Summer 2000

Topics

1. Installment Sales of Property
   Is the installment method for you?
2. Schedule a Mid-year Visit with Your Tax Practitioner
   Mid-year planning avoids surprises when you file your tax return
3. Clergy Election to Revoke Self-Employment Tax Exemption
   Clergy members can now elect to pay Social Security Tax
4. EITC and Foster Children
   The definiton of "foster child" changes for 2000
5. What To Do If You Receive an IRS Notice
   Don't ignore that notice!
6. Start Planning for Your 2000 Income Tax Return
   It's never too early to get a head start
7. Changing Your Name or Address?
   The IRS should be notified as soon as possible
8. Mid-Year Review of Estimated Tax Payments
   Make sure you're paying enough

Installment Sales of Property
Is the installment method for you?

Using the installment method to report the gain from the sale of your property is a great way to defer the tax you will owe. It works like this. In the year you sell your property at a taxable gain, in most cases you will pay tax only on the amount of money you actually receive. In the year of the sale, this is generally the down payment and all monthly payments you receive up to the end of the year.

Using the installment method to report the gain allows you to receive a predetermined amount of income for the duration of the agreement. This makes planning for your future income needs a bit easier.

For some, using the installment method is not a good idea. If the buyer of your property stops making payments, you may have to take action to get the payments due you or to get your property beck. Sometimes this can be expensive. Weigh all your options before making any decisions.

Top

Schedule a Mid-year Visit with Your Tax Practitioner
Mid-year planning avoids surprises when you file your tax return

It is always a good idea to periodically review your tax situation. This is especially important when there is a change in your family status. This can occur when there is a marriage, divorce, the birth of a child, an adoption, or when children go off to college.

A change in your family status could create significant tax consequences. For example, if you are married during the year, the withholding from your paycheck may need to be changed, especially if your new spouse is also employed. Having too little or too much withholding can make the difference in getting too high of a refund or owing tax at the end of the year. Most people don't consider a high refund to be a problem, however the IRS does not pay you interest on that refund, and you may be able to put that additional money to better use during the year. The birth or adoption of a child increases your dependency exemptions and the child tax credit. For 2000, the child tax credit is $500 for each qualifying child.

If you have children who are going to college, or are already in college, you may qualify for certain education tax credits that will reduce the amount of your tax liability dollar for dollar. You may want to adjust your withholding to account for these credits.

Top

Clergy Election to Revoke Self-Employment Tax Exemption
Clergy members can now elect to pay Social Security tax

Members of the clergy who have previously elected out of paying self?employment tax will have a two?year window to revoke that election. A revocation made under this new provision is irrevocable. The new law, signed in late 1999, allows members of the clergy to revoke the election by filing new Form 2031. This form must be filed no later than the due date of your federal income tax return (including extensions) for your second tax year beginning after 1999. For most taxpayers the due date for revoking the exemption is April 15, 2002.

You can make the revocation effective for either your first or second tax year beginning after 1999. You will then be liable for any self?employment tax for the tax year for which the election is effective. Form 2031 is not filed with your income tax return. You may fax or mail the form to a special IRS address indicated in the instructions to the form.

Top

EITC and Foster Children
The definition of 'foster child" changes for 2000

For tax years beginning in 2000, the definition of "foster child" for purposes of the earned income tax credit has been changed. In the past, a foster child was any child who lived in your home for the entire tax year and treated as if he or she were your own child. The child was not required to be related to you in any way.

Under the new rules, a foster child is defined as a child who:

1) is cared for by the taxpayer as if he or she were the taxpayer's own child;
2)has the same principal place of abode as the taxpayer for the taxpayer's entire tax year; and
3) either is the taxpayer's brother, sister, stepbrother, stepsister, or descendant (including an adopted child) of any such relative, or was placed in the taxpayer's home by an agency of a state or one of its political subdivisions or by a tax?exempt child placement agency licensed by a state.

The effect of this new definition may either deny or allow you the earned income tax credit. For example, if you lived with a person for the entire tax year who has a child, and the child is not yours, that child will no longer qualify you for the earned income tax credit, where in the past it may have. Since this child is not related to you by blood or marriage, or placed in your home by an agency of a state or one of its political subdivisions or by a tax?exempt child placement agency licensed by a state, this child will not qualify you for the earned income tax credit.

