Raleigh Estate Planning and Corporate Law Attorneys

Taxes

Tax Hardship: What To Do if You’re Offered an IRS Offer in Compromise

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Owing The Government Large Sums Of Money For Taxes Can Be Daunting, But It Happens

It could happen any number of ways – whether through under-withholding, untaxed income, or estimating quarterly tax payments required – but every year, thousands of people find themselves owing the Internal Revenue Service more than they can repay, at least at that moment. The IRS is not famous for being in the habit of waiting for payment. The IRS has an impressive array of collection options – it can seize and sell your property to pay your tax debt, garnish your wages, and place liens on your home and bank account. 

Owing the IRS money is not a small matter. A payment plan is an option for many people, but if you owe a lot, IRS payment plans are time-limited, and you might be unable to afford the payments to pay off the entire debt during the time period of the payment plan. Fortunately for people in this situation, the IRS provides another option for repayment, known as an offer in compromise.

An Offer Of Compromise Provides An Avenue Out From Under Debts Owed To The IRS

An offer of compromise is a process whereby you can make an offer to the IRS to pay an amount that is less than you owe in satisfaction for the total debt. Basically, you file copious amounts of paperwork, including IRS forms that include detailed information about your financial situation, including assets, debts, and the like, and you offer an amount you consider yourself willing to pay instead of the full amount owed. While the acceptance rate for such offers used to be less than 25 percent, in recent years, that amount has increased to about 45 percent. If your offer is accepted, you are deemed to have satisfied your entire tax debt.

The process is complicated, but the IRS provides a Taxpayer Advocate Service that can give you some assistance regarding an offer of compromise. They provide assistance and information, not advice – you’ll have to go elsewhere for that.

What Is Required To File An Offer Of Compromise?

The first requirement is that you be eligible to file an offer of compromise. To pass that first hurdle, you must show that:

  • You are not currently in a bankruptcy proceeding.
  • You have filed all previously required tax returns and have made all estimated or actual payments for taxes due on those returns.
  • If you are applying for an offer in compromise for the current year, provided you are applying for an offer of compromise for the current year.
  • If you are an employer, you have made required quarterly tax payments for the current quarter and for the two-quarters previous to your applying for an offer of compromise

If you meet those requirements, you can move on to filing an offer of compromise. That, in itself, can be a daunting process. You will be required to complete several IRS forms and provide significant amounts of information regarding your monthly income, cash on hand, debt, and assets. You also will be required to detail monthly expenses, including rent or mortgage, grocery costs, utilities, and any other recurring monthly expenses. You also will have to pay the application fee, which is refundable if your offer of compromise is rejected, and payment toward what you propose as the balance due on your taxes. Obviously, the proposed balance due will be less than the amount the IRS says you owe. If you opt for a payment plan, you will include the first payment amount. You also could include payment for the entire amount owed that you propose. Even if your offer is rejected, however, the IRS will keep your payment and apply it to the amount of taxes the IRS says are owed.

There are a number of reasons the IRS might reject your offer. Among them are failing to meet any of the requirements for eligibility, you failing to include the application fee, or the IRS has referred your case to the Department of Justice for prosecution. Reasons for accepting your offer come down to whether the IRS believes it can collect the entire amount due or whether the IRS believes it can collect that amount but that it would be unfair, inequitable, or cause economic hardship.

If You Owe Significant Amounts To The IRS, Contact The Tax Attorneys of Wilson Ratledge

The IRS is a formidable opponent with an unmatched ability to disrupt your life financially and even seize your assets. If you owe money to the IRS that you can’t repay, you should consider an offer of compromise. You should contact the North Carolina tax attorneys of Wilson Ratledge. We have the knowledge and experience to help you through the process.

How To Reduce Your Tax Liability Through Asset Protection Planning

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Tax planning is an important part of financial planning, and with the current tax laws, there are a number of ways to reduce your tax liability. We will show you how to do so, the right way, in this article.

Getting Started With Tax Planning

Before getting started with trying to reduce your tax liability through asset protection planning, it is imperative to do the following:

1. Review Your Assets and Liabilities

Completing a personal balance sheet can be a helpful way to get a snapshot of your current financial situation. It can help you identify your assets – things you own that have value – as well as your liabilities, or the money you owe. By taking stock of your net worth – the difference between your assets and liabilities – you can get a sense of how financially healthy you are and where you may need to make changes.

2. Determine What Type of Asset Protection Is Best for You

There are a variety of different types of asset protection available to individuals, and the best type of protection for you will depend on your specific situation. Some common forms of asset protection include trusts, limited liability companies (LLCs), and offshore accounts. Each has its own advantages and disadvantages, so it is important to do your research and consult with a Raleigh tax planning attorney at Wilson Ratledge before making a decision.

