What to Do After the Tax Return is Filed
by Steven Mendelsohn

On April 15th (or several months later if we request an extension) most of us will breathe a sigh of relief.  Our tax returns, hopefully including the promise of a refund, are filed and we can stop worrying about the subject for nearly another year.

But it may be that April 15th is precisely the date on which we should start rather than stop thinking about taxes.  The returns we file this year reflect last year's activities, and last year's important decisions.  There is little we can do now to improve the tax results of any of those.  But with a little thought and planning, there may be a great deal we can do to improve this year's results and to achieve healthier bottom lines on the 2009 returns we file this time next year.

For many of us that thought is distasteful, either because we loathe and detest thinking about taxes, or because we have a fatalistic view of the benefits that sustained attention will yield.  But looked at as one might look at a job, from the standpoint of earnings per hour, it could be that a little time spent on tax planning will be among the best investments we can make; better than the stock market or home ownership or even the lottery, the way things are these days.

Generally speaking the wealthier people are, the more they appreciate the importance of tax planning, the more access they have to tax planning expertise and resources, and the more money they have at stake.  But for anybody who has any taxable income, or who is the spouse or dependent of someone with taxable income, or who has any financial interdependence with a taxpayer, the benefits of tax planning, in quality-of-life and disposable income terms, may actually grow greater as income diminishes.

The tax law doesn't go out of its way to offer benefits or opportunities to low income people, but there are some important ones.  For all people with disabilities, regardless of income, tax planning presents complications that other taxpayers do not face. However, even though the effort may appear more daunting, it can also be more worthwhile.

The first step in tax planning involves what to do with any refund.  If you are a person receiving Medicaid, SSI, or assistance or services under other needs-based programs, you may face concerns about "countable resources" and asset limitations.  You don't want to lose the refund, particularly if you were eligible for something like the earned income tax credit or the child tax credit (both of which can generate refunds that reduce your income tax below zero) because that refund puts you over the asset limit.  So you need to know how much of a grace period you have (nine months in the case of the EITC, for example) before the cash becomes a countable asset for SSI.  Then you either need to spend that money within that nine months or, if you want to save it, find a way to get the money into a sheltered account.  Such savings vehicles exist under different benefit programs, ranging from Plans for Achieving Self-Support (PASS) accounts to individual development accounts (IDAs); and there is legislation currently pending in Congress that may create new options.

No one should ever use a refund anticipation loan.  Tax refunds come quickly enough, especially if you e-file, and it is almost impossible to find a real-life situation where someone's need for the refund is so immediate as to outweigh the interest charges incurred in order to get the loan.

Now the next major step in tax planning is to think about your likely income and expenses for 2009, and adjust any relevant withholding or estimated tax payments to avoid either being over-withheld or under-withheld at the end of the year.  Some people may choose to be over withheld as a precaution or as a kind of forced savings, and if that's what you want to do, it's certainly o.k.  You shouldn't do it by accident though, and you certainly don't want to be under-withheld either.

You can't accurately estimate your end-of-year bottom line unless you have some idea of the deductions you will be claiming, the expenses you will be incurring, and any tax benefits you will be entitled to at the end of the year.  For most people whose circumstances don't change these are pretty much the same from year to year, but if you are going to do something like make a purchase of some assistive technology (AT), you need to take that into consideration.  Much of AT is tax deductible, but whether as a medical expense or a work expense depends on the purpose and context of its use.  In either of these settings, deductibility will depend on your having enough deductible expenses from all sources to be able to itemize, and in the case of medical expenses, remember that only the portion of those expenses exceeding 7.5% of your adjusted gross income (AGI) will qualify.  So it may be in your interest to accelerate other deductible expenses, in order to combine them with your AT and reach the threshold for itemization; that is, to have more itemized deductions than your standard deduction would be.

If you are planning to enter or re-enter the workforce during the year, there are a number of tax planning steps that will help, but they are not steps you can expect vocational counselors or even benefits counselors to tell you about, and they are not steps that your tax preparer will be able to tell you about unless you have made the key facts known.  For example, certain job search costs are deductible, and certain training such as for a job within your same line of work may be deductible as well. 

For a person with disabilities who incurs rehabilitation training expenses, the deductibility issues become very complex.  They are beyond the scope of this paper, but the point is that they must be anticipated and discussed with a tax advisor, and if the tax advisor is not prepared to deal with them and their implications for you and your family as a taxpaying unit, then you need a different advisor, just as you would need a different doctor if you mistakenly wound up at a heart specialist's for treatment of a broken leg.

Starting April 1st, the take-home pay of people who work will be increased by an average of about $8 a week as a result of the recently-enacted federal economic stimulus package.  That will increase your net income, and ironically, if SSI countable income or other benefit program countable income is an issue, it may be a case where tax law changes affect benefit levels and eligibility.  In that case, if your net pay is up against your countable income limit, you may need to think about increasing your withholding.  It needs to be discussed, and regrettably, there are few if any tax professionals who understand the ins and outs of these social programs.  If "deeming" has to be taken into account, the issues become more complex still.

Sometimes tax planning becomes a part of overall financial planning.  If you work with a financial planner, the implications of retirement accounts, inheritances, insurance settlements, or other income streams and set-asides and savings vehicles need to be taken into account, not only from the tax standpoint (where the planner should be expected to have knowledge and expertise) but also from the interrelated standpoint of impact upon needed benefits and services, an area where unfortunately all too many planners are outside their areas of expertise, and more significantly, outside their comfort zones.

Broadly speaking, the best analogy for understanding the interaction of tax law and benefits law is found in drug interactions.  Some medications work together, some are contraindicating, and many combinations have never been investigated or observed.  Until the rules governing different bodies of law are harmonized with reference to their impact on the lives and choices of real people who are subject to them, this problem of interaction is not likely to go away, just as drug interactions are not likely to go away until drugs are testable in combination with all the other medicines that a given person might be taking.  There will be times when no one can give a confident answer, so all one can do is get the best information possible and make the best decision possible, with as clear a view as possible of the risks and benefits.

All this begins with tax planning, though.  Tax planning, is a very good investment.

______________________________________________________________

Steven Mendelsohn is an attorney and public policy analyst specializing in economic empowerment and full participation in society for people with disabilities.