2007 Tax Planning Figures

2007 Tax Planning Figures There are a number of key figures that taxpayers must know in order to calculate their 2007 federal income tax liabilities. Here is a list of a few such figures:

1. Income Tax Rates.

   • Married Filing Jointly:

   Over	But Not Over	Pay	+% on Excess	Of the Amount Over
   $0	$15,650	$0	10	$0
   15,650	63,700	1,565.00	15	15,650
   63,700	128,500	8,772.50	25	63,700
   128,500	198,850	24,972.50	28	128,500
   195,850	349,700	43,380.50	33	195,850
   349,700		94,601.00	35	349,700

   • Single Taxpayer

   Over	But Not Over	Pay	+% on Excess	Of the Amount Over
   $0	$7,825	$0	10	$0
   7,825	31,850	782,50	15	7,825
   31,850	77,100	4,386.25	25	31,850
   31,850	77,100	4,386.25	28	77,100
   160,850	349,700	39,148.75	33	160,850
   349,700		101,469.25	35	349,700

   • Head of Household:

   Over	But Not Over	Pay	+% on Excess	Of the Amount Over
   $0	$11,200	$0	10	$0
   11,200	42,650	1,120.00	15	11,200
   42,650	110,100	5,837.50	25	42,650
   110,100	178,350	22,700.00	28	110,100
   178,350	349,700	41,810.00	33	178,350
   349,700		98,355.50	35	349,700

2. Standard Deductions:

   • Married/Joint $10,700
   • Single 5,350
   • Head of Household $7,850
   • Dependents $850

3. Personal & Dependency Exemptions:

   $3,400, phased out at:

   • Married/joint $234,600
   • Single 156,400
   • Head of Household 195,500
   • Married/Separate 117,300

4. Capital Gains & Losses:

   	10% & 15% Tax Brackets	25% or Higher Tax Brackets
   Short-Term	Ordinary rate	Ordinary rate
   Long-Term	5%	15%

5. Alternative Minimum Tax:

   AMT Income	Tax (%)
   Up to $175,000	26%
   Over $175,000	28%

6. Tax Credit for Dependent Children:

   2007	Modified Adj. Gross Income	Tax Credit for Each Child Under 17
   Married/Joint	$0 - $110,000	$1,000
   Individual	0 - 75,000	1,000

May 24th, 2007 | No Comments »

Paying Employment Taxes

The IRS Office of Chief Counsel remids taxpayers that they need to specifically designate how payments made to the IRS are to be applied — or else the IRS will decide how to apply taxpayer payments.

The IRS will, pursuant to Revenue Procedure 2002-26, apply voluntary taxpayer payments as the taxpayer designates when he or she makes the payment to the IRS. In cases where the payment is not voluntary (i.e., it occurs via an IRS wage levy) or the taxpayer fails to designate where the IRS is to apply the payment, the IRS will apply the payment “”in the order of priority that the Service determines will serve its best interest.”

With federal income taxes, this usually means that the IRS will apply the tax payment to the tax and tax period that has the shortest IRS tax collection statute (AKA CSED or collection statute expiration date). Where trust fund recovery penalties are involved, the IRS will generally apply the payments “first to the non-trust fund portion of tax, then to assessed lien fees and collection costs, then assessed penalties, then assessed interest, then accrued penalties and accrued interest, and then finally to the trust fund portion of the tax.”

In the later scenario, the IRS is able to maximize the trust fund recovery penalty because the penalty is imposed retroactively on the amount of tax that is outstanding at the time that the penalty is assessed. Thus, if the penalty is not assessed before the taxpayer pays off the older tax periods, then the IRS will have lost the penalty amounts and interest that would have accrued on the prior tax years.

May 23rd, 2007 | No Comments »

Tax and Divorce Planning

Taxpayers often seek tax advice as a means of adding insult to injury in divorce proceedings. Private Letter Ruling 200720007 provides yet another example of how taxpayers can go about doing this.

