Thursday, November 16, 2017

Seven Things to Do When and IRS Letter Arrives

The IRS mails millions of letters to taxpayers every year for many reasons. Here are seven simple suggestions on how individuals can handle a letter or notice from the IRS:
  1. Don’t panic. Simply responding will take care of most IRS letters and notices.
  2. Read the entire letter carefully. Most letters deal with a specific issue and provide specific instructions on what to do.
  3. Compare it with the tax return. If a letter indicates a changed or corrected tax return, the taxpayer should review the information and compare it with their original return.
  4. Only reply if necessary. There is usually no need to reply to a letter unless specifically instructed to do so, or to make a payment.
  5. Respond timely. Taxpayers should respond to a letter with which they do not agree. They should mail a letter explaining why they disagree. They should mail their response to the address listed at the bottom of the letter. The taxpayer should include information and documents for the IRS to consider. The taxpayer should allow at least 30 days for a response.
    When a specific date is listed in the letter, there are two main reasons taxpayers should respond by that date:
    • To minimize additional interest and penalty charges.
    • To preserve appeal rights if the taxpayers doesn’t agree.
  6. Don’t call. For most letters, there is no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, the taxpayer can use the phone number in the upper right-hand corner of the letter. They should have a copy of the tax return and letter on hand when calling. 
  7. Keep the letter. A taxpayer should keep copies of any IRS letters or notices received with their tax records.  

Wednesday, August 23, 2017

Divorce or Separation May Affect Taxes

Divorce or Separation May Affect Taxes

Taxpayers who are divorcing or recently divorced need to consider the impact divorce or separation may have on their taxes. Alimony payments paid under a divorce or separation instrument are deductible by the payer, and the recipient must include it in income. Name or address changes and individual retirement account deductions are other items to consider. has resources that can help along with these key tax tips:
  • Child Support Payments are not Alimony.  Child support payments are neither deductible nor taxable income for either parent.
  • Deduct Alimony Paid. Taxpayers can deduct alimony paid under a divorce or separation decree, whether or not they itemize deductions on their return. Taxpayers must file Form 1040; enter the amount of alimony paid and their former spouse's Social Security number or Individual Taxpayer Identification Number.
  • Report Alimony Received. Taxpayers should report alimony received as income on Form 1040 in the year received. Alimony is not subject to tax withholding so it may be necessary to increase the tax paid during the year to avoid a penalty. To do this, it is possible to make estimated tax payments or increase the amount of tax withheld from wages.
  • IRA Considerations. A final decree of divorce or separate maintenance agreement by the end of the tax year means taxpayers can’t deduct contributions made to a former spouse's traditional IRA. They can only deduct contributions made to their own traditional IRA. For more information about IRAs, see Publications 590-A and 590-B.
  • Report Name Changes.  Notify the Social Security Administration (SSA) of any name changes after a divorce. Go to for more information. The name on a tax return must match SSA records. A name mismatch can cause problems in the processing of a return and may delay a refund.
For more on this topic, see Publication 504, Divorced or Separated Individuals. Get it on at any time.
Avoid scams. The IRS does not initiate contact using social media or text message. The first contact normally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on to find out.

Thursday, July 20, 2017

Understanding Charitable Remainder Trusts

How to Secure a Lifetime Income, Save Taxes & Benefit a Charity

Since 1969, countless families have used charitable remainder trusts (CRTs) to increase their incomes, save taxes and benefit charities.
What does a CRT do?
A CRT lets you convert a highly appreciated asset like stock or real estate into lifetime income. It reduces your
income taxes now and estate taxes when you die. You pay no capital gains tax when the asset is sold. And it lets you help one or more charities that have special meaning to you.
How does a CRT work?
You transfer an appreciated asset into an irrevocable trust. This removes the asset from your estate, so no estate taxes will be due on it when you die. You also receive an immediate charitable income tax deduction.
The trustee then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets. For the rest of your life, the trust pays you an income. When you die, the remaining trust assets go to the charity(ies) you have chosen. That’s why it’s called a charitable remainder trust.

