13 IRS Tax Rules Trump Tax Plan Won't Change

With Republican control of the House and Senate, President-elect Trump and Congress might tell the tax code, “you’re fired!” And as big as the coming tax changes might be, it’s worth noting what is highly unlikely to change. Keeping track of these 13 key tax rules could put dollars in your pocket and ease your interactions with the tax system.

1. Everything is income. 

The IRS taxes all income from any source, whether in cash or in kind. Lottery? Taxed. Gambling? Taxed. You name it, it’s taxed. If you find a diamond ring, you pay tax on its fair market value even if you don’t sell it. 

2. Pay taxes later. 

Most tax planning involves timing. You want to accelerate tax deductions and defer tax payments, subject to constraints such as the constructive receipt doctrine. If you have a legal right to money but say “pay me later,” it’s taxed now. But you can condition payment, such as refusing to sell your house or settle a lawsuit unless you are paid next year.

3. Forms 1099 really count. 

Those little tax forms you get in January are keyed to your Social Security number. The IRS always gets a copy. Pay attention to them—the IRS sure does. These IRS Forms 1099 are critical, and due soon.

4. Beware foreign accounts. 

Foreign bank accounts may generate income, but you won’t receive a Form 1099. Still, reporting them is key. If balances exceed $10,000 in the aggregate any time during the year, you also must file an FBAR. With FATCA, IRS scrutiny is high, and how you transition from failures to report in the past to present compliance can be delicate. Beware, so far, the IRS has collected $10 billion from offshore compliance.

5. Pay small tax bills. 

If you get a small tax bill, pay it even if the IRS is wrong. What’s “small” varies, but don’t risk an audit or dispute escalating by fighting over small dollars.

6. Reply to every IRS letter, unless it says not to. 

This is common sense. Often, fighting the IRS is about attrition.

7. Don’t talk to the IRS if they visit, and never lie. 

If the IRS comes to your home or business, decline to speak and tell them your lawyer will call. Take their card and be polite but firm. If you say anything to the IRS, don’t lie.

8. The IRS can audit 3 years, but keep records for 7, and tax returns forever. 

The usual IRS statute of limitations is 3 years after you file your return. If you understate your income by 25% or more, the IRS gets 6 years. To be safe, keep tax records for 7 years. And keep copies of your tax returns themselves forever.

9. Avoid amending returns, but if you do amend, don’t cherry-pick. 

Don’t take amending tax returns lightly. Amended returns have a high audit rate, especially if they request a refund. The IRS says you “should” amend your return if you discover a mistake after it’s filed. But there’s no legal obligation. The only time you really must amend is if you knew at the time you filed the original return that it was false. If you decide to amend, you can’t cherry-pick which items to fix. The amended return must correct everything, not just the items in your favor.

10. File returns even if you can’t pay. 

Many taxpayers don’t file on time because they don’t have the tax money. They would be much better off if they filed on time. Payment can come later, and might be the subject of an IRS installment agreement. Penalties too will likely be smaller if you file on time.

11. Don’t explain or attach too much. 

Tax returns should be concise. If an explanation or disclosure is needed, keep it succinct. Attachments to tax returns should be limited to tax forms and, where required, plain sheets of paper listing additional deductions, income, etc. Don’t attach other documents. If the IRS wants documents, it will ask.

12. Be careful with big refunds. 

Getting a refund? Consider applying it to next year’s tax payments rather than asking for the cash, especially if it is large. If you are getting a tax refund, not asking for the money back can lower your profile with an initial or amended return. 

13. Get professional advice. 

Handling a tax case by yourself is usually a mistake. You can prepare your own returns with software if you like, but if you have an audit or dispute, hire an accountant or lawyer to handle it. Even simple audits can come off the rails or extend into other areas if you aren’t careful. Whether you need practical procedural advice or technical help on particular issues, find someone with experience in your issue. And don’t wait until the last minute.

2016 Top 10 Year-End Tax Planning Tips

1. Accelerate deductions and defer income. 

It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.

2. Bunch itemized deductions. 

Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.

3. Make up a tax shortfall with increased withholding. 

Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.

4. Leverage retirement account tax savings. 

It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).

5. Reconsider a Roth IRA rollover. 

It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, reexamine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.

6. Get your charitable house in order. 

If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgment from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

7. Give directly from an IRA. 

Congress finally made permanent a provision that allows taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.

8. Zero out AMT. 

Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful; this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.

9. Don’t squander your gift tax exclusion. 

You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.

10. Leverage historically low interest rates. 

Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever.