“It’s not fair!” Every week I hear this from a divorce client about some obscure gotcha rule that affects their divorce settlement outcome. They are lucky. They’re getting hit upside the head only during a once-in-a-lifetime divorce. You, my dear reader, are not so lucky. IRS gotcha rules can hit you upside the head each and every year, if you’re not careful. And those rules keep changing.
I recently interviewed Dillard Leverkuhn, a Bryan CPA and partner with Thompson, Derrig & Craig, PC (www.tdccpa.com/) about the most vexing tax issues he sees. To assist you in your tax planning before year-end, I give you just a few of his tips.
Foreign Bank Accounts
This one is becoming so big that Dillard’s firm has moved it to the first question of their client tax organizer questionnaire. Most financial advisors and their clients assume that filing a tax return with a foreign country means that foreign account holders aren’t required to file anything with their US tax return. Not true. If you have a foreign bank account and you have never filed a Report of Foreign Bank and Financial Accounts Form TDF 90-22.1, you may need to seek professional advice. If you own foreign account(s) and the aggregate value (converted to US dollars) of all foreign accounts is $10,000 on any day during the year, you must file this IRS form for that year.
Failure to file has cost some local citizens between tens of thousands to hundreds of thousands of dollars in additional tax and penalties for not filing the report plus regular penalties plus interest plus CPA fees plus attorney fees. Yes, attorney fees. Failure to file this form has become a serious problem.
For 2011, you need to file this form by June 30, 2012. No extension. Dillard has had to go back six years and re-file tax returns for clients. This is three years more than the statute of limitations.
When Tax Exempt Interest Is Not Tax Exempt
Many folks invest in tax-exempt bonds to avoid income taxes. If your bonds are specified private activity bonds, your tax-exempt interest might suddenly become taxable. It is added back into your Alternative Minimum Tax (AMT) calculation.
You can see whether you bond is a private activity bond by checking the Form 1099. You may want to check with your investment advisor about repositioning your bond investments if your advisor is not aware that you are subject to AMT. If you are picking your own investments and preparing your own tax returns, you are particularly at risk for this gotcha.
Losing Out on a Deduction
Dillard has seen a trend among clients who previously prepared their own tax returns on do-it-yourself tax preparation software. These clients were missing the sales tax deduction on prior returns. He offers to amend prior returns so his clients can recapture that deduction.
Looking forward, the sales tax deduction expires on December 31, 2011. If you are thinking about replacing a car, buying a truck, boat or RV, you might want to think about buying it before year-end. For example, if you buy a $40,000 vehicle before December 31, 2011, and you are in the 25% tax bracket, you can capture an income tax savings of $625.
Taking Money Out of Your IRA
Required Minimum Distribution (RMD) rules are in effect the year in which the IRA owner turns 70 ½. If you don’t take out enough money from your IRA by year-end, you may have to pay a 50% penalty on the RMD that is required but not taken.
Dillard has noticed that many people don’t understand how to calculate their IRA RMD amount every year. Here’s how to do it for 2011.
Step 1. Add up the combined balance of all IRA accounts as of December 31, 2010.
Step 2. Look up your factor in IRS Publication 590 (find it at www.IRS.gov). You need to scan to nearly the end of the publication to Table 3. If your spouse is more than 10 years younger than you, go to Table 2.
Step 3. Divide your combined balances by your factor. The answer is your RMD – the minimum amount you need to take out of your IRAs during 2011.
Note: The IRS Publication 590 instructs us to calculate a separate RMD for each IRA and then add them together for a combined total RMD. If you have taken an algebra class, you will know that both the method I describe and the Pub 590 method will give you the same total RMD.
If you have an inherited IRA, you need to seek professional tax advice because the distribution rules are different.
When you are taking money out of your retirement plan account (not to be confused with your IRA account), you must calculate the RMD for each retirement plan separately. You cannot combine retirement plan RMDs nor can you combine a retirement plan and an IRA in one RMD.