Charitable Remainder Trust
Why not sell the asset myself and re-invest?
You could, but you would pay more in taxes and there would be less income for you. Let’s look at an example.
Years ago, Max and Jane Brody (ages 65 and 63) purchased some stock for $100,000. It is now worth $500,000. They would like to sell it and generate some retirement income.
If they sell the stock, they would have a gain of $400,000 (current value less cost) and would have to pay $60,000 in federal capital gains tax (15% of $400,000). That would leave them with $440,000. (See chart at right.)
If they re-invest and earn a 5% return, that would provide them with $22,000 in annual income. Multiplied by their life expectancy of 26 years, this would give them a total lifetime income (before taxes) of $572,000. Because they still own the assets, there is no protection from creditors and no charitable income tax deduction is available.
What happens if they use a CRT?
If they transfer the stock to a CRT instead, the Brodys can take an immediate charitable income tax deduction of $90,357. Because they are in a 35% tax bracket, this will reduce their current federal income taxes by $31,625.
The trustee will sell the stock for the same amount (see chart at right), but because the trust is exempt from capital gains tax, the full $500,000 is available to re-invest. The same 5% return will produce $25,000 in annual income which, before taxes, will total $650,000 over their lifetimes. That’s $78,000 more in income than if the Brodys had sold the stock themselves. And because the assets are in an irrevocable trust, they are protected from creditors.
What are my income choices?
You can receive a fixed percentage of the trust assets (like the Brodys), in which case your trust would be called a charitable remainder unitrust. With this option, the amount of your annual income will fluctuate, depending on investment performance and the annual value of the trust.
The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income will increase as the value of the trust grows.
Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily market-
able, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust’s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year.
Comparison of Income After Sale
 Without CRTWith CRT
Current Value of Stock$ 500,000$ 500,000
Capital Gains Tax*- 60,0000
Balance To Re-Invest$ 440,000$ 500,000
5% Annual Income$ 22,000$ 25,000
Total Lifetime Income$ 572,000$ 650,000
Tax Deduction Benefit**$ 0$ 31,625
*15% federal capital gains tax only.
(State capital gains tax may also apply.)
**$90,357 charitable income tax deduction times 35% income tax rate.

Can I receive a fixed income instead?
Yes. You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.
This option is usually a good choice at older ages. It doesn’t provide protection against inflation like the unitrust does, but some people like the security of being able to count on a definite amount of income each year. It’s best to use cash or readily marketable assets to fund an annuity trust.
In either (unitrust or annuity trust), the IRS requires that the payout rate stated in the trust cannot be less than 5% or more than 50% of the initial fair market value of the trust’s assets.
Who can receive income from the trust?
Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives.
The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you receives it. Instead of lasting for someone’s lifetime, the trust can also exist for a set number of years (up to 20).
Do I have to take the income now?
No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets will have appreciated considerably in value, resulting in more income for you.
How is the income tax deduction determined?
The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates. (Our example is based on a 3.0% Section 7520 rate.) Generally, the higher the payout rate, the lower the deduction.
It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction can reduce your income taxes by 10%, 20%, 30% or even more.
What kinds of assets are suitable?
The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won’t qualify, either, but you might consider paying off the loan.) Cash can also be used.
Who should be the trustee?
You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.
However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.
Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.
Do I still have some control?
Yes. For as long as you live, the trustee you select—not the charity—controls the assets. Your trustee must follow the instructions you put in your trust. You can retain the right to change the trustee if you become dissatisfied. You can also change the charity (to another qualified charity) without losing the tax advantages.
Can I make any other changes?
Generally, once an irrevocable trust is signed, you cannot make any other changes. Be sure you understand the entire document and it is exactly what you want before you sign.
Sounds great for me. But if I give away the asset, what about my children?
If you have a sizeable estate, the asset you place in a CRT may only be a small percentage of your assets, so your children may be well taken care of. However, if you are concerned about replacing the value of this asset for your children, there is an easy way to do so.
As the illustration below shows, you can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust. The trustee of the insurance trust can then purchase enough life insurance to replace the full value of the asset for your children or other beneficiaries.

Replace Asset with Insurance
Why use a life insurance trust?
With a trust, the insurance proceeds will not be included in your estate, so you avoid estate taxes. You can keep the proceeds in the trust for years, making periodic distributions to your children and grandchildren. And any proceeds that remain in the trust are protected from irresponsible spending and creditors (even spouses).
Life insurance can be an inexpensive way to replace the asset for your children. (Every dollar you spend in premium buys several dollars of insurance.) Insurance proceeds are available immediately, even if you and your spouse both die tomorrow. And, in addition to avoiding estate taxes, the proceeds will be free from probate and income taxes.
So what’s the catch?
There really isn’t one. Combining a charitable remainder trust with an irrevocable life insurance trust is a winning formula for everyone—you, your children and the charity.
You convert an appreciated asset into lifetime income, and because you pay no capital gains tax when the asset is sold, you receive more income than if you had sold it yourself and invested the sales proceeds. You receive an immediate charitable income tax deduction, reducing your current income taxes. And by removing the asset from your estate, you reduce estate taxes that may be due when you die.
With the life insurance trust replacing the full value of the asset, your children receive much more than if you had sold the asset yourself, and paid capital gains and estate taxes. Plus the proceeds are free of income and estate taxes, and probate.
Finally, you will make a substantial gift to a favorite charity. And because the charity knows it will receive the gift at some point in the future, it can plan projects and programs now—benefiting even before receiving the gift.
Should I seek professional assistance?
Yes. If you think a charitable remainder trust would be of value to you and your family, speak with a tax-planning attorney, insurance professional, corporate trustee, investment adviser, CPA, and/or favorite charity. Be sure an attorney experienced in CRTs prepares the documents.
Benefits of a Charitable Remainder Trust
  • Convert an appreciated asset into lifetime income.
  • Reduce your current income taxes with charitable income tax deduction.
  • Pay no capital gains tax when the asset is sold.
  • Reduce or eliminate your estate taxes.
  • Gain protection from creditors for gifted asset.
  • Benefit one or more charities.
  • Receive more income over your lifetime than if you had sold the asset yourself.
  • Leave more to your children or others by using life insurance trust to replace the gifted asset.

