In seven previous columns, I explained how I use “tax tidbits” to enliven conversations when talking taxes with clients or speaking to groups like retirees, individuals who run their own businesses and investors. The tidbits discuss amusing court decisions and tactics that trim taxes. I mentioned several that interested clients and audiences.
Below are additional tidbits concerning topics I'd like to address:
When it comes to charitable contributions, don’t just write checks or use credit cards. Consider donating stocks, real estate or other investments that you’ve owned for more than 12 months and are worth more than you paid for them. Here’s the double break: Besides deducting their full market value, you also escape the long-term capital gains tax that would have fallen due had you sold the shares.
Your planning comes undone when you donate depreciated stocks or other investments. Instead, sell the property, donate the sales proceeds to the charitable organization and claim both the donation deduction and the capital loss.
Contributions of stock or other property are deductible for the year in question as long as the gifts are completed by Dec. 31. But in some situations, completing the legal paperwork takes time.
Tax Court allows deductions without records. In a 1994 decision, the court rejected the IRS’s disallowance for lack of substantiation of deductions claimed by Marvin Eugene Huff. Marvin introduced evidence that a tornado destroyed a storage shed in which he had placed the records of his pulpwood logging business. The court agreed with him that a tornado was an event beyond his control and cited his credible testimony about the expenses in issue. Accordingly, it concluded that the disputed deductions were reasonable in light of the nature of his business.
Social Security numbers. Before you submit a Form 1040, check to see that it correctly lists Social Security numbers (SSN). Transposed digits in a SSN can cause untold grief.
As for joint filers, the Internal Revenue Service requires them to list both of their SSNs, even if one had no income at all. Since a joint return usually shows the husband’s name first in the name-and-address box at the top of the 1040, enter his SSN in the box to the right that reads “Your Social Security Number.”
On other forms and schedules, take care to enter the “primary” SSN, as a general rule. Suppose, as is usually the case, it’s the husband’s name and SSN that appears first at the 1040’s top.
In this case, enter his SSN on, for example, Schedule A, on which the couple itemizes deductions for such outlays as contributions, medical expenses, state and local income and property taxes and payments of interest on mortgages for personal residences, or Schedule D, which lists gains and losses from sales of stocks, bonds, real estate and other investments. The retribution for failing to do it this way: A possible delay in the processing of your return, coupled with the receipt of questioning correspondence from the government’s most unpopular agency. And should some schedules become separated from a return not filed electronically, SSN will make it easier for the IRS to reassemble everything.
Ignore my advice about the primary SSN when a spouse has self-employment income and needs to file Schedule C (Profit or Loss From Business) and Schedule SE (Self-Employment Tax). On Schedules C and SE, enter the SSN of the self-employed spouse. To illustrate, the husband has the primary SSN, and the wife with the self-employment income has to complete Schedules C and SE. She should enter her SSN on her Schedules C and SE. A husband who also is self-employed should enter his SSN on his own Schedules C and SE.
Look for more tidbits in two future columns.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting).
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.