2013 Tax Numbers Announced, Plus 2013 Tax Planning Advice

A variety of numbers that are important for 2013 tax planning were recently released by the Internal Revenue Service and Social Security Administration.

First, let’s talk retirement accounts. In 2013, maximum 401(k) contributions from your own paycheck will be capped at $17,500 for the year, an increase of $500 over 2012. For folks 50 and older, the “catch-up” limit remains the same, at $5,500. Personal IRA contributions will be limited to $5,500 for those under 50, and $6,500 for those age 50 and older. For SIMPLE accounts, the maximum contribution increases to $12,000, with a $2,500 catch-up limit for those 50 and over.

While elimination of the Social Security taxable wage limit is one of the proposals on the table in Washington, D.C., the inflation adjusted cap for 2013 is currently slated to be $113,700, up from $110,100 for 2012. This is the maximum salary level per year per person on which Social Security taxes are charged. Your wages above that amount are not subject to that particular tax. Expect this to be a hotly debated item during the next Congressional session.

Also on the Social Security front, retirees that have not yet reached full retirement age for their birthdate can earn up to $15,120 in 2013 from employment without losing any Social Security benefits.

If you provide cash gifts to others, you’re in luck in 2013: The annual gift tax exclusion has increased to $14,000 for 2013. Do note, however, that this is als a hotly contested item, and may be on the retroactive chopping block for 2013.

Lastly, Health Savings Account (HSA) contribution limits will increase to $3,250 for individuals and $6,450 for families next year.… Continue reading

Penalty Abatement Statements – A Humorous Example

Taxpayers have the right to request relief from penalties assessed by the Internal Revenue Service. The IRS sets very specific criteria for the granting of penalty abatements. It can be very difficult to demonstrate that a taxpayer’s circumstances meet the criteria for penalty relief. Most of the time, we will request a written statement from the taxpayer explaining the circumstances that lead to the accrual of their tax liability, and then use that to create our own penalty abatement request that fits to one of the IRS criterion, cites case law, etc.

Most of the time, taxpayer’s have some reason for not paying their taxes that ties back to not having the money to do so. Lack of funds does not meet IRS reasonable cause criteria, but the circumstances behind the lack of funds sometimes can be reasonable cause.

Occasionally, the taxpayer’s explanation for failing to pay their taxes doesn’t leave us with a lot to work with. On rare occasions, we receive an explanation that is quite humorous.

This example is from a taxpayer that elected to continue NOT paying his taxes because it was financially convenient. With a struggling business, a divorce, and alimony and child support to pay, the taxpayer was experiencing financial hardship. He wrote:

I financed [business] shortfalls with credit card advances and soon I had unsupportable credit card debts and many other expenses…

As things started to turn around for the taxpayer, he continues:

In early 2001 I noticed that I somehow had enough money to pay my bills. Later, I discovered that I had inadvertently neglected to call in the 941 payment [for fourth quarter], even though the check had been generated by the accounting program. I was consternated but simply didn’t have the money to make good.

This is a common reason as to why people miss a Federal Tax Deposit, often several in a row. They then try to make it up when they can. However, in this case:

I expected a notice from the IRS daily, but nothing happened and when it was time for the next 941 payment I thought, “This is the kind of tax relief I need right now.” As an expedience, I didn’t pay the 941’s for the next several months and used the respite to get back on my feet financially.

Doing this enabled the taxpayer to get current with his vendors, credit cards, etc. He skipped his payroll tax … Continue reading

Super-secret RCP reduction tip for Offers in Compromise

I know you’d rather hear about marketing, but I have something that could be of benefit to your clients that I want you to know about.

Based on recent conversations with a few tax practitioners, there is apparently a super-secret method for reducing the Reasonable Collection Potential calculated for an Offer in Compromise. I’m calling it “super-secret” because nobody I’ve been talking to about it so far has noticed it. It’s a method that is hiding in broad daylight, because it’s actually printed right on the Form 656.

One of the elements of the Fresh Start changes that the IRS didn’t make a big deal about in the media was that, for the third time in 18 months, they decided to slightly alter the Offer in Compromise payment options. They reverted to the “Lump Sum Cash” and “Periodic Payment” naming conventions that existed a couple years ago, but made the payment terms for the Lump Sum Cash offer much more clear.

You’re probably already aware that the remaining income multiplier was reduced from 48/60 down to 12/24. If the Offer in Compromise will be paid in full within 5 months of acceptance, the multiplier is 12, otherwise it’s 24 months. You’re probably also aware that it’s currently taking about seven months for an Offer Examiner to be assigned, plus another month or two for the Offer to be processed and accepted.

This gives your client nearly 9 months to get their finances straightened out. More than enough time to figure out how to come up with the Offer money and put it aside. In fact, they can have even more time. After acceptance, the Offer doesn’t need to be paid over the course of 5 months, it needs to be fully paid within 5 months, in order to qualify for the 12 month multiplier.

See the difference there?

In reality, from the time of submitting their Offer, your client can reasonably expect to have a whopping 12 to 14 months to come up with the cash. By filing the Offer with a 12 month multiplier, you get the lowest possible RCP calculation. You simply file it as a Lump Sum Cash Offer, include the 20% down, and need to come up with the other 80% a full 5 months after acceptance. In other words, in section 5 of Form 656, you put ONE payment, dated 5 months after acceptance of the Offer.

With … Continue reading