Tax & Business Strategies Monthly Newsletter - April 2008

Tax Planning Strategies
IRS Announces Stimulus Rebate Schedule
Plan Your Withholding & Estimates for 2008
Zero Capital Gains Rate in 2008 Requires Careful Planning

Business & Management Practices
Disposing of Business Assets
Use Like-Kind Exchanges to Defer Taxes

General Information
Where’s My Refund?
It's Important to Pay Taxes in Full
April 15 Tax Deadline Rapidly Approaching

Briefs
Read This Before Tossing Old Tax Records
What to Do if You Haven’t Filed a Prior Year’s Return
Tips for Recently Married or Divorced Taxpayers

TAX PLANNING STRATEGIES

IRS Announces Stimulus Rebate Schedule

The IRS has announced the Stimulus Rebate payment schedule for tax returns filed by April 15. Taxpayers who utilized direct deposit on their 2007 tax return will be first to receive the rebates.

Direct Deposit Payments - Based on the last two digits of the taxpayer’s Social Security number, the following are the planned deposit dates into the taxpayer’s bank account.

00 - 20 -- May 2
21 - 75 -- May 9
76 – 99 -- May 16

Paper Check – Based on the last two digits of the taxpayer’s Social Security number, the following are the planned issue dates for the checks.

00 - 09 -- May 16
10 - 18 -- May 23
19 - 25 -- May 30
26 - 38 -- June 6
39 - 51 -- June 13
52 - 63 -- June 20
64 - 75 -- June 27
76 - 87 -- July 4
88 – 99 -- July 11

A small percentage of tax returns will require additional time to process and to compute a stimulus payment amount. For these returns, stimulus payments may not be issued in accordance with the schedule above, even if the tax return was processed by April 15.

All or part of an economic stimulus payment may be applied to back taxes or certain other debts of the taxpayer, such as delinquent child support and student loans. In such cases, the IRS will send a letter to the taxpayer explaining the offset.

To accommodate people whose tax returns are processed after April 15, the IRS will continue sending weekly payments. People who file tax returns after April 15 and receive a refund can expect to receive their economic stimulus payments in about two weeks after receiving their tax refunds, but not before the date they would have received their payment if the return had been processed by April 15. To ensure taxpayers receive their stimulus payment this year, they must file a tax return by October 15.

Two bureaus of the Treasury Department are involved in making the payments. The IRS will calculate the amount of each economic stimulus payment based on the tax year 2007 income tax returns it receives. The IRS will then forward the information to the Financial Management Service (FMS), which is the bureau of the Treasury Department that makes federal payments such as Social Security benefits, federal income tax refunds and, now, economic stimulus payments.

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Plan Your Withholding & Estimates for 2008

April 15 is the due date for the first estimated tax installment for the 2008 tax year and only a couple of weeks away.

You may not realize it, but taking a few minutes to plan your estimated tax payments and/or proper withholding amounts for the year can actually insulate you from underpayment penalties in 2009.

Congress considers our tax system as a "pay-as-you-go" system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the "pay-as-you-go" requirement. These include:

• Payroll withholding for employers;

• Pension withholding for retirees; and

• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This nondeductible interest penalty is higher than what you might earn from a bank and is computed on a quarter-by-quarter basis.

Safe Harbor Payments – Federal law and most states have safe harbor rules. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year:

1. The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of your current year’s tax liability, you can escape a penalty.

2. The second safe harbor – and the one taxpayers rely on most often – is based on your tax in the immediately preceding tax year. If your current year’s payments equal or exceed 100% of the amount of your prior year’s tax, you can escape a penalty. If your prior year’s adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year’s tax to meet the safe harbor amount.

Where taxpayers get into trouble is when their income goes up or their withholding goes down for the current year versus the prior year. Examples are having a substantial increase in income, such as when investments are cashed in, thereby increasing income but without any corresponding withholding or estimated payments. Another frequently encountered situation is when a taxpayer retires and his payroll income is replaced with pension and Social Security income without adequate withholding. Taxpayers who don’t recognize these types of situations often find themselves substantially underpaid and subject to the underpayment penalty when tax time comes around.

Bottom line, 100% (or 110% for upper-income taxpayers) of your prior year’s total tax is the only true safe harbor because it is based on the prior year’s tax (a known amount), whereas the 90% of the current year’s tax amount is a variable based on the income for the current year, and often that amount isn’t determined until it is too late to adjust the prepayment amounts.

Therefore, it is very important that you bring any potential tax events to our attention, so that we might suggest adjustments to your withholding or provide you with estimated payment vouchers.

