Marcy Tolkoff, JD

There's little that gets a heart racing faster than hearing from the not-so-avuncular Uncle Sam about a tax matter. The good news is that IRS inquiries are usually due to relatively minor mistakes or omissions on your tax return than can be easily fixed, such as math errors, transposed digits in Social Security numbers, or blanks where there should be signatures. Still, even relatively incidental oversights will delay a refund and may require you to pay interest or penalties.  

Here are common oversights that will cost you money, anxiety, or both.  

The past should be the starting point for the present. By reviewing the prior year's tax return, you may be reminded of deductions that you may otherwise forget to take in the current year. "You want to look for tax breaks that carry over from last year, such as unused capital losses, equipment depreciation deductions and charitable contribution carryovers if your contribution deduction was limited last year," explains Edward A. Slott, CPA, author of 

Your Complete Retirement Planning Road Map 

(Ballantine Books, 2006) and several other books on IRA strategies. "Also, check to see if you paid 2005 state income tax last year since that's an itemized deduction this year," he adds.  

Many busy professionals, including physicians, don't  make estimated tax payments throughout the year. "Some clients treat the payment of estimated taxes as if it's optional, often sending just a portion or skipping payments entirely, reasoning that they'll just pay it all at the end of the year," says Steven W. Kaye, CFP, of American Economic Planning Group in Watchung, NJ. "It's a requirement, not a choice. You have to pay in if you don't have taxes withheld from your W-2." 

Typically, an accountant will set up four equal payments due in April, June, September, and January, totaling at least the amount of tax paid the prior year. If you don't make your full quarterly payments on time, you'll have to fork over an underpayment penalty-essentially an interest rate the IRS charges reflecting what it could have earned on that money if it had been paid promptly (the current rate is 8 percent).  

Many states have tax breaks that apply only to state returns; they're often missed because filers generally begin with the federal return and automatically carry the numbers over to their state return without checking to see if they all apply. For example, even though up to 85 percent of Social Security benefits and certain other distributions may be taxable for the federal return, this income isn't taxable in many states. And if you live in New York and are 5911/42 or older, you can exclude up to $20,000 a year of pension, IRA, or annuity payouts even though they're taxable on the federal level. Conversely, you may be entitled to certain credits on a state but not a federal return, such as those for homeowners and renters. If you don't know how your state treats these and other exclusions and deductions, don't count on it to point out your error.  

Many investors opt to have mutual fund or stock dividends reinvested instead of distributed to them. However, when it comes time to sell those investments, people often forget to deduct those reinvested dividends from their gain or add them to their loss. "Tax is paid on the reinvested dividends in the year in which they were received, so the dividends must be added to the investment's cost basis," explains Ed Slott. "If you don't take this into account, you'll pay tax twice on the same sale-once, when the dividend was first reinvested, and again when the investment is sold."  

Articles

There are some things in life you want to get right the first time; your taxes ought to rank right up there.

Your 2006 taxes: 9 costly mistakes

You may think that when we ushered in the New Year, you said goodbye to your last chance to pare down the bill that comes due on April 16th. Not so. There are still some savvy tax-reducing moves left. Here's a roundup of ways to hold on to more of your hard-earned money. 

There are the lucky dogs, and then there are those who are subject to the Alternative Minimum Tax. A secondary calculation that was designed to make sure the rich pay their fair share, the AMT ensnares high-income individuals who wouldn't necessarily be considered affluent-and their numbers are growing. More than 80 percent of households with incomes between $100,000 and $200,000 will pay the AMT by 2010, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. Not only will the AMT affect more people, 71 percent of those subject to it in 2006 (and 89 percent in 2010) will be faced with higher marginal tax rates. The only good news-as more taxpayers are included, the average AMT liability-$6,782 last year-is projected to drop.     

For your 2006 return only, the IRS will retroactively refund the excise tax you paid on your personal and business long-distance phone service from March 1, 2003 to July 31, 2006. "The 41-month time period was chosen arbitrarily," explains Barbara Weltman, author of 

J.K. Lasser's 1001 Deductions & Tax Breaks 2007

 (John Wiley & Sons, 2007), "and some are still fighting to have it extended."   

If you don't have copies of your phone records, see if your long-distance carrier will provide them. A simpler option: The IRS allows you to select a fixed credit-$30 for one exemption, $60 for four or more. Unlike deductions, which reduce your AGI, credits reduce your tax bill dollar-for-dollar. The fixed refund amounts, which include interest, only apply to individuals and Schedule C sole proprietors with gross income up to $25,000. Businesses (including corporations and partnerships) must claim the actual amounts from their phone bills or use an IRS-created simple formula. Larger sole proprietors have a choice of three options: their actual amounts, the IRS formula for their business expenses and actual for their personal, or the standard refund amounts for both business and personal; for guidance, go to 

 and download Form 8913, Credit for Federal Telephone Excise Tax Paid. 

If you don't have a retirement plan, you may be able to contribute up to $4,000 to a traditional IRA (or $5,000 if you're 50 or older) for 2006. You have until April 16th to make contributions and reduce your taxable income for the year.  

You can also get a jump start on 2007. Deadlines for certain other plans have passed, but now's the time to start planning for this year's contributions. "You can contribute up to $15,500 in a 401(k) or 403(b) plan, or $20,500 if you're 50 or over," says Louis Bassik, CPA, of Price, Rosenberg & Bassik in Bardonia, NY.  

