IRS Statute of Limitations: Claiming a Tax Refund

Generally, a taxpayer may file a claim for a tax refund of an overpayment of any tax within three years from the time the tax return was filed with the IRS or two years from the time the tax was paid to the IRS, whichever period is later. If no tax return was filed with the IRS, the claim may also be made within two years from the date that the tax was paid to the IRS. See 26 U.S.C. §6511(a).

The statute spells out numerous exceptions to this general rule. For example, pursuant to 26 U.S.C. §6511(d)(1), a taxpayer may file a claim within 7 years if the tax refund pertains to a bad debt under section 166 or 832(c) or in connection with a loss from a worthless security under section 165(g).

Therefore, even though the majority of situations are resolved by the general rule, it is prudent to consult your tax attorney to see if your situation fits into one of the exceptions.

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Effect of Legal Separation and Divorce on Your Ability to Claim “Single” Tax Status

According to the IRS, in order to be able to claim “single” tax status, you must be “unmarried or legally separated from your spouse under a divorce or separate maintenance decree” on the last day of your tax year, and you do “not qualify for another filing status.” (See IRS Publication 501).

Determining your marital status can be a complex legal matter with numerous exceptions, and exceptions to exceptions. Only a tax professional who reviews the facts of your case may be in position to advise you on your marital status. Here, I will only attempt to sketch the broadest concepts to give you some awareness of the issues.

IRS may consider your marital status as “unmarried” if, on the last day of the relevant tax year, “you were unmarried or legally separated from your spouse under a divorce or separate maintenance decree.” Id. Usually, the state law will determine whether you were legally separated from your spouse on the last day of the relevant tax year. If you were divorced under a final decree by the last day of the year, the IRS will consider you unmarried for the entire year. However, if the divorce was motivated by the desire to file your tax return as unmarried persons, and you and your spouse remarry the next year, the IRS will disregard the divorce for tax purposes and demand that you and your spouse file your tax return(s) as married persons.

If your marriage is annulled (by a court decree which holds that no valid marriage ever existed), the IRS will consider you as “unmarried,” and you must amend your tax returns for all years (within the Statute of Limitations – usually the past three tax years) affected by the annulment.

Keep in mind that, if you are able to claim “single” status, you may also be eligible for a more advantageous tax filing status, such as “head of household” or “qualifying widow(er) with a dependent child.”

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Difference between Self-Employment Tax and FICA tax

The best way to understand the difference between the Self-Employment tax (“SE tax”) and the FICA (Federal Insurance Contributions Act) tax is by contrasting self-employment versus regular salary employment. In essence, the SE tax is a Social Security and Medicare tax imposed on individuals who for themselves, while FICA tax is paid in equal portions by employees and employers.

Usually, if you receive a salary by working for someone else, you do not pay the SE tax, but only your half of the FICA tax, which consists of the Social Security and Medicare taxes imposed on employers and employees by the U.S. government to fund Social Security and Medicare programs. Employee’s share of FICA tax consists of 6.2% Social Security tax (in 2010, imposed on up to $106,800 of an employee’s salary) and 1.45% of Medicare tax (no wage limit). The employee’s share of the FICA tax is calculated based on employee’s gross earnings. The other half of FICA tax is also calculated based on the employee’s gross earnings, but it is paid by the employer. Thus, the total FICA tax imposed by the federal government is 15.3% and it is paid in equal shares by employees and employers.

SE tax is a rough equivalent of FICA tax. When you are self-employed, however, you are your own employer. Therefore, the U.S. government imposes a similar 15.3% SE tax on the self-employed individuals, but you are the only one fully responsible for the tax (since there is no employer who would pay one-half of the tax).

In an effort to apparent eliminate tax discrimination between employees (who pay full SE tax) and self-employed individuals (who pay one-half of FICA tax), the federal government created significant differences between the SE tax and the FICA tax. Two of them stand out and deserve special mention in this essay. First, unlike the FICA tax, the SE tax is imposed only on net earnings. Therefore, if you are self-employed, you are able to deduct your business expenses from your self-employment gross income and calculate your SE tax on your net self-employment income. Second, in calculating his adjusted gross income, a self-employed individual is able to deduct a half of his SE tax from his total gross income, further reducing his income tax burden.

Nevertheless, despite these and other differences between these taxes, significant disparity persists. This disparity, however, does not always favor the employees; on the contrary, in many cases, self-employed individuals (especially start-up businesses) are able to make full use of the business expense deductions available to them and significantly reduce their tax burden. Generally, however, once the business matures, the SE tax is felt more heavily by self-employed individuals than employees. In these cases, it is prudent to consult your tax attorney to see what tax planning strategies are available under the Internal Revenue Code to reduce your tax burden.

Sherayzen Law Office can help you correctly assess your current tax situation and help you develop responsible tax planning strategies for you and your business. Call NOW to discuss your tax situation!

Importance of Determining Your Tax Filing Status

Figuring out your filing status is the first major step in filing your tax return. Your tax filing status not only will allow you to determine the correct tax (from the Tax Computation Worksheet or appropriate column in the Tax Table), but also it is crucial to understanding your eligibility for and the exact amount of deductions, exemptions, tax credits. For example, in some situations, if your taxable income is close to $160,000, the choice between filing as “single” and filing as “married filing separately” may influence whether you need to pay the alternative minimum tax (“AMT”); it is more likely that filing as “single” will help you avoid AMT, while “married filing separately” status may have the opposite effect. Sometimes, the latter tax filing status may also make you ineligible for certain tax credits even at a much lower income bracket – a situation that may be avoided if you are filing joint tax return with your spouse.

There are five possible tax statuses: 1) single; 2) married filing jointly; 3) married filing separately; 4) head of household, and 5) qualifying widow(er) with dependent child. The benefits and drawbacks of each status differ greatly depending on a tax situation. In some cases, you may be eligible for more than one status (for example, single and head of household); in other cases, your eligibility may be greatly influenced by the choices you make.

In order to draw out the benefits and avoid costly mistakes, careful tax planning is necessary. The Internal Revenue Code (“IRC”) is so complex that it requires a tax professional to fully understand its provisions. Tax attorneys are professionals who usually are in a much better position to legitimately utilize possibilities offered by the IRC.

Sherayzen Law Office is a law firm that offers individual and business tax services. We can help you understand your current tax position, file the tax returns for you, and carefully plan your tax strategies for the future. CALL NOW to start resolving your tax issues!

Foreign Earned Income Exclusion Amount for 2010

Under I.R.C. §911, if certain conditions are met, a qualified individual can exclude his foreign earned income from taxable gross income for the U.S. income tax purposes. This income may still be subject to U.S. Social Security taxes.

The income exclusion amount for 2010 has increased to $91,500.