“The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” So affirmed the US Supreme Court in Gregory v Helvering, 293 U.S. 465 (1935). Despite many attempts by administrations of both parties over the intervening 75 years to characterize efforts of taxpayers to minimize their liability to the US Treasury as either unpatriotic at the least or criminal at worst, the rule of law still holds. Tax evasion is illegal, and efforts to conceal assets and refuse to file returns and pay legally due taxes will result in fines, penalties and sometimes incarceration. However, tax avoidance is simply using the existing rules to minimize the contribution to the tax collector and it is proper and appropriate behavior, long supported by the courts.
It is up to the individual taxpayer together with competent tax advice and legal counsel to establish a solid, legitimate plan to reduce their tax liabilities. This is the time of year to review what the uneven economic experiences of 2009 have produced and to make whatever year-end adjustments are appropriate so as to minimize the tax consequences and to avoid any unpleasant surprises come tax filing time.
For US citizen/taxpayers Jan 15th 2010 is an important date. It marks the due date of the final quarterly estimated tax payment due to the US Treasury. There are various frames of reference and safe harbor rules regarding estimated taxes, and a number of ways under the IRS regulations to avoid underpayment penalties. An hour invested with a qualified CPA could save time, aggravation and anxiety, and more importantly money.
The most common penalty is for underestimating the annual tax bill paid in quarterly increments to the US Treasury (Panama has a similar trimester program). This occurs when the ultimate tax that is due is more than projected and the Treasury levies a ‘penalty’ which amounts to interest on the money that should have been paid earlier. The current interest rates are relatively low, and many taxpayers don’t worry about the few hundred dollars levied on an underpayment of estimated taxes. However, substantially understated income and the related taxes are subject to a 20% penalty of the tax, in addition to any other penalties and interest, so it is important for the US citizen/taxpayer to make an accurate assessment of their annual income before year end, in order to be able to adapt and adjust in the last month of the year if possible and minimize the ultimate tax liability.
Compare your 2009 income to your 2008 income and related tax liability. If there is a significant difference in either the likely income or the amount of tax paid to the US Treasury, then it is probably useful to seek the help of a competent tax advisor to see if you can arrange your financial affairs to legally shift income between 2009 and 2010 or prepay some expenses in 2009, to reduce the projected tax due and to adjust the estimated payment due on 15 January.