The clock's winding down, but there are still ways to reduce your bill-and next year's too.

Your 2006 taxes: Smart ways to cut taxes now

These are just some of the workplace comments that were directed toward anesthesiologist Nadia Nathan, according to her allegations in a complaint filed with the Massachusetts Commission Against Discrimination (MCAD) against Brigham and Women's Hospital. She also maintains that she was subjected to comments and gestures about her "tits" as well as to aggressive pulling on her hospital gown. 

From 1998 until 2004, the Egyptian-born single mother of three claims she was treated quite differently from her colleagues. In her complaint, she says she was subjected to unwarranted disparagement; passed over for assignments in favor of less experienced male physicians; limited in the amount of time she could work in the cardiac operating room; and restricted in terms of research support and resources, although her colleagues' work was well supported.  

After she informed her supervisors that she might file a complaint with the MCAD, Nathan says she was placed on unpaid leave and told she'd never be permitted to return to her duties in the cardiac operating room. (In a statement provided to 

, Brigham and Women's Hospital noted that it takes seriously any complaint of discrimination, but would not comment on pending legal issues.)   

Gloria Farina was a young girl when she emigrated from Cuba. Raised in south Florida, she went to medical school in Texas before becoming an ED physician. She worked for 13 years at a trauma facility in Dallas before returning to Miami. From 1995 to early 2000, Farina was the only female physician in Emergency Medicine Associates (EMA), a group that serves as the emergency department staff of Indian River Memorial Hospital in Vero Beach.  

Almost from the beginning, Farina says, two of the group's doctors created a hostile work environment by regularly making crude sexual remarks and jokes. "They'd make comments about my appearance, as well as about other staff members and even patients, and also talk about their sexual experiences and fantasies." She describes numerous instances of inappropriate behavior, such as the time a doctor was told he had shaving cream on his face and ears and he asked Farina if she'd "lick it off."  

In addition to the steady stream of sexual references, Farina says she was also routinely asked whether she was going to have children and if she would continue working. "The male doctors would question me about why I didn't just get pregnant and stay home since I was married to a doctor," says Farina. After she had her first child and returned to work, the situation intensified. "I got the worst shifts and didn't get bonuses that the other doctors received," she explains. "I was assigned to acute care, which usually pays more than the ED, except I was paid less." Why didn't she just quit and find a new job? "I felt strongly that I hadn't done anything wrong and that they should be the ones to leave."  

Thanks to laws that protect against abuse, there's no need to suffer in silence. Here's how to fight back.

Harassment: When you're the victim

When something sounds too good to be true, it usually is-but there just may be an exception. A VEBA, which stands for Voluntary Employees Beneficiary Association, is a tax-exempt trust through which a business owner can get current tax deductions by making discretionary contributions that may be withdrawn 

 for qualifying benefits such as post-retirement medical and long-term-care costs. If you think it's just another garden variety benefit plan, hold onto your stethoscopes.  

"A VEBA, which you can have in addition to a retirement plan, provides a number of significant business planning opportunities," says Lance Wallach of Plainview, NY, who specializes in VEBAs, pension plans, and tax-reduction strategies. "It allows owners and highly compensated employees to take tax-deductible dollars and obtain many benefits including life, health, and disability insurance." It can also be created so that funds used in a practice buy-out will be tax-deductible. 

				"Many physicians are drawn to the asset protection advantages that VEBAs offer," explains tax attorney Roccy DeFrancesco, author of 

 (Triarc Advisors, 2006). "If you had a judgment against you-as the result of a malpractice, divorce, or other type of lawsuit-any money in an ERISA-qualified VEBA would be protected against seizure."			

As indicated earlier, you can contribute to a qualified retirement plan and a VEBA simultaneously. So if you've already fully funded your retirement plan for the year, you can make additional contributions to the VEBA. Another plus, you can withdraw money from the VEBA for 

 before age 59½ without penalty and don't have to make withdrawals after 70½				

 a retirement plan. (VEBAs are subject to some portions of the Employee Retirement Income Security Act of 1974, but not by the rules covering qualified plans.)  

If properly constructed, a VEBA can also be an advantageous estate-planning tool. "It's one way wealth can pass tax-free to the next generation without limitation," says Wallach. "With a retirement plan, once the estate reaches a certain amount, the inheritance will be subject to income as well as estate taxes, but not so with a VEBA." 

There are, of course, qualifications. In order to be exempt from estate tax, there must be no "incident of ownership," meaning you must be willing to forgo a degree of control, such as having the right to change the beneficiary. If you named your children or an insurance trust as the irrevocable beneficiary, proceeds would go directly to the beneficiary and avoid all taxes.  

First, discuss your goals and specific circumstances with a VEBA specialist. Then a plan administrator-a professional with extensive tax expertise-will custom-design a plan to meet your needs. "A VEBA can't arbitrarily discriminate among employees," cautions Wallach. "For example, benefits have to be based on objective criteria like salary or length of service, not on subjective reasons or no reason at all."  

The benefit plan you've never heard of that saves, shelters, and showers you with tax-free money.

Author | Marcy Tolkoff, JD

Articles

Your 2006 taxes: 9 costly mistakes

Your 2006 taxes: Smart ways to cut taxes now

Harassment: When you're the victim

What's a VEBA-and why do you need to know?