Do Clients Always Need to Pay Self-Employment Taxes?by
Last week, I discussed my use of “tax tidbits” to enliven conversations when talking taxes with clients or speaking to groups like retirees. I'd like to share more of my favorites with you here.
Make donations to schools, hospitals and other philanthropic organizations by contributing appreciated assets—stocks, bonds or mutual funds. That entitles you to an income tax charitable deduction for the full current market value of the asset while avoiding the capital gains tax you would’ve paid if you sold the asset outright.
Usually, the IRS assigns special agents of the Criminal Investigation Division to investigate suspected criminal violations of the tax laws. What should you do if you become aware you’ve been singled out? You have just one option: Get the advice of an attorney knowledgeable about criminal investigations before you hand over any records or make any statements to special agents. Such discussions can come back to haunt when they’re pieced together and repeated on the witness stand by government sleuths.
You aren’t entitled to damages for harassment and humiliation by IRS agents just because they try to collect overdue taxes. That, predictably, was what a judge told an aggrieved taxpayer.
Self-employment taxes, held the Tax Court, are due from a protestor on the fees he receives for a series of speeches urging a revolt against the income tax laws. Similarly, there is no relief from self-employment taxes just because a person thinks the Social Security system is unconstitutional. Unsurprisingly, that argument is routinely rejected by the courts.
Self-employed individuals must file Form 1040s if they net as little as $400 after expenses. They might not owe income taxes, but they do owe self-employment (Social Security) taxes.
Just because you received a refund doesn’t mean you can forget about an audit. A refund merely means that IRS computers have checked arithmetic and other basic items. Keep your records at least until the statute of limitations runs out for an audit.
Suffer some investment losses? Capital losses can’t offset more than $3,000 of regular income from sources such as salaries and pensions, but any excess can be saved to shelter income next year and beyond.
Let’s say you sell shares of Icarus Airlines at a loss. You then repurchase the identical number of Icarus shares as you sold within 30 days before or after the sale. The transaction is a “wash sale,” meaning you must postpone the deduction. The agency won’t invoke the wash rule if more than 30 days have passed since you sold them.
A loss deduction for worthless stock is allowable only in the year it actually became worthless. If you're uncertain about year of worthlessness, claim a deduction for the first year in which the stock became entirely worthless.
The Internal Revenue Code imposes tight restrictions on deductions for losses from tax shelter investments. The law allows offsets of such losses only against income from other shelters, not from, say, wages and pensions.
Look for more tidbits in subsequent 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 275 and counting).