A tax credit can be so much more valuable than a tax deduction as a deduction reduces income and then a tax rate is applied. Therefore, the marginal savings a deduction provides is only a portion of the amount incurred. Whereas a tax credit can offer a benefit for each dollar amount spent.
That benefit seems to have received extra attention from the IRS as we see a couple of recent tax court decisions which seemed to have discovered situations that were costing the Government money without providing the intended benefits to the economy:
- In TC Summ. Op. 2016-81 (Berry) the taxpayer claimed $5,800 of self-employment income from the one-time sale of tools and machinery, however, self-employment income is reserved for those in their own recurring business intended to make a profit. By reporting this capital gain income as another type, Berry, then, “conveniently” qualified him for a nice earned income credit. The court moved the income to Line 21 of Form 1040, removed the self-employment tax (and earned income credit) rightly stated that a one-time sale of tools is not considered an activity entered into for profit “with continuity and regularity.”
- In the Federal Court of Claims case Foxx v. U., 2017 PTC 46 (Fed. Cl. 2017) a
$2,500 preparer penalty was assessed because the preparer artificially reported additional income in order to claim a larger earned income credit for a client.
Rightly so, there are limits to what can be accomplished with Tax planning.
Whether you are a business, individual, or non-profit, we can outline specific steps you should take to minimize taxes, maximize loan eligibility, and enhance the value of your property.
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