This past year has brought forth great change. We're facing troubled times with our economy. This storm we've encountered appears to stretch far over the horizon. Everyone is feeling the brunt of this financial blow, even the government. And what does the government do when they want to bring in more income? Generally they raise taxes. But what do they do when they promised not to raise taxes? Audit! There's a new sheriff in town and he has vowed to close loopholes. The commissioner of the IRS has announced an audit increase. They will not tolerate frivolous positions.
Last summer the IRS threatened a $5,000 penalty specifically to mariners they deemed to be taking frivolous positions. Many people realized that a few hundred dollars in refund money isn't worth the possible aggravation and time involved when Uncle Sam questions your deductions. It is my hope to work with mariners so that they will no longer be on the IRS' radar.
The government wants you to pay no more than is legally due. The past years have brought forth myths regarding merchant mariners and taxes. The scuttlebutt has ranged from sailor tax credits to avoiding taxes all together. Most of this is myth dreamt up by crafty accountants and sea-lawyers.
We are here to help you! There's more to tax planning for mariners than "magic numbers". Tax planning for mariners is about implementing a strategy that fits your specific needs and goals. Let's get back on the right track. Clients aren't test cases for seeing if a deduction will fly. We incorporate accepted strategies in developing your plan.
What do I mean by "developing your plan"? The truth is that sometimes the business deductions you generate while sailing don't have any effect on your tax due. When income gets too high, ALT Min comes in and snatches away the tax benefits generated by your business deductions. "Developing your plan" involves taking current and future tax changes, for-casting income, and implementing accepted tax and credit sheltering recommendations and techniques. There are planning techniques that can help you minimize short and long term tax effects. If planned correctly, taxable events can be minimized and in some cases completely eliminated.
· The decision has been made on foreign earned income exclusions for mariners. The IRS won its' case. Any wages earned in international waters by US citizens are US income regardless of residence. http://www.ustaxcourt.gov/InOpHistoric/Cl3ark.TCM.WPD.pdf Before this case, mariners had often successfully been allowed to exclude income from international waters. Now there is no question, only foreign port or foreign water time can possibly be excluded. For most mariners international waters is where the majority of their time is spent. This is in addition to meeting the BonaFide resident or physical presence test. Many people have been audited for taking the exclusion. Many could also be subject to a six year statute of limitations as opposed to the more common three year statute for audit.
· Have you considered a Roth IRA conversion? With the recent drops in most portfolios, this could be a good time to convert standard retirement income to a Roth venue.
· There are new rules regarding section 121 exclusions and second homes. Section 121 provides a $250,000 capital gains exclusion on the sale of a primary residence meeting certain criteria held two years or more. In the past people have made their second home their primary residence for two years, then sold and utilized the 121 exclusion on the sale. New rules force us to allocate the percentage of time the property was a primary/secondary residence to the exclusion. This can virtually eliminate the benefits from section 121 upon the sale of a property that has been owned for a long term. If you were utilizing this type of strategy, you might benefit in considering a section 1031 exchange as an alternative.
· Mariners! Don't believe the myth that there is a sailors' tax credit you receive simply for being on a vessel. You need to INCUR actual expenses in order to take incidental per diem deductions. The IRS is showing zero tolerance with the unsubstantiated practice.
· State income tax payers