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Zero Capital Gains Rate in 2008 Requires Careful Planning

One of the greatest benefits of the tax code is the special tax rates that currently apply to gain recognized from the sale of capital assets held for more than a year (long-term). The special tax rates apply to virtually all capital assets including land, improved real estate, your home, and business assets in excess of the accumulated depreciation previously deducted.

Beginning this year, 2008, these special rates, which apply to net long-term capital gains (LTCG)(1) and qualified dividends drop to zero percent to the extent that your regular tax rate is less than 25% and 15% for all other capital gains. These rates, which apply only to non-corporate taxpayers, also apply for the alternative minimum tax and are available through 2010 barring any future tax law change.

This zero tax rate provides an extraordinary opportunity for a taxpayer to cash in on certain gains and pay no tax. This could be tax paradise for those who carefully plan their transactions this year through 2010.

The conventional strategy in the past was to offset as much of your gains as possible with losses from selling other assets in your portfolio. If you have an overall loss, then it is limited to $3,000 ($1,500 for married taxpayers filing separately), and any excess carries over to the next year. Keep in mind that losses from the sale of business assets are generally separately allowed in full in the year of sale, and not mixed with the losses from the sale of other capital assets. So with this change in the law, a new strategy emerges: it may be more appropriate to take gains to the extent they would be taxed at zero percent.

What this zero tax means to you is that there is no tax on your long-term capital gains to the extent that your regular tax rate is less than 25%. Before you make plans to sell everything in 2008 through 2010, remember that the gain itself adds to your income, impacts income-based limitations, and may possibly push you into a higher regular tax bracket, so it is a balancing act to take advantage of this zero rate. Of course, you can also use losses to offset the gains, and contrary to past conventional strategy, you should only have enough losses to keep the gain within the zero tax rate. If your income is too high to take advantage of the zero tax rate, then continue to employ the conventional strategies discussed above for 2008 through 2010.

The zero tax rate applies to the amount of your taxable income below the 25% tax bracket. For 2008, this “breakpoint” is the “top” of the 15% bracket and is:

• $32,550 for single taxpayers and married taxpayers filing separate returns;

• $65,100 for married taxpayers filing joint returns and surviving spouses; and

• $43,650 for heads of households.

Thus, the amount of your adjusted net capital gain taxed at 0% is:
(1) The break-point amount for your filing status, minus
(2) Your “other” taxable income (taxable income reduced by adjusted net capital gain).

Here’s an example to illustrate the tax savings. Todd is a 40-year-old single taxpayer who earned $25,000 of wages in 2008. He has some stock with a very low basis that he’s held for 15 years that he sells for a $10,000 gain. He has no other income and does not itemize his deductions. His taxable income – AGI of $35,000 less the standard deduction and his exemption allowance – is $26,050. His 2008 tax is $2,006, making his effective tax rate just 7.7%. Since Todd’s taxable income is within the 15% tax bracket, he pays no tax on the $10,000 LTCG. If he’d sold the stock in 2007, his tax on the gain would have been $500. If the law required the gain to be taxed at ordinary rates, the tax on it would be $1,500. Either way, Todd saves a significant amount of tax on his 2008 sale.

The following issues may also come into play when planning your capital gains and losses strategies: (1) Gains from the sale of inherited capital assets are automatically long-term; (2) By election, long-term capital gains can be used to increase the amount of investment income when figuring the investment interest deduction, but then aren’t eligible for the lower capital gain tax rates; (3) Losses from selling personal-use capital assets, such as your home or auto, are not deductible, and (4) You may have short and/or long-term capital losses from a prior year to account for. You should also take into consideration how your state taxes capital gains; most do not have a 0% LTCG rate, and many do not have any special rates for capital gains.

Please give our office a call so that we can help you develop a strategy to suit your unique situation.


(1) Net capital gain is generally the excess of net long-term capital gains over net short-term capital losses, subject to certain netting rules. However, the zero tax rate doesn't apply to collectibles gain or gain taxed on sales of certain small business stock, both taxed at a maximum rate of 28%, or to unrecaptured Sec. 1250 gain (depreciation) gain, which is taxed at a maximum rate of 25%.

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BUSINESS & MANAGEMENT PRACTICES

Disposing of Business Assets

Many taxpayers fail to understand the tax ramifications of disposing of personal property such as equipment, furniture and autos used in business and end up with unpleasant surprises at tax time. The tax consequences depend upon how the property was used, how long it was owned and the method of disposition. There are numerous ways of disposing of an asset, such as selling, scrapping, converting to personal use, contributing to a charity, exchanging for another like business item, or even giving it away. We cannot cover all of the aspects of dispositions here but we can give you an overview.

