Increasing EITC with 1.179-1(b)

At times a deduction, allowed by congress, is so powerful, I doubt it as I doubt flat world theorists.

This deduction is 179 expensing and the part that is so empowering is specially laid out in CFR 1.179-1(b)

(b) Cost subject to expense. The expense deduction under section 179 is allowed for the entire cost or a portion of the cost of one or more items of section 179 property. This expense deduction is subject to the limitations of section 179(b) and § 1.179-2. The taxpayer may select the properties that are subject to the election as well as the portion of each property's cost to expense.

EITC is increased and then decreased based on earned income. There is an optional amount based off of income.

Fraud has often occurred where taxpayers (or their practitioners) increased income (or decreased it) to increase EITC and get into these "optimal" ranges. I will leave the particulars of the current year amounts but know that it acts as a bell curve.



What I would like to go over is common pitfalls of this strategy.

1) A legitimate Trade or Business must be had.

2) Property eligible for 179 expensing

3) Property that could otherwise fall under the tangible property regs and be expensed.

4) Future year considerations.
   
     a) Having EITC this year may not be worth it if we we suspect much higher income in future years.  
     b) Asset class of assets we choose to take 179 on and ones we don't. If we have a truck and a trailer. The trailer is 5 year property while the over the road truck is 3 year property. We should consult with the client with future planning in mind.

Considering all these factors, one can delay tax and have refundable tax credits.

But remember, where the IRS giveth, it soon taketh away. Not considering the increase in future year income and not making the necessary  capital expenses, will undoubtably hurt the long run for the taxpayer.

Best of wishes this tax season.

Structuring Alimony Payments for Tax

Lets imagine

1) A greater than normal financial year finds you
4) Formers spouse(s) is in a lower tax bracket
2) Alimony payments are being made to a previous spouse(s)
3) Former Spouse(s) agrees to allows payments of alimony to be made early

§ 71 allows a for AGI deduction for alimony payments under certain circumstances:

1)  The payments are made under a “alimony or separate maintenance payment”.
2) Agreement must not state the payments "are not alimony"
3) Can't live together
4) Payments must cease at death or spouse remarriage


Let's put this into perspective. A client approaches you during a great year and wants to reduce his current year income and wants to pre-pay alimony to take a greater then normal deduction. 

Can the client do this?

The Short answer is Nope. 

The why?

§ 71 the first requirements is the payments be made under a “alimony or separate maintenance payment”. The IRS has taken a stance that these payments "must" be under the arrangement of the agreement. Thus, the agreement would be for the betterment of the spouse receiving payments and would be setup to not allow for one spouse to take advantage of the other. Payments are regularly paid and are due on dates. 

Courts have often disallowed payments that are made in a tax year that the agreement did not specify.  

In short, prepaying payments to reduce current year income is not allowed under the IRC. 

Today was payday.