When I discuss year-end tax planning with my clients, many of them say they plan to accelerate deductions from 2019 into 2018.
I caution them not to take their eyes off the calendar when they write checks at year’s end. Their efforts to offset write-offs against 2018’s income rather than 2019’s could be thwarted by long-standing IRS rules.
I’ve long ceased being surprised by how many clients scrambling for last-minute write-offs mistakenly believe that just writing “Dec. 31” on checks automatically entitles them to claim 2018 deductions for business expenses, charitable contributions, medical bills and the like. Wrong.
What does an adamant IRS insist they do? Put their payments in mailboxes in sufficient time for letters to be postmarked by midnight, Dec.31. I assure them that as long as they do that, the agency couldn’t care less that their checks reach recipients in 2019.
The IRS also remains unconcerned when taxpayers use credit cards issued by third parties like American Express and Visa. It concedes that taxpayers qualify for deductions as soon as they authorize charges, even if AmEx doesn’t bill them until 2019. But they might be unable to shift write-offs from 2019 to 2018 when they pay with cards issued by stores that bill them directly. No deductions, warns the IRS, until they pay the bills.
Another no-no: The IRS deep-sixes deductions for 2018 if taxpayers mail checks that are postdated to prevent cashing until 2019. The IRS and the courts agree it makes no difference that they were mailed by Dec. 31.
Consider the Tax Court’s homily in a decision that held the IRS correctly disallowed a deduction for the year of mailing. "A postdated check is not a check immediately payable but is a promise to pay on the date shown. It is not a promise to pay presently and it does not mature until the day of its date, after which it is payable on demand the same as if it had not been issued until that date, although it is, as in the case of a promissory note, a negotiable instrument from the time issued." Put more plainly: Forget it.
As a parting reminder, I also alert my clients to what’s likely to happen if IRS computers bounce their returns for examination. They should expect IRS auditors to look closely at large year-end checks that are dated Dec. 31 and are made out to charities, doctors, tax collectors and others. And why shouldn’t the auditors contend that the payments ought to be deducted on 2019’s 1040 form, rather than 2018’s, especially when the recipients may not have sent the checks to their banks until well beyond 2018’s close?
My clients ask for guidance on what they might do beforehand to placate the IRS. I advise them to use certified mail to send their payments, request certified mail receipts and staple these to their canceled checks.
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 250 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.