Sumner Redstone owes a lot of money!!

Most people are familiar with the statute of limitations on assessing taxes. The statute of limitations for the IRS to assess tax is three years from the due date of the return or the day the return was filed, whichever was later. If there is a substantial omission (more than 25 percent) of gross income on the return, the statute of limitations is increased to six years. The IRS also has 10 years to file suit against a taxpayer to collect taxes after an assessment has been made.

What most people don’t know is that there are no statute of limitations if the IRS can prove that the taxpayer (1) filed a false or fraudulent return, (2) willfully attempted to evade tax, or (3) failed to file a return.   

Sumner Redstone, (estimated net worth $6.2 Billion) the Chairman of the Board for CBS and Viacom learned about the statute of limitations the hard way.

In 2010, due to Sumner Redstone’s testimony in an unrelated civil case, the IRS discovered that Sumner Redstone had transferred some of his own shares of his company, National Amusement Inc. to two trusts for his children in 1972. The IRS also discovered that Redstone did not file a gift tax return for that year.

Even though the gift occurred nearly four decades ago, the IRS in 2011 decided to commence an examination of Sumner Redstone’s 1972 tax year. Because Redstone did not file a gift tax return in 1972, the statute of limitations did not apply.

After a two year examination, the IRS determined that the 1972 transfer of shares was valued at approximately $2.5 Million, and as such, Redstone owed $737,625 plus 41 years of interest. By one estimate, the bill with compounding interest comes out to more than $15 Million. Even for a Billionaire like Redstone, this was a very expensive mistake.

Redstone took his case to the US Tax Court. But the court, earlier this month, ruled in favor of the IRS.  Even if you don’t meet the minimum income threshold to file a 1040 (http://www.efile.com/tax/do-i-need-to-file-a-tax-return/#file), it is best to file a 1040 anyway to start the clock running on the statute of limitations.

Get your Gift Tax Returns filed early

In addition to filing your 1040, many taxpayers will have to file Gift Tax returns Form (709) for the 2015 tax year.

Per the IRS, the requirements to file a Gift Tax return are as follows:

1)      You gave gifts to someone (other than your spouse) in 2015 totaling more than $14,000.  

Exceptions to this rule are as follows:

a.       Transfers to political organizations

b.      Payments made directly to a qualifying educational institution on behalf of someone else.

c.       Payments for medical care for an individual which are paid directly to a Doctor or medical institution.

2)      You gave a gift of a future interest of any amount. Example: A person may donate his home to charity but the charity does not get to take ownership until after the person dies.

3)      Any gift that is being split with a spouse such as community property. Note: You cannot file a joint Gift Tax return. Each spouse must file his or her own tax return.

For most accountants, tax season begins in early-to-mid February. The IRS has declared that they will begin accepting e-filed returns on January 19^th. The due date to send out most 1099s and W2s is February 1^st. That means most people won’t be heading to their accountants until at-least mid-February. However, if you are required to file a Gift Tax return, you can start much earlier.

Most people don’t need to wait for any government documents to determine what gifts they made in the prior tax year. Therefore, a taxpayer can file his/her own Gift Tax return as early as

January 2^nd. Since Gift Tax returns can only be paper filed (not e-filed), the IRS January 19^th start date foe e-filing does not apply. Most likely your accountant will not be busy during the first two weeks of January. That is the perfect time to get your list of gifts to your accountant for preparation of your Gift Tax return so you don’t get stuck in the crunch-time of tax season.   

Clinton Portis files for Bankruptcy

Two-time NFL Pro-Bowler Clinton Portis has just joined Mike Tyson, Warren Sapp, Sheryl Swoopes and many others on the list of professional athletes who have filed for bankruptcy. Although he made more than $43 Million in his professional career, according to USA Today, he only has $150 in his checking account. The bankruptcy filings state that Portis has nearly $5 Million in debts including debts for mortgages, gambling debts, child support, cars, and back-taxes to the IRS.
A working paper from the National Bureau of Economic Research states that approximately 15.7% (nearly 1 in 6) of NFL players go broke within 12 years after leaving the sport.