The ex-wife requested this ruling from the IRS. The ruling requests a determination as to whether the payments the ex-wife received were not “alimony.” “Alimony” payments are generally taxable income to the recipient (in this case, the ex-wife) and tax deductible by the payor (in this case, the ex-husband).

The Code sets out several requirements for payments to qualify as “alimony” for federal income tax purposes, including:

1. such payment is received by, or on behalf of, a spouse under a divorce or separation instrument;
2. the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under section 71 and not allowable as a deduction under section 215;
3. in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee and payor are not members of the same household at the time such payment is made; and
4. there is no liability to make such payment for any period after the death of the payee and no liability to make any payment as a substitute for such payments after the death of the payee.

Payments must meet all of these elements to qualify as “alimony” for federal income tax purposes.

The divorce agreement in this case indicated that the amounts paid were to qualify as “alimony” for federal income tax purposes, but the divorce agreement failed to specify that the payments were to terminate upon the death of the payee. The question then is, are the payments “alimony” if the agreement fails to address this “death of the payee” issue?

As the IRS ruling sets out, where the agreement is silent on this issue, it is necessary to look to state law to see if the state law specifies that the requirement to make “alimony” payments terminates upon the death of the payee. The state law in this case (the state was not disclosed), did not specify that “alimony” payments were to terminate upon the payee’s death. As a result, the payments did not qualify as “alimony” for tax purposes, despite the express provision in the divorce decree.

I wonder if the wife and wife’s tax counsel had this result in mind when they failed to include a provision in the divorce agreement for the “alimony” payments to end upon the wife’s death? If so, the tax planning saved the wife from having to report and pay income taxes on the “alimony” payments and it precluded the husband from being able to deduct the payments.

May 22nd, 2007 | No Comments »

Non-Profit No More

The IRS can sometimes take a hardline with taxpayers. For example, the IRS often takes a hard line with taxpayers in instances where the taxpayer is a non-profit and it fails to timely file a tax return. In these cases the IRS will has the power to revoke the taxpayer’s non-profit status, but in many cases the IRS does not have to exercise this power.

The IRS often cites to the US v. Boyles case, which the IRS interprets as saying that there is no excuse (ever) for filing a late tax return. The case doesn’t actually say that, rather, it says that absent “reasonable cause,” there is no excuse for missing a tax filing deadline. There have been cases that interpret the Boyles opinion that watter it down even more — cases which are ignored by the IRS.

Code Section 6652(c) makes this issue much more extreme for non-profits. This section sets out a $20 per day fine for non-profits for each day that any one tax return is not filed, with a $10,000 maximum fine. The section goes on to specify that the $20 fine is $100 per day and the cap is $50,000 for non-profits that have gross receipts of $1,000,000 or more. The use of the term gross receipts is unfortunate, because many non-profits have gross receipts of more than $1,000,000 but they may only have a few dollars of income after distributions and expenses are accounted for.

Think about it. A non-profit — which is probably staffed by volunteers — misses a filing deadline. The non-profit doesn’t notice that the filing deadline was missed. The non-profit did have gross revenues in excess of $1,000,000 for the year, but it only had $10 of net income for the particular year.

The IRS does not notify the non-profit of the missed deadline for, say, two, five, ten, or more years (usually becuase the IRS is slow or it mails notices to the wrong address or taxpayer or the mail is not delivered to the taxpayer). The non-profit could now be subject to a $50,000 tax penalty and the IRS can revoke the non-profit’s tax exempt status.

The IRS will then use the threat of taking away the non-profit’s tax exempt status as leverage to politely “encourage” the non-profit to pay the $50,000 fine. This is a very common scenario (see, e.g., IRS Ruling 200720027 for an instance when it appears that the IRS actually sent some notice to the non-profit).

And what can the non-profit do to contest the penalty? They can hire a tax attorney to contest the penalty via the Appeals Office. What is the taxpayer to do when the Appeals Office misinterprets the Boyles case to uphold the penalty? Well, they will have to pursue the claim in Federal District Court — but wait, it’s a non-profit with only $10 of net income. It can’t even afford the court filing fee, so it has lost its case before the case has even started.