3. Implement a Plan To Protect Your Assets

The next step to reducing tax liability while protecting your assets is to put the established plan into action. This can involve setting up trusts, creating a will, and/or creating an LLC. Working with an experienced estate planning lawyer can help you create a plan that fits your specific needs and protects your loved ones in case something happens to you.

Some Legal Ways To Reduce Tax Liability Through Asset Protection Planning

1. Use Charitable Contributions

Qualified charitable contributions are a great way to reduce your taxable income and save money on your taxes. The North Carolina deductible qualified charitable contribution is up to 60% of your adjusted gross income. There are a few things to keep in mind when making a donation, such as the type of charity and the value of the donation.

To be eligible for a tax deduction, donations must be made to qualified charities. Qualified charities are organizations that have been approved by the IRS as being eligible to receive tax-deductible contributions. Some common examples include churches, schools, and other nonprofit organizations.

The value of your donation is also important to consider. Generally, you can deduct the fair market value of any donated goods or services. However, there are some exceptions.

2. Gifting

Giving gifts is a popular way to celebrate holidays and special occasions, but it can also be used to reduce tax liability. The key to reducing your tax liability when gifting is understanding the gift tax exclusion. 

The Federal gift tax exclusion allows you to give up to $16,000 per person per year without having to pay taxes on the gift. If you exceed the $16,000 limit, you may have to pay taxes on the amount that exceeds the limit. However, there are ways to give larger gifts without having to pay taxes. 

You can gift assets such as stocks or property and avoid paying taxes on the gift. Additionally, you can spread out large gifts over multiple years in order to avoid having to pay taxes on the larger gifts too.

3. The Use of Trusts

Trusts are a valuable estate planning tool that can be used to reduce or eliminate your tax liability. Trusts can be used to hold assets and income for beneficiaries, which can help reduce the amount of taxes you pay on those assets. Additionally, trusts can be used to transfer property and income to beneficiaries in a way that minimizes the taxes they pay. 

Trusts can also help protect your assets from creditors and lawsuits. An often chosen way to reduce tax liability, if you too are looking for a way to reduce your tax liability, trusts may be the solution for you.

Consult With an Experienced Asset Protection Attorney

In conclusion, there are many ways to reduce your tax liability through asset protection planning. These range from gifting to LLCs, to wills to trusts to offshore accounts, and many more. By following the advice in this article, you can take steps to reduce your tax liability and protect your assets. 

Consult with a North Carolina tax planning attorney at Wilson Ratledge to get started on asset protection planning today. We will work with you to create a plan that will best suit your needs and protect your assets.

Navigating the Challenges That Are Often Associated With Estate Taxes

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The estate tax in North Carolina is a levy on the assets of a deceased person. In most cases, the tax applies to the balance of an individual’s estate after outstanding debts and final expenses are paid. The estate tax can be a major financial burden for heirs, who may need to sell assets or take out loans to pay the tax bill. In many cases, family members must delay distributions from an estate in order to cover the cost of the tax. 

In many cases, the tax is unavoidable and can lead to difficult decisions about how to dispose of a loved one’s estate. Here are some tips on navigating the challenges that are often associated with estate taxes in North Carolina.

How Much Are Estate Taxes?

In North Carolina, the estate tax was eliminated in 2013. So, you do not owe any estate taxes to the state. You do, however, need to pay some taxes to the federal government if the estate is valued at over $12.06 million. While this value is often adjusted for inflation every year, the federal estate tax exemption is $12.06 million in 2022. The tax rate is about 40%. 

However, there are some exemptions from the federal estate tax, for example, if the estate was given as a gift during the estate owner’s lifetime or if the estate was placed under the care of a trust. These are aspects of estate planning that might need to be discussed with an estate planning attorney. The attorney can help you to develop a strategy that best suits your needs.

Reducing Liability for Estate Taxes

As we just mentioned above, individuals looking to reduce their liability for estate taxes may want to consider creating a trust. A trust can be used to hold property. This will not only reduce the taxable estate, but the trust will also help to manage the property and any income it generates in a tax-efficient manner. Trusts can also help protect assets from legal judgments and creditors. In addition, trusts can be used to provide for beneficiaries in the event of the settlor’s death.

Gifting property is also another way that can help reduce the amount of federal estate tax owed on a person’s estate after they die. The IRS allows individuals to give away some amount without having to pay any gift taxes. This amount is known as the “exclusion amount.” Gifts that exceed the exclusion amount are subject to a gift tax at a rate of up to 40%.

However, there are ways to give away more than the exclusion amount without having to pay the gift tax. One way is through a technique known as “gift splitting.” This allows spouses to split their combined gift exclusion amount between them. This means that each spouse can give away up to a bigger gift without having to pay any gift taxes.

