Award-winning accountant Jay Starkman offers valuable tips on dealing with the IRS, election consequences, possible ways to avoid auditing, and most importantly, keeping more of your hard earned “gelt” in your pocket.
He was the recipient in 2011 of the American Institute of CPAs Arthur J. Dixon Award, the accounting profession’s highest accolade in taxation.
Starkman’s widely praised book, “The Sex of a Hippopotamus : A Unique History of Taxes and Accounting,” has been out of print for three years. Originally priced at $28.95, it has been resold on Amazon for as high as $775.
He has published six articles in The Wall Street Journal, including one on Sept. 29 on the presidential election. “Bidenomics May Repeat FDR’s Blunder: Democrats propose new taxes similar to those that plunged America back into depression in 1937.”
Here are some hot issues with Starkman’s responses. And yes, your zip code or using bitcoin can raise flags.
Will I get audited?
Almost everyone gets computer-generated notices. IRS claims that it audits 2 to 4 percent of returns, with higher income at the 4 percent rate. It counts computer notices in its audit figures. The real audit coverage is a fraction of 1 percent.
The IRS is expending its audit resources on abusive tax shelters, like conservation easements (there are 200 cases docketed in tax court now). For lower income taxpayers, the IRS spends disproportionate audit resources on verifying earned income tax credit. The result is IRS audits more low-income people with low revenue potential. The chances of being audited are tiny, so one needn’t be fearful of claiming lawful deductions. Fear versus reality helps keep taxpayers honest.
Audit risk is determined by your DIF (discriminate function) a secret formula. It includes showing inadequate income for your zip code, deductions disproportionately high for a given income, failure to report income by third parties, whether a noncash contribution required an appraisal. Living in a high-income zip code is a DIF factor all by itself.
There is no age limit for contributing to a Roth IRA, if you otherwise qualify. Or, you can contribute to a traditional IRA and convert that, or an existing 401(k), 403(b) or 457 plan to a Roth IRA.
Filing as a Married Couple?
If husband and wife have similar incomes, but one incurred disproportionate medical expenses, test whether married filing separately results in a savings. There are other situations for married-separate; one year I saved a client $150,000.
Seven states presently allow S corps and LLCs to pay taxes on behalf of the individual as a workaround for the $10,000 limit on state tax deductions. Georgia, but few other states, allows an individual income tax credit for such tax payments.
Consider paying a high state income tax using discounted film tax credits, available in dozens of states. The discount is taxable income, resulting in net savings of 6 percent to 8 percent, and there is a slight risk of loss where credits were not properly granted.
For real estate taxes paid on unimproved and nonproductive real property, one can elect to capitalize any otherwise nondeductible property tax.
If you received a PPP [paycheck protection program] loan, you may be able to both exclude the forgiven loan and deduct the expenses paid with the loan. Practitioners are awaiting IRS guidance on applying this double benefit.
Those who received less than the full Economic Impact Payment may be eligible to claim a refundable tax credit on their 2020 return. The IRS is concerned about anyone using a virtual currency (ie. bitcoin) and has a new question on returns that everyone must answer.
Filers can claim up to $300 of cash contributions to charity on their 2020 returns in addition to the standard deduction. In 2021, that becomes $600 for married filing jointly and $300 for single filers.
2021 possible tax legislation
During the campaign, [Joe] Biden proposed canceling the Trump tax cuts, raising the top federal income tax rate back to 39.6 percent, and raising the corporate income tax from 21 percent to 28 percent. He also promised to limit low capital-gains tax rates to the first $1 million in profits and extend the full Social Security tax to income above $400,000.
Given the narrow Democratic Congressional majorities and the history that the president’s party loses seats in a midterm election, Democrats may not be too aggressive in tax raises they will actually pass. A 39.6 percent top individual rate is a foregone conclusion, however, given the weak economy, the effective date might be delayed until 2022.
It’s little known that most non-itemizers with under $100,000 income can have IRS complete the calculation of tax and earned income credit. Anyone able to prepare and file their own return on paper should do so.
Starkman is a member of Congregation Beth Jacob. With wife Leah, they have three married children: an engineer, a banker and a computer tech. He is also known for his tax humor.
In terms of biblical times, he states, “To avoid the bad reputation associated with taxes, rulers should insulate themselves from the collecting and especially raising taxes. Go to Joseph and do what he tells you,” Pharaoh tells his subjects (Genesis 31:55).
Why is Joseph remembered as a successful and popular tax collector? His people were enslaved shortly after his death.