The key to knowing the tax ramifications of dispositions is understanding the tax term “adjusted basis.” Any gain or loss from the disposition of a business asset is measured from adjusted basis. Adjusted basis is generally the cost of the item reduced by any business deductions taken for the item. For example, you purchase computer equipment for $1,000 and it is in a class of business property that must be depreciated over 5 years. You can elect to write-off any portion of the item the first year (within the Sec. 179 expense limitations) and depreciate the balance over five years. If you elected to depreciate the item instead of taking the Sec. 179 expense election, your depreciation deduction would be $200, and your adjusted basis after the first year would be $800 ($1,000 - $200). If you then sold the equipment for $900, you would have a $100 ($900 - $800) taxable gain. Why? Because you recovered $100 of your cost as the depreciation you had previously taken as a deduction. On the other hand, if you had sold it for $500, you would have a $300 deductible loss. So, as you can see, you must take into account how much of the cost of the asset you have already written off to determine any subsequent gain or loss.

Favorite and frequently encountered deductions for taxpayers are non-cash contributions to charity. Although there are some special rules, taxpayers can generally deduct the lesser of cost or fair market value (FMV) for personal items contributed to a charitable organization. For business assets, adjusted basis is substituted for cost. For example, if a taxpayer contributes to charity a desk which was used only for personal purposes, and never for business, that had cost $150 and has a FMV of $50, the taxpayer can take a $50 charitable deduction. However, if the desk had been a business asset, and its cost had been fully deducted (depreciated), the taxpayer’s charitable deduction would be zero since the adjusted basis would have been zero and was less than the FMV.

When a business asset is exchanged (traded-in) for a like-kind item, generally any gain or loss that would have resulted from the sale of the asset increases or decreases the adjusted basis of the replacement property. Thus, where a sale would result in a gain, the gain can be avoided by exchanging the item, such as trading in one business vehicle for another. On the other hand, if a sale would result in a loss, it is probably to the taxpayer’s advantage to actually sell the business asset so a loss can be taken.

Gains and losses from the sale of business assets are not included on the business schedule in the tax return where net profit or loss from operating the business is figured, and generally do not affect the taxpayer’s self-employment tax. Generally, losses from selling business assets are fully deductible in the year of sale. Gains to the extent they are attributable to depreciation are generally treated as ordinary income (but still not taxable for self-employment tax purposes), and any additional gain is treated as capital gain. If the asset was held for over a year, the long-term capital gains rates will apply.

Sometimes you may simply scrap an item because it has no further use in your business and has no resale value. When this happens, you treat the disposition as a sale for no money, which will produce a loss equal to the balance of the adjusted basis at that time. If you stop using an item for business purposes and convert it to personal use, your personal basis becomes the adjusted basis at the time of conversion with no additional deduction for the business. If you subsequently dispose of the item, any amount received in excess of the adjusted basis would be taxable but any loss would not be deductible.

If you simply give the item away to an individual, neither the business nor you as an individual taxpayer is allowed a deduction. The general rule is that the recipient’s basis will be the asset’s adjusted basis at the time of the gift. However, where a sale in the hands of the recipient would result in a loss, the loss would be based on the lower of the item’s adjusted basis or FMV at the time of the gift. If the value of the asset, plus other gifts you give the same individual during the year, exceeds $12,000 (2008), a gift tax return generally will be required.

As you can see, disposing of personal property business assets can be complicated and the results might not be as you expect or would like. Please give us a call for additional information.


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Use Like-Kind Exchanges to Defer Taxes

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. However, the tax code provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. These type of exchanges are commonly referred to as Sec. 1031 exchanges (referring to the tax code section that allows them), but it is important to understand that the tax on the gain is deferred and is not tax-free.

An exchange can include like-kind property exclusively or it can include like-kind property, along with cash, liabilities and property, that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

Who qualifies for the Section 1031 Exchange?
Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

What are the different structures of a Section 1031 Exchange?
To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another.

Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.

To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.

A reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period, the taxpayer disposes of its relinquished property to close the exchange.

What property qualifies for a Like-Kind Exchange?
Both the relinquished property you sell and the replacement property you buy must meet certain requirements.

Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.

Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.

Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property. For example, cars are not like-kind to trucks.

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:

• Inventory or stock in trade
• Stocks, bonds or notes
• Other securities or debt
• Partnership interests
• Certificates of trust

What are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?
While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters.