Reviewing Beneficiary Designations

A beneficiary designation is a legal document that states who will receive your property after you die. It is important to review your beneficiary designations regularly to ensure that they reflect your current wishes. For example, if you have named someone as a beneficiary who is no longer alive, or if the property you want to leave to them has been sold, you will need to update your designation. Otherwise, your wishes may not be carried out after your death.

Planning Ahead To Minimize Estate Tax Liability

Estate taxes can be a significant burden on heirs, particularly if the estate is large. However, as you have seen, there are a number of action steps that can be taken to minimize or avoid estate tax liability. However, just knowing what to do is not enough, you need to take action.

One of the most important things you can do is to plan ahead. Start by reviewing your assets and liabilities and estimating the value of your estate. If you have a spouse or children, consider how they will be affected financially if something happens to you. 

Next, you take steps to make provisions for transferring ownership of assets to your loved ones during your lifetime or consider setting up a trust as a way to reduce your taxable estate. 

Minimizing estate tax liability is a complex subject, and it’s important to have an experienced team to help. Wilson Ratledge has helped numerous families create a plan that will minimize your estate tax liability and ensure that your loved ones are taken care of after you’re gone. Contact us today to schedule a consultation!

What Is A 1031 Exchange And How Can It Help With Taxes?

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In the world of real estate, the term 1031 exchange is a type of purchase that is allowed under Section 1031 of the United States Internal Revenue Code. The purchase allows either a business or the owner of an investment property to defer the federal taxes on certain real estate exchanges. 

The term comes from the Internal Revenue Code Section 1031 which allows the exchange of real property that is not being held primarily for sale for other business or investment property.

Section 1031 Explained

A 1031 exchange, also known as a like-kind exchange, is one that occurs when one investment property is swapped for another. These transactions are taxable sales but if you meet the requirements of a 1031 exchange you will have limited tax or no tax at the time of the exchange. Essentially you are changing the form of an investment without cashing out or recognizing a capital gain as the Internal Revenue Service would see.

Benefits of a 1031 Tax Exchange

A 1031 tax exchange has many benefits for the average property owner. The primary benefit of a 1031 exchange is that you can sell one property, buy another property and avoid capital gains tax through the transaction. Doing this can save you a substantial amount of money while allowing you to purchase a new property and sell another property. It also helps you to avoid paying what could have been a hefty tax amount.

Time Limits

There are time limits associated with a 1031 exchange that must be strictly adhered to. When completing an exchange a new property must be purchased within 180 days. Failing to stay within this timeframe could have dire consequences. When completing any 1031 exchange you must be sure to complete your new property purchase within the time limit.

Rules for 1031 Tax Exchanges

In addition to the time limits, there are rules associated with 1031 tax exchanges that you should be aware of. 

The first and foremost rule is that the replacement property should be of equal or greater value than the original property. You should not get a lower-cost property when doing a 1031 tax exchange. 

Second, you can purchase up to three properties without regard to their fair market value as long as their aggregate value does not exceed 200 percent of your original property’s sale price. 

Third, you have to identify your replacement properties within 45 days of selling the original property. Finally, the replacement property (or properties) purchase must be completed within 180 days of the initial property sale.

How Can a 1031 Exchange Help With Taxes

A 1031 exchange can help you with taxes by allowing you to avoid short-term capital gains taxes. Capital gains are the profits made from selling an asset such as a car, land, house, or boat. Typically, an individual is taxed on these profits but by completing a 1031 tax exchange you can avoid this tax entirely.

Other Benefits of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange – one being that it resets the clock on depreciation. Depreciation is the percentage of the total cost of an investment property that is then written off each year. It also allows you to consolidate multiple properties into one property for the purpose of estate planning. 

Alternatively, it gives you the option of dividing one single property into multiple assets. Perhaps most importantly a 1031 tax exchange allows you to defer the capital gains tax. This frees more capital for investing in the replacement property.

Getting The Most Out Of a 1031 Tax Exchange

There are several benefits associated with a 1031 tax exchange and it is important that you take advantage of as many as possible. Getting the most leverage out of the exchange can help you in the long run with taxes, other purchases, and more. 

In order to learn more about this type of tax exchange and find out how they can help you talk to a qualified and experienced tax attorney. The tax attorneys at Wilson Ratledge can review your unique financial situation and determine how a 1031 tax exchange can be used to help you. We can help you in planning your course of action, fill out the documentation for you, communicate on your behalf, and much more. 

If you have more questions or are ready to move forward with a 1031 tax exchange, reach out to our office today to schedule a consultation!

SALT cap here to stay… for now.

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The state and local tax (SALT) deduction allows taxpayers of to deduct state and local tax payments on their federal tax returns. The tax plan signed by President Trump in 2017, called the Tax Cuts and Jobs Act, instituted a cap on the SALT deduction. 