Source :

Monday, July 10, 2017

Tips on How to Handle an IRS Letter or Notice

The IRS mails millions of letters every year to taxpayers for a variety of reasons. Keep the following suggestions in mind on how to best handle a letter or notice from the IRS:

1.    Do not panic. Simply responding will take care of most IRS letters and notices.

2.    Do not ignore the letter. Most IRS notices are about federal tax returns or tax accounts. Each notice deals with a specific issue and includes specific instructions on what to do. Read the letter carefully; some notices or letters require a response by a specific date.

3.    Respond timely. A notice may likely be about changes to a taxpayer’s account, taxes owed or a payment request. Sometimes a notice may ask for more information about a specific issue or item on a tax return. A timely response could minimize additional interest and penalty charges.

4.    If a notice indicates a changed or corrected tax return, review the information and compare it with your original return. If the taxpayer agrees, they should note the corrections on their copy of the tax return for their records. There is usually no need to reply to a notice unless specifically instructed to do so, or to make a payment

5.    Taxpayers must respond to a notice they do not agree with. They should mail a letter explaining why they disagree to the address on the contact stub at the bottom of the notice. Include information and documents for the IRS to consider and allow at least 30 days for a response.

6.    There is no need to call the IRS or make an appointment at a taxpayer assistance center for most notices. If a call seems necessary, use the phone number in the upper right-hand corner of the notice.

7.    Be sure to have a copy of the related tax return and notice when calling.

8.    Always keep copies of any notices received with tax records.

9.   The IRS and its authorized private collection agency will send letters and notices by mail. The IRS will not demand payment a certain way, such as prepaid debit or credit card. Taxpayers have several payment options for taxes owed.

Friday, June 16, 2017

3 Trust Ideas for Reducing Estate Taxes

Trusts are an effective way to protect assets from tax, creditors and other forces seeking to take a piece of what your clients have built over their lifetimes. Here are three worth considering carefully: 

Charitable Remainder Trust: 

This kind of trust provides two big benefits .First, it creates a place for them to donate assets (that might be burdened with high capital gains), giving them an immediate charitable deduction. Second, the trust generates regular income for the client, while remaining tax-free. Upon death, the remainder of the trust goes to the charitable organization, also tax-free. For charity-minded clients, this is the best of both worlds, allowing them to benefit from their assets, while also giving back.

 Domestic Asset Protection Trust (DAPT): 

A DAPT is an irrevocable trust that is set up under the laws of the states, allowing a person to be a discretionary beneficiary of his/her own trust without creditors being able to access it. This means the trust is safe from a wide spectrum of threats, including divorce, bankruptcy and taxes. However, not all jurisdictions are equal in this regard. It’s important to choose a state with a short statute of limitations, and one where no statutory exception creditors have access. 

Dynasty Trust:

In all the tax reform talk about a potential repeal of the estate tax, it is sometimes lost that the GST, or Generation Skipping Tax, and Gift Tax will likely still exist. Clients wishing to leave a legacy to future generations of their family could suffer significant burdens from both taxes as they work to pass on their wealth. A dynasty trust is set up so that the trust can make discretionary distributions that avoid the GST. Numerous benefits include protection from estate tax, creditors, divorce, direct decedents and spendthrifts. Additionally, it allows for a consolidation of client capital. 