The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you, and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.

Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified.

The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

Are there restrictions for deferred and reverse exchanges?
It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable.

If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the proceeds that are not like-kind property.

One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete.

You cannot act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) cannot act as your facilitator.

Be careful in your selection of a qualified intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer. These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse exchange, thereby disqualifying the transaction from Section 1031 deferral of gain. The gain may be taxable in the current year, while any losses the taxpayer suffered would be considered under separate code sections.

How do you compute the basis in the new property?
Since, in an exchange, gain is deferred but not forgiven, your deferred gain will be taxed at a later time when the replacement property is sold. Thus, your basis in the replacement is reduced by the gain deferred. A collateral effect is that the resulting depreciable basis is lower (by the amount of the deferred gain) than what would otherwise be available if the replacement property were acquired in a taxable transaction.

When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

The foregoing is an overview of the provisions dealing with tax-deferred (Sec. 1031) exchanges. Clients are cautioned to consult with this office prior to entering into an exchange transaction to insure the exchange meets the strict requirements of tax-deferred exchanges. Clients should also be wary of individuals promoting like-kind exchanges without verifying the validity. Sales pitches may encourage taxpayers to exchange non-qualifying vacation or second homes. Many promoters of like-kind exchanges refer to them as “tax-free” exchanges, not “tax-deferred” exchanges. Taxpayers may also be advised to claim an exchange despite the fact that they have taken possession of cash proceeds from the sale.

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GENERAL INFORMATION

Where’s My Refund?

Are you expecting a refund and wondering where it is? If you owe back taxes, child support, or have a student loan balance, etc., the refund may have gone there. Otherwise, the IRS has a tool on their website that can track down your refund.

Whether you chose to split your refund among several accounts, opted for direct deposit to one account, or asked the IRS to mail you a check, you can track your refund through their secure web site.

To access your personal refund information, go to the IRS Where’s My Refund? website. For security reasons, you will need to provide the following:

• Social Security Number (or IRS Individual Taxpayer Identification Number)

• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household or Qualifying Widow(er))

• Exact refund amount shown on your return

If you have not received your refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you will be prompted to start a refund trace online.

If Where’s My Refund? shows that the IRS was unable to deliver your refund, you will be prompted to change your address online.

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It's Important to Pay Taxes in Full

As the April 15 deadline approaches, we begin to receive calls from taxpayers who do not have the ready cash needed to pay their tax liability. There are significant penalties for failing to pay your tax liability by the April 15 due date.

Whether paying with a timely filed tax return, or filing and paying late after receiving a bill from the IRS (and we have determined the bill is correct), taxpayers are encouraged to pay the taxes they owe in full. If taxes are not paid, and no effort is made to pay them, the IRS can ask a taxpayer to take action to pay the taxes, such as selling or mortgaging any assets owned or getting a loan. If the taxpayer continues to make no effort to pay the bill, or other payment arrangements have not been made, the IRS could take more drastic measures, such as levying bank accounts, wages, or other income, or taking other assets. A Notice of Federal Tax Lien could be filed that may have a detrimental effect on a taxpayer’s credit standing.

The penalties and interest charged by the IRS are substantially higher than most commercial lending rates, so it is generally better to borrow the funds elsewhere and pay the IRS in full. Where taxpayers cannot raise part or all of the funds to pay their taxes by conventional means, the IRS offers credit card payment and installment agreements.

Credit Card Payment – Payments can be made by credit card. However, the IRS does not pay the discount fees of credit card companies, so that is an additional fee that will be added to your credit card charge. If you are considering paying by credit card to increase your airline miles, forget it. The cost is more than the miles are worth! Payments by credit card can be made through one of two official vendors:

• Official Payments Corporation at 1-800-2PAYTAX (1-800-272-9829) - www.officialpayments.com, or

• Link2Gov at 1-888-PAY1040 (1-888-729-1040) - www.pay1040.com.

Installment Agreement – Taxpayers wishing to pay off a tax debt through an installment agreement, and owe:

• $25,000 or less in combined tax, penalties, and interest can apply for an installment agreement using a simplified procedure.

• More than $25,000 in combined tax, penalties, and interest may still qualify for an installment agreement, but must complete a more complex application including the submission of financial statements.

The IRS user fee for setting up an installment agreement is $52 for direct debit agreements and $105 for non-direct debit agreements. Certain low-income taxpayers will qualify for a reduced fee of $43. These fees must be paid with the first installment. You will also be charged interest and may be charged a late payment penalty on any tax not paid by its due date, even if your request to pay in installments is granted. Interest and any applicable penalties will be charged until the balance is paid in full.