And if the non-profit cannot pay the $50,000 fine to the IRS, then the IRS usually doesn’t have to bother taking away the non-profits tax exmpt status — becuase it simply uses its tax collection powers to take the non-profit’s assets — shutting down the non-profit outright.

May 21st, 2007 | No Comments »

Taxation of Employee Donated Sick Leave

Employees often want to donate paid sick-leave time to deserving co-workers who find themselves in a pinch. The IRS recently released another ruling that identifies a few of the planning considerations in donating sick-leave to co-workers.

The federal tax consequences of donating paid sick-leave depends on whether the donation is made through the employer or directly from the employee and whether the recipient employee or a third party actually receive the payment.

As the recent IRS ruling sets out, where employees forfeit paid sick-leave to the employer and the employer credits the recipient employee with the donated sick-leave, the payments will only be considered taxable income to the recipient employee (for both federal income and employment taxes). This tax treatment only applies where the transfer is made pursuant to an “employer-sponsored medical leave sharing arrangement” or a “qualified employer-sponsored major disaster leave-sharing plan.”

Each of these plans has a few specific requirements. For example, as the recent IRS ruling notes, the later type of plan only covers transfers of paid sick leave that are made pursuant to a Presidential-declared disaster. Payments associated with a major disaster that is not made pursuant to a Presidential-declared disaster do not qualify.

While not addressed in the IRS rulings, presumably donations made pursuant to these plans will not trigger a gift tax liability for the donating employee.

Absent one of these arrangements or plans, the “assignment of income” doctrine specifies that the donating taxpayer is subject to both federal income and employment taxes on sick-leave that is donated to recipient employees. The donating employee could also incur a gift tax liability for the transfer.

This would be similar to the scenario where the donating employee simply wrote a check to the recipient employee; however, the donating employee may be able to avoid a gift tax on a direct transfer if they make the payment directly to a hospital or medical provider (and the payment is applied to qualified medical expenses).

An even better option might be to create a separate non-profit entity to handle these types of donations. With the non-profit, employees might be able to offset their income tax obligation with a charitable deduction (assuming that they do not run into an alternative minimum tax situation and/or their itemized deductions are not phased out due to the amount of their adjusted gross income) and there would probably be no gift tax consequences.

This option could have the added benefit of avoiding the restrictions imposed by the “medical leave sharing arrangement” and “major disaster leave-sharing plan” and the qualified medical expense limitation for the gift tax exclusion.

May 19th, 2007 | No Comments »

Taxpayer Anctics: Taxpayer Convictions

Taxpayers often make mistakes. It happens. But there are some times when you just have to ask “what was the taxpayer thinking?”

Take the recent United States v. Baucom (and combined United States v. Davis) case. Taxpayers Martin Louis Baucom and Patrick Grant Davis were convicted of conspiracy to defraud the United States and willful failure to file tax returns.

After being indicted the taxpayers were given the opportunity to hire a competent tax attorney. The taxpayers sent “questionnaires” to potential tax attorneys in an effort to hire tax counsel. The court informed the taxpayers that this was not an appropriate means for obtaining a tax attorney and it gave the taxpayers additional time to obtain tax counsel.

The taxpayers then asked the court to allow their non-attorney friend to represent them in their criminal tax matter. The taxpayers’ request – which was sent to the judge, who was also an attorney – stated:

Defendant . . . has little confidence in the legal profession . . . . Defendant is aware of a few attorneys he trusts, but their multi-thousand dollar fees are out of the question . . . . He does NOT trust just any attorney out of a grab-bag whom the government is willing to furnish; neither would this defendant be satisfied with such an “attorney’s” concept of the Constitution of the United States after the average attorney, full of law-school brainwashing, thinks that the Constitution is what the judges say it is, rather than what the Constitution itself, says it is.

The court admonished the taxpayers for “continuing to send questionnaires to potential attorneys after having been advised that this was not an effective means of obtaining counsel” and the court gave the taxpayers additional time to find a tax attorney.