The common thread in many of these bankruptcies is that the athletes trusted their money with the wrong people. In Portis’s case, he connected with a group of financial advisors who were recommended to him by one of his college teammates. The advisors did not have his best interests at heart and he is now paying for it.

Although it is not easy to vet a financial advisor, you should do a minimum amount of due-diligence so you don’t end up like Clinton Portis.

The first thing to do is check whether they have the CFP (Certified Financial Planner) designation or the CPA/PFS (Certified Public Accountant – Personal Financial Specialist) designation. Financial Advisors who have this designation are regulated and must take mandatory classes on various aspects of financial planning.

You should also look to see if the Financial Advisor is commission-based or fee-based. The commission-based Financial Advisor makes money off of the products that are sold to the customer and does not charge the customer a fee for their services. The fee-based advisor charges a fee for their services. I believe it is best to go with a fee-based advisor because the goal of the commission based advisor is to sell you investment products which may or may not be in your financial interests.

  Finally, make sure to read any agreement that you would sign with the Financial Advisor. Make sure the words “fiduciary duty” are somewhere in the agreement. This means the Financial Advisor has your best interests in mind.

These tasks are very easy to do. Perhaps if Clinton Portis had done his due-diligence, he would not be in the position he is today.

 

End of year tax planning for 2015

December 31^st is coming up which means you have little time to take advantage of opportunities to lower your tax bill. Here are some things you can do before the end of the year which will help you on your 2015 tax return:

Give to charity now

Giving money to charitable organizations is a great way to reduce your taxes. Be sure to get a receipt for any charitable gift over $250. To qualify for a deduction on your 2015 tax return, the gift must be made before the end of the year. If you are giving a check, make sure it is mailed before December 31^st.

Don’t forget that you can also get a tax deduction by giving non-monetary items such as clothing to places like your local thrift shop.

Education Saving Accounts

Currently, 34 states including New York give state tax deductions (not federal) for contributions to their respective 529 plans. In New York, taxpayers can take a deduction of up to $5,000 ($10,000 for a married couple filing jointly) for contributions to a NYS 529 plan. Your earnings in a 529 plan grow tax free. This is a great way to reduce your tax bill while also saving money for college.

Another opportunity before the end of the year is to contribute to a Coverdell Education Savings Account (ESA). Contributions to a Coverdell ESA are limited to $2,000 a year. Though there is no tax deduction for contributions to a Coverdell, your earnings in the account will grow tax free.

Getting rid of potential capital gains taxes

Capital gains taxes usually result from the sale of stock at a gain. Long-term capital gains (Gains on stock held for more than one year) can be taxed as high as 20%. Short-term capital gains are taxed at ordinary income rates which are higher than long-term rates.

Here are two ways to pay less capital gain taxes on stock transactions.

1)      Make charitable donations with appreciated stock

Instead of selling stock at a gain, an alternative would be to donate the stock to a charitable organization. This type of donation gives the taxpayer a double benefit. The first benefit is that the taxpayer does not have to pay any capital gains taxes on the donated appreciated stock. The second benefit is that the taxpayer gets a tax deduction based on the fair market value (FMV) of the stock on its date of contribution.

2)      Sell depreciated stock

If you have already sold appreciated stock during the year and are expecting a high capital gains tax liability, then a way to lower this liability would be to sell additional stocks at a loss. Capital losses will neutralize capital gains and thus lower your tax liability. Keep in mind, the maximum one can take for a net capital loss is $3,000 ($1,500 Married filing separately). This means that if you have $50,000 in capital gains, you are only allowed to take up to $53,000 in capital losses on your tax return. Any excess capital losses will be carried over to the following year and applied to next year’s capital gains.

These are only a few ways to lower your potential tax liability. Every taxpayer has his or her own set of specific circumstances and with it, different strategies on how to lower taxes. For questions on how to lower your tax liability, I can be reached at david@davidsilversmithcpa.com