On Monday, April 18, 2022, the United States Supreme Court declined to hear New York, New Jersey, Connecticut and Maryland’s plea to reverse the federal cap on state and local tax deductions that was instituted under former President Donald Trump’s signature tax plan.

The U.S. Supreme Court turned down the case in which states argued that the $10,000 federal cap on state and local tax deductions was coercive in violation of the U.S. Constitution’s 10th and 16th amendments.  Further, the states claimed that the cap harmed states with higher state and local tax burdens by increasing their residents’ federal tax bills and effectively raising the cost of home and property ownership.

Federal lawmakers have been debating over the last year whether to actually increase the cap, but have been unable to reach an agreement on such a proposal, partly because lawmakers on both sides of the aisle have agreed that a higher deduction would primarily benefit high-earners.  It is worth noting that, absent further legislation, the SALT deduction cap will sunset at the end of 2025.

In its legal filings, Treasury acknowledged that if the cap was viewed in isolation, its limitation may increase the federal tax liability of certain individuals who reside in the states challenging the provision. Nevertheless, states are free to address their own tax policy, and more than 20 states, including North Carolina, have put pass-through entity tax workarounds in place after the Internal Revenue Service and Treasury issued guidance indicating they would be a permissible method to bypass the cap.  Pass-through entities include S corporations, partnerships, and limited liability companies taxed as partnerships or S corporations.

What Are Tax Extensions and How Do They Benefit Taxpayers?

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Tax extensions are an additional period of time granted to a tax filer to prepare and file their taxes. In addition to giving a tax filar additional time to file their taxes, a tax extension gives an individual an opportunity to better review their forms prior to filing. 

A tax extension gives individuals six extra months to file their taxes. This extension pushes the tax filing deadline from April 15th to October 15th. Requesting a tax extension can aid an individual or couple who realize they are not prepared to file their tax returns by the Internal Revenue Service’s deadline.

Extensions Can Increase Accuracy

Tax extensions have multiple benefits with the first benefit being an increase in the overall accuracy of the tax return. Mistakes can often occur at the height of the hectic tax season leading to delays in processing tax refunds and increasing the chances of being audited. 

These mistakes are sometimes attributed to stressed-out filers or rushed accountants and those errors can ultimately cost the tax filer money. Requesting an extension can help ensure that the tax return is accurate making the tax season a smooth one for you and your family.

Extensions Can Save Accountant Fees

Accountant rates tend to increase during tax season and they often spike sharply the week of the filing deadline. Seeking help during the height of the tax season can be costly. Filing for an extension allows taxpayers to save money by giving them an opportunity to consult with an accountant outside of the busy tax season. 

Taxpayers can expect to save a significant amount of money in accountant fees if they request an extension moving their tax filing deadline back. These savings can add up with each tax season and become very beneficial.

Most Tax Extensions Are Automatically Approved

Most tax extension requests are honored automatically. Certain people like deployed active duty military members receive extensions without having to file form 4868. Simply make sure your information such as your legal name and social security number are correct. Errors on the form could result in rejections delaying your ability to receive approval quickly or result in a rare rejection.

Tax Extensions Can Reduce Late Penalties

The IRS imposes late penalties when a tax return is filed late without an extension being requested. There are two types of late penalties that can be charged to the taxpayer:

  1. 5% fee on any tax due for each month or fraction of a month
  2. Late payment penalty of between 0.5 and 25%.

If you request an extension, you only have to pay one of these fees regardless of how much taxes you owe. If you pay estimated tax when filing your extension, there is generally no penalty at all.

Extensions Can Improve the Accuracy of The Return

When a tax filer is hurrying to meet a looming tax deadline the chances of them making a tax filing mistake increases. Requesting an extension gives you extra time to go over the return to ensure accuracy prior to sending it to the IRS. The extension can provide you with an opportunity to avoid errors and improve the overall accuracy of your tax return.

Extensions Can Preserve Your Tax Refund

There is a three-year deadline for receiving a tax refund check from the IRS if you are owed one. This three-year period begins on the original filing deadline for that tax year which is typically April 15th. 

The statute of limitations is extended by six months when an extension is filed for. Even if a taxpayer is behind on submitting tax returns they can benefit from this extension and preserve their ability to receive a tax refund.

Extensions Cut Down on Confusion

The request to file a tax extension signals to the IRS that you are required to file a tax return for the season. This can reduce confusion if you are a person who does not always file a tax return. Requesting a tax extension lets the IRS know that you meet the requirements for filing and avoids some potential issues that might otherwise arise.

Contact Our Tax Controversy Attorneys Today

If you are having issues with audits, IRS collections, or any other tax-related controversies, it’s important that you contact a qualified tax attorney today. The tax controversy attorneys at Wilson Ratledge are here and ready to help. Contact our office today to schedule an initial consultation so we can help guide you through the resolution process with your tax issues.