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MONTHLY TAX NEWSLETTERFebruary 2010
Looks like the IRS is stepping up their auditing efforts. As predicted in an article posted on MDTAXES three years ago, Are You At Risk of Being Audited, I sadly noted that the IRS had planned to increase the number of tax returns they will be examining.
To quote myself from three years ago, "The IRS has acknowledged that the Service can't 'audit its way out of the tax gap.' Even so, audits remain an important compliance tool...[and you should] expect the IRS to rely on audits as a deterrent against non-compliance with the current tax laws."
This past summer and fall, my firm assisted a handful of clients who were being audited by the IRS. The most noticeable trend was that many of these examinations were handled as "desk audits". Instead of meeting face to face with an IRS agent, our clients were asked to compile certain records, and then submit their documentation through the mail for examination. (Makes you wonder if the IRS is offshoring these audits to India. Just kidding, of course. Or am I?)
Based on our limited sample of audited taxpayers, it appears the IRS is currently focusing their auditing efforts on medical expenses, charitable donations, and employee business expenses. Let's take a look at the documentation the IRS requests in connection with these audits:
Medical and Dental Expenses
Miscellaneous Itemized Deductions and Employee Business Expenses
Please provide an explanation, receipts and records to substantiate any amounts that you entered on Schedule A lines 20, 21, and 22. For the amounts claimed on Form 2106 or Form 2106-EZ, please submit the following:
What can I say but "Oy Vey"? After reading through that list of documentation that the IRS might request from you, you really need to set up some type of system to keep your receipts and other evidence of the deductions you claim on your tax return each year.
For most people, three of the largest expenses they will incur in their lifetime are buying a house, saving for retirement, and paying for a child's college education. Buying a home is generally done via a mortgage to make it affordable for the everyday person. Saving for retirement is also done over a period of many years, usually via an employer sponsored retirement plan such as a 401(k) or 403(b) plan or via IRA’s. Similarly, one also has the option to save for a child’s college education utilizing a long term plan as well.
The IRS allows individuals to save for a child’s education via a tax- free plan called a Section 529 Plan. Each state sponsors their own plan in connection with an investment company such as Fidelity, Vanguard, or Schwab among others.
Individuals generally choose a plan based upon the investment objectives and track record of each specific state plan. For instance, you may live in Massachusetts (the MA sponsored plan is managed by Fidelity Investments), but can choose to use another state’s college savings plan. While many states do offer an incentive to their residents to use their own state sponsored plan by offering a tax deduction on their state income tax return, other states, including MA, do not offer such a tax break.
529 Plans are usually categorized as either prepaid plans or savings plans.
For both plans, contribution limits are subject to tax free gifting rules. For 2010, you and your spouse can jointly gift up to $26,000 per year per child without gift tax consequences. However, special rules allow taxpayers to front-load five years of gifts into one year for education planning, allowing you and your spouse to jointly gift up to $130,000 into the plan in any one year during a five year time period. Please note that you will need to file a gift tax return if you're married and contribute more than $26k on behalf of one child in any calendar year.
The primary advantages of 529 Plans are as follows:
In summary, we are all well aware of the already exorbitant and continually growing costs associated with attending a college or university. For this reason, you need to start saving for a child's college education as soon as you can, hopefully while your child is relatively young.
As part of your planning process, as with any investment decision, you should consult an expert and/or do your research. Start by contacting the various investment companies’ toll free customer service phone numbers to discuss your questions with their representatives, or visit their websites and read through their literature; both avenues provide a wealth of knowledge of general information for Section 529 Plans as well as specific information pertaining to their own plan(s). Another great resource is the website www.savingforcollege.com which provides an abundance of useful information on Section 529 Plans and also maintains rankings of the performance of the different state sponsored plans.
Andrew Schwartz CPA, founder of The MDTAXES Network, is now on the editorial board and will be a contributing writer to the website www.healthcarewealthcare.com. Supported by an executive team with over 75 years of combined healthcare publishing experience, this new site provides wealth management (personal and professional), practice management and recruitment information to doctors.
By dedicating itself to wealth management information for healthcare professionals, the site provides a niche for those companies and individuals who wish to get their ideas and information to this audience via a combination of podcasts, editorials and advertising.
At the same time, the site gives their audience of doctors a one-stop, informational, “bottom-line oriented” resource for their wealth and practice management needs.
Informational categories on this site include Practice Management, Investing, Financial Planning, Insurance, Retirement Planning, Long-Term Care, Wealth Management, Art and Investment Collectibles, Banking, Real Estate, Legal Matters, Philanthropy, and Physician Recruitment information.
Doctors looking to stay current with the income tax issues affecting healthcare professionals and their practices will continue to find the most up-to-date information only at www.mdtaxes.com.
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