New Tax Breaks to Be Aware Of By TOM HERMAN madoff fraud victims items
New Tax Breaks to Be Aware Of By TOM HERMAN
The millions of procrastinators now scrambling to finish their tax returns may want to watch out for a few new twists -- and several old ones.
Unless they're careful, they could wind up paying Uncle Sam more than they really owe. Even when Congress tries to offer Americans tax relief, the result is often so complex that it requires the assistance of high-priced experts trained in the translation of tax-law gibberish.
Getty ImagesAmong the major changes: The Internal Revenue Service recently issued guidance that is likely to provide relief for many Ponzi-scheme victims, including those hurt by Bernard Madoff, who pleaded guilty last month to criminal charges in connection with a decades-long scheme. The IRS's conclusions are "very taxpayer-friendly," for those who qualify, says David F. Earley, senior tax manager at Deloitte Tax LLP in Boston. But victims may have to consult tax experts to reap the benefits.
Separately, investors who sold the stock of insurance companies that once were owned by policyholders may be able to save on taxes, thanks to a court decision last year.
Taxpayers this year should also be aware of older laws that may have new relevance. For example, many people looking for work can deduct job-search expenses, whether or not they find a job.
Here are a few recent changes and other last-minute advice from accountants and other tax advisers:
Ponzi schemes. IRS Commissioner Doug Shulman said the Madoff scandal has affected "a very large and diverse pool" of investors. "Beyond the toll in human suffering -- as entire life savings and retirements appear to have been wiped out -- the Madoff case raises numerous tax and pension implications for the victims," he told senators recently.
The IRS defines a Ponzi scheme as one in which a fraudster gets cash or property from investors, purports to earn income for them and then reports income amounts that are "wholly or partly fictitious." Payments, if any, of the purported income or principal to investors come from cash or property from other investors. And the perpetrator of the fraud "criminally appropriates some or all of the investors' cash or property."
Much to the relief of many victims, the IRS concluded that investors typically are entitled to a "theft" loss -- and that "investment" theft losses aren't subject to the stiff limits that apply to personal casualty or theft losses. (With personal theft losses, your deduction for 2008 typically would be limited to the extent the losses exceeded 10% of adjusted gross income, after reducing each loss by $100.)
The IRS also said the theft loss is deductible in the year the fraud is discovered, except to the extent there is a claim with a "reasonable prospect of recovery." The amount of the theft loss "includes the investor's unrecovered investment, including income as reported in past years."
The bottom line: Taxpayers who invested directly with Madoff are allowed to deduct up to 95% of their net investment, minus the amount of any recovery in the year the loss was discovered and any recovery expected from insurance or other coverage, such as that provided by the Securities Investor Protection Corp., Mr. Shulman said. A special rule applies to investors suing people other than the promoter of the scheme. For these investors, the limit is 75%, Mr. Shulman said. Losses typically can be carried back as many as five years for qualified taxpayers and forward 20 years.
This can get so complex that most victims probably will need to consult tax experts. The impact "can vary widely, depending on your personal situation," says Mr. Earley of Deloitte.
Insurance stocks. The U.S. Court of Federal Claims issued a decision last year that could mean tax savings for many investors who sold stocks of publicly traded insurance companies that once were mutuals, or owned by policyholders. The IRS had argued -- unsuccessfully -- that shares received by policyholders in this "demutualization" process had a tax cost of zero. The court disagreed, saying the plaintiff in this case didn't realize any income on the sale of the stock in question.
That decision could spark a large volume of tax-refund claims by investors who sold their shares in prior years where the time limit for filing claims hasn't yet expired. Generally, you're required to file a claim for a refund or credit within three years of the date you filed your original return, or within two years of the date you paid the tax, whichever is later. For more details, including a copy of the decision, see www.demutualization.biz, an informative site set up by Chuck Ulrich, a certified public accountant in Baxter, Minn., who has battled the IRS on this subject for many years.
But be warned: The government has appealed the decision. For more on the IRS's position, see "Tax Topic 430" on its Web site, available at www.irs.gov/taxtopics. An IRS spokesman declined to elaborate Tuesday, other than to confirm the case has been appealed.
Job-search costs. With the economy in a shambles, more people are searching for work than at any time in recent memory. But you can't deduct job-search expenses if you're looking for a job in "a new occupation," the IRS says. You also can't deduct them if there was a "substantial break" between the time you left your old job and when you began hunting for a new one -- or if you're looking for a job for the first time. Moreover, these expenses fall under the category of miscellaneous itemized deductions, which are deductible only to the extent that the total exceeds 2% of your adjusted gross income. For more details, see IRS Publication 529.
Social Security taxes. Suppose an employee got laid off and worked for two or more employers last year. That employee may have had too much in Social Security taxes withheld -- and thus may be eligible for a credit on his or her 2008 return. The maximum amount of wages subject to tax for 2008 was $102,000, and the maximum tax that should have been withheld was $6,324. All wages, however, are subject to Medicare tax withholding.
Individual retirement accounts. There still is time for many people to contribute to a regular IRA for 2008. The contribution limit for a traditional IRA for 2008 generally was $5,000, or your taxable compensation for the year, whichever was smaller. For those 50 or older before 2009, the limit was $6,000, or taxable compensation for the year, whichever was smaller. (But to contribute to a traditional IRA, you must be under age 70 ?189 at the end of the tax year.) Contributions should be made by the April 15, 2009 due date for filing your 2008 return.
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Interest rates drop on underpayments to the IRS.
For example, the rate fell to 4% for underpayments by individuals in this year's second quarter, down from 5% in the first quarter.
In 2007, the rate was 8%.
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The IRS seeks volunteers for a panel.
The IRS is looking for people who want to serve on its Taxpayer Advocacy Panel, which is supposed to listen to taxpayers, identify "key issues" and make suggestions on how to improve IRS service.
To be eligible, you have to be a U.S. citizen, "current with your tax obligations," able to commit 300 to 500 hours during the year and pass an FBI criminal background check, the IRS says. Applications will be accepted until April 30.
For details, go to www.improveirs.org.