How to Pay Zero Taxes 2012: Your Guide to Every Tax Break the IRS Allows!

HOW TO PAY ZERO TAXES, 2012

Also by Jeff A. Schnepper

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HOW TO PAY ZERO TAXES, 2012

TWENTY-NINTH EDITION

Jeff A. Schnepper

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This book is normally dedicated to my mogul,

Barbara, who taught me how to love, and to

my children, Brandy, Joshua, Allison, Mario, and Jonelle,

who gave me five more reasons why.

If I had the choice of doing it all over

again, I would begin by loving you again.

Also normally dedicated to the memory

of Frisco T. D. Schnepper, Tiger T. C. Schnepper,

and to Fred and Bruno, who now give me paws,

BUT

Forget it, guys . . . This one’s

for my Bianca Rose Conlin,

and her brothers Drew Ethan Conlin and Tyler Evan Conlin,

who redefined my universe!

Contents

ACKNOWLEDGMENTS

CHAPTER 1

Tax Insanity

CHAPTER 2

Is It Legal?

CHAPTER 3

How Our Tax System Works

CHAPTER 4

Exclusions—Tax-Free Money

A Alternatives to Earned Income

1. Hospitalization Premiums

2. Group Life Insurance Premiums

3. Group Legal Services Plans

4. Accident and Health Plans

5. Employee Death Benefits

6. Merchandise Distributed to Employees on Holidays

7. Expenses of Your Employer

8. Meals and Lodgings

9. Employee Discounts

10. Workers’ Compensation

11. Cafeteria Plans

12. Dependent Care Assistance Program

13. Employer Educational Assistance

14. Employee Awards

15. Clergy Housing Allowance

16. Miscellaneous Fringe Benefits

B Donative Items

17. Gifts, Bequests, and Inheritances

18. Scholarships and Fellowships

19. Prizes and Awards

C Investors

20. Interest on State and Municipal Obligations

D Benefits for the Elderly

21. Public Assistance Payments

22. Social Security and Other Retirement Benefits

23. Annuities

24. Sale of Your Home

E Miscellaneous Individual Exclusions

25. Carpool Receipts

26. Damages

27. Divorce and Separation Arrangements

28. Life Insurance

29. Qualified State Tuition (§529) Programs

30. Your Home—The Mother of All Tax Shelters!

31. Disabled Veteran Payments

32. Exclusion of Income for Volunteer Firefighters and Emergency Medical Responders

33. Unemployment Benefits

34. Homeowner Security

35. Reimbursed Costs to Parents of Children with Disabilities

36. Wrongful Conviction and Incarceration

F Schedule of Excludable Items

CHAPTER 5

Credits—Dollar-for-Dollar Tax Reductions

A Estimated Tax and Withholding Exemptions

B Credits

37. The Earned Income Credit

38. Excess Social Security Tax

39. The Child and Dependent Care Credit

40. Credit for the Elderly or Permanently and Totally Disabled

C Special Credits

41. Work Opportunity Credit (Formerly Targeted Jobs Tax Credit)

42. Welfare to Work Credit

43. Research Tax Credit

44. Orphan Drug Tax Credit

45. Adoption Assistance

46. Hope Scholarship Credit

47. American Opportunity Tax Credit

48. Lifetime Learning Credit

49. Child Tax Credit

50. Disability Credits

51. Health Insurance Credit

52. Saver’s Credit

53. Small Employer Credit

54. Electric Vehicle Credit

55. Credit for Residential Energy Efficient Property

56. Energy Saving Home Improvement Credit

57. Energy Efficient Appliances

58. Hybrid Vehicles Credit

59. Telephone Tax Refund

60. First-Time Home Buyer Credit

61. Making Work Pay Tax Credit

62. Plug-in Electric Drive Vehicle Credit

63. Plug-in Electric Vehicle Credit

64. Conversion Kits

65. Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed against AMT

66. Small Business Health Insurance Credit

67. Foreign Tax Credit

CHAPTER 6

Above the Line Deductions