If you are unable to pay your liability in full, please call this office as soon as possible. Procrastination can lead to further problems, penalties and interest.

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April 15 Tax Deadline Rapidly Approaching

Just a reminder to those who have not yet filed their 2007 tax return that April 15 is the due date to either file your return, pay any taxes owed, or file for the automatic six-month extension.

In addition, the April 15, 2008 deadline also applies to the following:

• Tax year 2007 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

• Tax year 2007 contributions to a Roth or traditional IRA – April 15 is the last day contributions can be made to either a Roth or traditional IRA, even if an extension is filed.

• Individual estimated tax payments for the first quarter of 2008 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2008 estimated taxes are due on April 15. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call our office for any questions.

• Individual refund claims for tax year 2004 – The regular three-year statute of limitations expires on April 15 for the 2004 tax return. Thus, April 15 is the last day a refund will be granted for any return or amended return for 2004. Caution: The statute does not apply to balances due for unfiled 2004 returns.

If we are holding up the completion of your returns because of missing information, we urge you to forward that information as quickly as possible in order to meet the April 15 deadline. Keep in mind that the last week of tax season is very hectic, and we may not be able to complete your returns if you wait until the last minute. If it is apparent that the information will not be available in time for the April 15 deadline, then let us know right away, so we may prepare an extension request and estimate tax vouchers if needed.

If we still have not met with you this year, we urge you to call right away, so that we can schedule an appointment and/or file an extension if necessary.


Filing as soon as possible takes on a new significance this year, since the cash rebates will only be issued to those who have filed a 2007 tax return. This rule applies to those who normally do not file but qualify for the rebate. Please call this office if you have questions.

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BRIEFS

Read This Before Tossing Old Tax Records

Now that you have your taxes completed for 2007, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) we need to keep the records in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) we need to keep track of the tax basis of our capital assets so when we actually dispose of them we can minimize the tax liability.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, you can probably discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute.

Examples - Sue filed her 2004 tax return before the due date of April 15, 2005. She will be able to dispose of most of her records safely after April 15, 2008. On the other hand, Don filed his 2004 return on June 2, 2005. He needs to keep his records at least until June 2, 2008. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:

• Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.

• Stock and mutual fund statements – Where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after final sale.

• Tangible property purchase and improvement records - Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

Have questions about whether or not to retain certain records? Give us a call first; it is better to make sure before discarding something that might be needed down the road.

For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records thinking that the large exclusions would cover any potential appreciation in the home’s value. Guess what happened during the real estate boom? The exclusion was not always enough! Records can be important, so please use caution when discarding them.

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What to Do if You Haven’t Filed a Prior Year’s Return

The failure to file a federal tax return can be costly — whether you end up owing more or missing out on a refund.

There are several reasons taxpayers don’t file their taxes. Perhaps you didn’t know you were required to file. Maybe, you just kept putting it off and simply forgot. Whatever the reason, it’s best to file your return as soon as possible. If you need help, even with a late return, the IRS is ready to assist you.
Here are some things to consider:

• Failure to File Penalty. If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the “late filing” penalty and interest charges. The longer you delay, the larger these charges grow.

• Losing your Refund. There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. The federal deadline for claiming refunds is three years after the return due date. For example, the last day for claiming a federal refund for your 2004 tax return will be April 15, 2008.

• EITC. Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file.

Whether or not you must file a tax return will depend upon a number of factors, including your filing status, age and gross income. Please call for assistance.


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Tips for Recently Married or Divorced Taxpayers

Newlyweds and the recently divorced taxpayers should ensure the name on their tax return matches the name registered with the Social Security Administration (SSA). A mismatch could unexpectedly delay a tax refund.

• For recently married taxpayers, the tax scenario begins when the bride says "I do." If she takes her husband's last name, but doesn't tell the SSA about the name change, a complication may result. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the Social Security Number (SSN). If a new spouse has not made the change with the SSA administration, she should use her old name on the tax return.

• After a divorce, a woman who had taken her husband’s name and made that change known to the SSA should contact the SSA if she reassumes a previous name.

The key to avoiding filing problems is to match the tax return name with what the SSA has on record for that SSN.

It's easy to inform the SSA of a name change by filing Form SS-5 at a local SSA office. It usually takes two weeks to have the change verified. The form is available on the agency's web site at www.socialsecurity.gov or by calling 800-772-1213 and at local offices. The SSA web site provides the addresses of local offices.

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