The taxpayers responded by filing:

a document entitled “AFFIDAVIT & DECLARATION OF CONTINUED EFFORTS TO SEEK COMPETENT COUNSEL.” The document contained numerous citations of Washington State cases and procedural rules. Among other things, Davis asserted that “[t]his court has NO authority to appoint me counsel over my objections”; “I can and will sue any Attorney for ineffective assistance of counsel who is appointed to my case over my objections”; and that “I can and will sue the person who picked my attorney and appointed him to me over my objections if said attorney loses my case.”

Fifteen months after the indictments, the court finally said that the taxpayers had had sufficient time to obtain a tax attorney, they refused to do so, and, therefore, the criminal trial would proceed with the taxpayers representing themselves. The trial commenced and the taxpayers were convicted. The court sentenced Baucom to fifteen months imprisonment. The court considered Davis’ charitable works in imposing a light four years probation (conditioned on the service of 12 months of house arrest). The taxpayers appealed the convictions and they lost.

Notwithstanding the antics of the taxpayers, here is the interesting part of the case. The lower court judge refused to include the amount of the state taxes that the taxpayers failed to pay in determining the taxpayers federal sentence. The lower court judge said:

I don’t think I have the . . . jurisdiction to sentence this man for [a] violation of North Carolina law. I mean, it’s inconceivable to me that a federal judge would be sitting up here and saying you violated North Carolina law and I’m putting you in jail for it. It’s just–what happened to the whole notion of federalism? I don’t think I have the power to do that. And if I do, if I have discretion, I decline to exercise the discretion to do that. It’s not fair and I ain’t gonna. Y’all can all go to Richmond and they can tell some other judge what to do.

On appeal, the IRS attorneys argued that the judge did have this power and he should have exercised the power. The Fourth Circuit Court of Appeals agreed with the IRS.

The Fourth Circuit Court stated:

We also think that the sentences imposed by the district court fail to reflect the seriousness of the offense and do not provide just punishment… Appellants failed to file taxes of any sort for twelve years before they were apprehended. Moreover, as the Government notes, neither Appellant began paying taxes until 2004, after his conviction. Finally, we note with respect to Davis’ sentence that we are troubled by the heavy reliance of the district court on Davis’ charitable works.

The appeals court affirmed the convictions, vacated the sentences, and remanded the cases to the lower courts to impose higher sentences.

May 17th, 2007 | No Comments »

IRS Tax Attorney Office Reorganizes

It appears that the IRS Office of Chief Counsel is doing some housecleaning (this office consists of tax attorneys who handle most of the civil tax court matters for the IRS).

IRS Office of Chief Counsel Notice CC-2007-012 specifies that the Procedure and Administration Section of the Office of Chief Counsel subsidiary legal divisions have been reorganized into seven new branches.

The notice lists these branches and their subject matter as:

Branches 1 and 2

Subject areas: Returns, information returns, withholding, statutes of limitations, interest, penalties, sanctions, ethics, practice before the IRS, Circular 230, innocent spouse, electronic tax administration, powers of attorney.

Branches 3 and 4

Subject areas: Payment, assessment, collection, liens, levies, collection due process, period of limitations on collections, trust fund recovery penalty, jeopardy and termination assessments, refunds, erroneous refunds, joint committee.

Branch 5

Subject Areas: Bankruptcy, installment agreements, offers in compromise, receiverships, closing agreements, attorney fees, low income tax clinics, user fees.

Branches 6 and 7

Subject Areas: Court procedure, confidentiality of return information, privacy act, FOIA, summonses, burden of proof, disaster relief, combat zone, examinations, informants, arbitration, mediation and alternative dispute resolution, Appeals, rules of evidence, mitigation and equitable doctrines, discover, Fed/State issues, judicial doctrines, privileges, Religious Freedom Restoration Act, Right to Financial Privacy Act.

The Notice goes on to provide new contact information for each branch. Taxpayers should take note of this new contact information, as contacting IRS tax attorneys directly is probably the most overlooked avenue for addressing the more challenging procedural tax issues.

May 16th, 2007 | No Comments »