The rules regarding the earned income tax credit are complex and confusing. It is important that you divulge all the pertinent facts to your tax preparer to ensure you qualify for the credit and to avoid denial of the credit in the future.

Top

What To Do If You Receive an IRS Notice
Don't ignore that notice!

Even though the chance of getting audited by the IRS is slim, it does happen. Often a notice from the IRS is merely a request for additional information and not a notice of examination. In any event, any notice you may receive requires your immediate attention.

Most of the notices the IRS sends to taxpayers include the phone number of a contact person at the IRS. Often all that is necessary is a minor correction or explanation, which could be resolved with a phone call. If the notice indicates that a math error occurred on the tax return, additional tax may be due. The IRS will request verification of the amounts reported and you may be required to send the additional information to the IRS.

If you disagree with the notice, you must act quickly. If the IRS is correct, and you owe additional tax, interest is accruing. Each day that passes increases the amount you will have to pay to the IRS.

If, for some reason, the IRS wants to review your return in person, don't panic. An audit is not something to fear if you are prepared. The first thing you should do is get organized. Never hand over more or less information than the auditor requests. This means providing only those documents needed to support the deduction being questioned.

Resist the urge to chitchat or make casual comments. The auditor isn't there to make friends, only to confirm whatever suspicions your return aroused. Comments only provide more information. Keep your answers honest, but brief.

Never try to argue with the auditor. If you believe the auditor is incorrect or unprofessional, mention this and explain why. If the agent continues in an unprofessional manner, call the auditor's immediate supervisor.

Stay calm. Getting flustered?will create more harm than good. Don't hand the IRS your only copy of a document and don't leave the original copies with the IRS. You should also insist on getting copies of whatever information they have in their files or copies of anything that you sign. Remember, as a taxpayer you have certain rights that will protect you during an audit.

Top

Start Planning for Your 2000 Income Tax Return
It's never too early to get a head start

If itemizing your deductions reduces your taxes, you will save even more by starting a paper trail now. If you save your receipts for charitable contributions, higher education expenses, deductible taxes, work?related expenses and medical expenses, you will be certain to take all the appropriate deductions. Determine how much withholding you require, especially if you think you may owe more for next year than you did for this year. If you think you may not have enough tax paid in by the end of the year, request that an additional amount be withheld from your paycheck by filing a new W-4 with your employer as soon as possible. It may prevent you from incurring a penalty when you file next year.

Top

Changing Your Name or Address?
The IRS should be notified as soon as possible

When you move into your new home, the first thing you want to do is notify the post office of your new address. The post office isn't the only place that should be notified, however. It is equally important that you notify the IRS and any state or local taxing agency of any change of address or a change in your name.

Form 8822 should be filed with the IRS as soon as you move to notify them of a change in your address. The form can also be used to change your name with the IRS if you were married or divorced. If the IRS needs to correspond with you for any reason, they will send a notice to the last known address. If the notice requires attention within a certain number of days, you could lose valuable time if the notice is undeliverable.

Notifying the IRS and the Social Security Administration of a name change will prevent any delay in a refund that may be due you. The IRS cross checks all names on a tax return to make sure they match the information on file at the Social Security Administration. If they do not match, the return will be rejected as incorrect until the IRS receives the correct information.

For 1999 returns filed in 2000, the IRS listed mismatched names and Social Security numbers as the primary reason returns were rejected.

Top

Mid-year Review of Estimated Tax PaymentsMake sure you're paying enough

If you are required to pay estimated tax payments throughout the year, you probably figured out the amount to pay when your return was filed. Sometimes it is difficult to determine accurately the amount of income you expect to earn during the upcoming tax year. At any rate, the amount of the estimated tax payments that you are paying may not be enough to cover your tax liability if things have changed since April. For this reason, it is important that you review your income and estimated tax payments mid-year.

There are several things that may contribute to an increase or decrease in your estimated income. For example, if you based your estimated tax payments on the amount of investment income you received in the prior year, it will not account for the fluctuation in the market. If interest rates changed significantly (as they have been known to do) you may have earned much more (or less) income than you anticipated. If you sold stock or other property at a gain, you may have to adjust your estimated tax payments to account for the additional income.

Inheriting income-producing property is another way additional income can sneak up on you. If, for example, you inherited an IRA, it is normally taxable to you.

A mid-year review of your estimated tax payments is not only a good idea, it could save you from having to pay additional tax and penalties when you file your return, if you happen to owe more than you originally thought.

Top