A Deductions for Adjusted Gross Income

68. Trade and Business Deductions

69. Employee Business Expenses of Actors and Other Performing Artists

70. Employee Business Expenses

71. Alimony

72. Interest on Qualified Education Loans

73. Retirement Plan Payments

74. Self-Employment Tax

75. Health Insurance Deduction for Self-Employeds

76. Moving Expenses

77. Clean Fuel Vehicles

78. Deduction for Qualified Higher Education Expenses—Tuition & Fees

79. Legal Fees

80. Classroom Materials

81. Medical Savings Accounts (Archer Medical Savings Accounts)

82. Health Savings Accounts

83. Sales Tax Deduction on Motor Vehicles

CHAPTER 7

Below the Line Deductions

A The Importance of Filing Status

B Tax Planning with Itemized Deductions

84. Medical Expenses

85. Income Taxes

86. Real Property Taxes

87. Personal Property Taxes

88. Interest

89. Mortgage Insurance

90. Charitable Contributions

91. Casualty Losses

92. Theft Losses

93. Miscellaneous Trade and Business Deductions of Employees

94. Travel Expenses

95. Transportation Expenses

96. Meals and Entertainment Expenses

97. Gifts

98. Reimbursable Employee Business Expenses

99. Educational Expenses

100. Limit on Itemized Deductions

C Schedules of Deductions

101. Medical Deductions

102. Deductible Taxes

103. Charitable Deductions

104. Casualty and Theft Loss Deductions

105. Miscellaneous Deductions

106. Employee Miscellaneous Deductions

107. Investor Deductions

CHAPTER 8

Traditional Tax Shelters

A Deferral and Leverage

108. Real Estate

109. Fees in Public Real Estate Partnerships

110. Oil and Gas

111. Equipment Leasing

112. Single-Premium Life Insurance

113. Cattle Feeding Programs

114. Cattle Breeding Programs

115. Tax Straddles

116. Art Reproduction

117. Noncash Gift Shelters

118. Municipal Bond Swaps

B How to Analyze a Tax Shelter

119. Getting Out of the Tax Shelter

120. Master Limited Partnerships

121. Abusive Shelters

CHAPTER 9

Super Tax Shelters

A Family Shifts

122. Unearned Income of Minor Children

123. Outright Gifts

124. Clifford Trusts

125. Interest-Free Loans

126. The Schnepper Shelter: Gift Leasebacks

127. The Schnepper Deep Shelter

128. Family Partnerships

129. Family Trusts

130. The Schnepper Malagoli Super Shelter

131. Employing Members of the Family

132. Author’s Delight

B Running Your Own Business

133. Your Home

134. Your Car

135. Meals and Entertainment

136. Travel and Vacation

137. Gifts

138. Advertising

139. Deductible Clothes

140. Creative Deductions—Busting the IRS

141. Medical Premiums

142. Borrowing from Your Company

143. Miscellaneous Corporate Advantages

CHAPTER 10

Investment Planning to Save Taxes

144. Short Sales

145. Broad-Based Index Options and Regulated Futures Contracts (RFCs)

146. Wash Sales

147. Premiums on Taxable and Tax-Exempt Bonds

148. Original Issue Discount (OID)—Taxable Bonds

149. Original Issue Discount (OID)—Tax-Exempt Bonds

150. Market Discount

151. Municipal Bond Swaps

152. Employee Options—Nonqualified

153. Incentive Stock Options

154. Year-End Stock Sales

155. Fund Strategies

156. Dividends

157. Tax-Exempt Income

158. Old Prices

159. Alternative Minimum Tax for Individuals

160. U.S. Savings Bond Exclusion

161. Madoff Losses

CHAPTER 11

Last-Minute Tax Planning

162. Defer Taxes

163. Accelerate Expenses

164. Accelerate Special Deductions

165. Dependents and Personal Exemptions

166. Phase-out of Exemptions

167. Timing Strategies

168. Retirement Plans

169. Individual Retirement Plans (IRAs)

170. H.R. 10 or Keogh Plans

171. Marital Status

172. The Goldinger Deferral

CHAPTER 12