Friday, June 2, 2017

Injured Spouse Relief: Qualifications & How to Apply

Did you file a tax return only to have your refund applied toward debt that your spouse owed? Or, you know your refund will be subject to your spouse’s debt, do you know what your rights are? If either of these scenarios relate to you, you are considered and injured spouse and you can do something to get your portion of the tax refund awarded to you.
Debts The IRS Can Withhold From Your Tax Refund
Debts that can be withheld from your tax return include the following:
  • Past due federal or state tax.
  • Past due child or spousal support payments.
  • Other federal non-tax debt including student loans.
How Do You Know If You Are An Injured Spouse?
According to the IRS website in order for you to qualify as an injured spouse you first must have filed a joint return with your spouse. Second, you must have reported taxable earnings that show you had income tax withheld during the tax year or paid estimate tax payments. You can also qualify if you were able to claim a tax refund credit including the child tax credit or an earned income credit.
Additionally, you must not be legally responsible for any of the past due amount. The money owed must either be linked to your spouse from before you were married or be solely their responsibility. If you owe the debt jointly, you will not qualify for the injured spouse tax relief.
What Else Do I Need To Know?
  • Special rules apply for some injured spouses, specifically those that live in a community property state. If you live in a community property state and believe you are an injured spouse, please refer to IRS publication 555 in order to understand your rights.
  • If you qualify as an injured spouse you are entitled to only a portion of what your joint tax return would have been.
  • You can file for injured spouse relief in one of two ways. If you know ahead of time that your return will be subject to paying off your spouse’s debt, you can file for the relief right with your tax return. You are also able to file for spousal relief after you have already submitted your return to the IRS.
What Forms Do I Need To Fill Out
In order to claim injured spouse tax relief you will need to fill out and file IRS form 8379 for injured spouse allocation. You can file the form either electronically or by mail. If you are filing a paper return and plan to include form 8379 with your return, the IRS asks that you write “Injured Spouse” in the upper top left corner of your 1040, 1040A or 1040EZ form.
If have already filed your tax return and are filing form 8379 by itself you will need to make sure that you include on the form both yours and your spouse’s social security numbers and list them in the same order that you listed them on your original return. Additionally, both parties must sign the form.Include the copies of W2 and other Tax Document which have federal withholding . 

Processing Time 

Generally: If you file Form 8379 with a joint return electronically, the time needed to process it is about 11 weeks. If you file Form 8379 with a joint return on paper, the time needed is about 14 weeks. If you file Form 8379 by itself after a joint return has already been processed, the time needed is about 8 weeks

Wednesday, October 5, 2016


You may discover you made a mistake on your tax return. You can file an amended return if you need to fix an error. You can also amend your tax return to claim a tax credit or deduction. Here are 10 tips from the IRS on amending your return:
  1. When to amend. You should amend your tax return if you need to correct filing status, the number of dependents or total income. You should also amend your return to claim tax deductions or tax credits that you did not claim when you filed your original return. The instructions for Form 1040X, Amended U.S. Individual Income Tax Return, list more reasons to amend a return

  2. When NOT to amend. In some cases, you don’t need to amend your tax return. The IRS will make corrections, such as math errors, for you. If you didn’t include a required form or schedule, for example, the IRS will mail you a notice about the missing item.

  3. Form 1040X.  Use Form 1040X to amend a federal income tax return that you filed before. You must file it by paper; you cannot file it electronically. Make sure you check the box at the top of the form that shows which year you are amending. Form 1040X has three columns. Column A shows amounts from the original return. Column B shows the net increase or decrease for the amounts you are changing. Column C shows the corrected amounts. You should explain what you are changing and the reasons why on the back of the form.

  4. More than one tax year.  If you file an amended return for more than one year, use a separate 1040X for each tax year. Mail them in separate envelopes to the IRS. See “Where to File” in the instructions for Form 1040X for the address you should use.

  5. Other forms or schedules. If your changes have to do with other tax forms or schedules, make sure you attach them to Form 1040X when you file the form. If you don’t, this will cause a delay in processing.

  6. Amending to claim an additional refund. If you are waiting for a refund from your original tax return, don’t file your amended return until after you receive the refund. You may cash the refund check from your original return. Amended returns take up to 16 weeks to process. You will receive any additional refund you are owed.

  7. Amending to pay additional tax. If you’re filing an amended tax return because you owe more tax, you should file Form 1040X and pay the tax as soon as possible. This will limit interest and penalty charges.

  8. Reconciling the Premium Tax Credit. You may also want to file an amended return if:
    • You filed and incorrectly claimed a premium tax credit, or
    • If you received a corrected or voided Form 1095-A. For more information, see Corrected, Incorrect or Voided Forms 1095-A for Tax Years 2014 and 2015.

  9. When to file. To claim a refund file Form 1040X no more than three years from the date you filed your original tax return. You can also file it no more than two years from the date you paid the tax, if that date is later than the three-year rule.

  10. Track your return. You can track the status of your amended tax return three weeks after you file with “Where’s My Amended Return?” This tool is available on or by phone at 866-464-2050.