad Advice: Holding the Check ’til 2010

Monday, December 14th, 2009

Most of the advice given in the tax blogosphere is good. However, I saw this posted today:

My business had a really profitable month. Do you have any ideas on last minute expenses to help lower my taxable income?

Depending on how many purchases you want to make, you could consider office furniture or computer equipment. Alternatively if you are looking for something cheaper, you could pay your January office rent early, or any other major bills such as your telephone service fee. On the other hand, you could defer some of your income until next year by waiting until after the end of the month to cash a check or two. [emphasis added]

The first part of the answer is generally good. In most cases, making a purchase of a major piece of equipment, especially if you can utilize Section 179 Depreciation, is an excellent way to lower your taxable income. And there’s nothing wrong with paying some bills early (if you’re a cash basis taxpayer). However, the last sentence is just bad advice because of constructive receipt.

The doctrine of constructive receipt governs when income is considered received. Section 1.451-2 of the Income Tax Regulations states, in part:

(a) General rule. Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.

From Sainte Claire Corporation, et. al, v. Commissioner (T.C. Memo. 1997-171):

…[A] taxpayer will be found to be in constructive receipt of income where the taxpayer had an unrestricted right to receive the income, the taxpayer was able to collect it, and the failure to receive it resulted from the exercise of the taxpayer’s own choice. [citations omitted]

If you receive a check in 2009 but let it age in your office until 2010 it’s still income in 2009 because you deliberately chose not to cash the check.

If you have an unexpectedly good December and can take Section 179, buy the new computer (I’m getting one on Wednesday). Get a new desk (I got that yesterday). Pay a bill or too early if you’re a cash-basis entity. But don’t hold onto the check until 2010.

Tags:,
Posted in Tax Preparation | 1 Comment »