The Economic Growth and Tax Relief Reconciliation Act of 2001

173. Marginal Rate Reductions

A Individual Income Tax Rate Structure

B Phase-out of Restrictions on Personal Exemptions

C Phase-out of Itemized Deductions

174. Tax Benefits Relating to Children

A Increase and Expand the Child Tax Credit

B Extension and Expansion of Adoption Tax Benefits

C Child Care Credit

175. Marriage Penalty Relief Provisions

A Standard Deduction Marriage Penalty Relief

B Expansion of the 15 Percent Rate Bracket for Married Couples Filing Joint Returns

C Marriage Penalty Relief and Simplification Relating to the Earned Income Credit

176. Education Incentives

A Modifications to Education IRAs

B Private Prepaid Tuition Programs; Exclusion from Gross Income of Education Distributions from Qualified Tuition Programs

C Exclusion for Employer-Provided Educational Assistance

D Modifications to Student Loan Interest Deduction

E Eliminate Tax on Awards Under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program

F Deduction for Qualified Higher Education Expenses

177. Pension and Individual Retirement Arrangement Provisions

178. AMT Relief

179. Health Insurance for Self-Employed

180. Income Tax Treatment of Certain Restitution Payments to Holocaust Victims

181. Estate, Gift, and Generation-Skipping Transfer Tax Provisions

A Phase-out and Repeal of Estate and Generation-Skipping Transfer Taxes; Increase in Gift Tax Unified Credit Effective Exemption

B Expand Estate Tax Rule for Conservation Easements

C Modify Generation-Skipping Transfer Tax Rules

D Availability of Installment Payment Relief

182. Sunset

CHAPTER 13

The Job Creation and Worker Assistance Act of 2002

183. Bonus Depreciation

184. Net Operating Losses

185. Classroom Materials

186. Electric Vehicle Credit

187. Work Opportunity Tax Credit

188. Welfare to Work Tax Credit

189. Archer Medical Savings Account

190. Liberty Zone Benefits

CHAPTER 14

The Tax Relief Reconciliation Act of 2003

A Rate Reductions

B The Marriage Penalty

C The Alternative Minimum Tax

D Child Tax Credit

E Dividends/Capital Gains

F Deduct Your SUV—Election to Expense

CHAPTER 15

Income Averaging and Hurricane Tax Breaks

CHAPTER 16

2006 Tax Reform

A The Tax Increase Prevention and Reconciliation Act of 2005

B The Pension Protection Act of 2006

C Tax Relief and Health Care Act of 2006

CHAPTER 17

Tax Reform 2007–2008

A The Mortgage Forgiveness Debt Relief Act of 2007

B The New Debt Relief Act

C The Economic Stimulus Act of 2008

D The Heroes Earnings Assistance and Relief Act of 2008

E The Housing and Economic Recovery Act of 2008

CHAPTER 18

2009 Tax Changes

191. Making Work Pay Tax Credit

192. Reducing the COBRA Bite

193. First-Time Home Buyer Credit Expanded

194. American Opportunity Tax Credit

195. Energy Credits

196. Plug-in Electric Drive Vehicle Credit

197. Plug-in Electric Vehicle Credit

198. Conversion Kits

199. Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed against AMT

200. AMT Patch

201. Earned Income Credit

202. Child Tax Credit

203. Section 529 Plans

204. Unemployment Benefits

205. Qualified Transportation Benefits

206. Estimated Taxes

207. Motor Vehicle Sales Tax

208. Business Depreciation

209. NOL Carrybacks

CHAPTER 19

2010 and 2011 Tax Changes

A The Hiring Incentives to Restore Employment (HIRE) Act of 2010

B The Patient Protection and Affordable Care Act

C Small Business Jobs Act of 2010

D The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

CHAPTER 20

How to Avoid/Survive an IRS Audit

APPENDIX A

Cost Recovery/Depreciation

APPENDIX B

Business Use of Listed Property

APPENDIX C

Auto Leases

INDEX