You may have already seen that the IRS has issued an extension of time to file returns and pay taxes for people in certain areas affected by Hurricane Sandy. The extension is till February 1, 2013 and applies:
In Connecticut (starting Oct. 27): Fairfield, Middlesex, New Haven, and New London Counties and the Mashantucket Pequot Tribal Nation and Mohegan Tribal Nation located within New London County;
In New Jersey (starting Oct. 26): Atlantic, Bergen, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, Somerset and Union;
In New York (starting Oct. 27): Bronx, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk and Westchester
That list comes from IR-2012-83. The document goes on to explain:
The tax relief postpones various tax filing and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until Feb. 1, 2013 to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013.
So people in the affected counties have an extra two and a half weeks to send in their fourth quarter estimates. We used to get excited about things like that when money actually earned interest. There is much more to the disaster declaration than returns and payments, though. The “much more” is alluded to in this notice.
The IRS also gives affected taxpayers until Feb. 1 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after Oct. 27 and on or before Feb. 1.
There is a lot packed into that sentence, much more than I will be able to explain in this post, but I think that there are planning opportunities that some people may be able to take advantage of. I’m sure it is a relatively small percentage of the affected people, but there are a lot of people in the affected areas. Based of some discussions that I have had, it does not seem like tax practitioners are that aware of the opportunities and the IRS explanations are a bit on the opaque side.
Among the “time sensitive acts” covered by the regulations are:
Making contributions to a qualified retirement plan (within the meaning of section 4974(c)) under section 219(f)(3), 404(a)(6), 404(h)(1)(B), or 404(m)(2); making distributions under section 408(d)(4); recharacterizing contributions under section 408A(d)(6); or making a rollover under section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3);
Filing a petition with the Tax Court, or for review of a decision rendered by the Tax Court;
Filing a claim for credit or refund of any tax;
Bringing suit upon a claim for credit or refund of any tax.
Then there is Revenue Procedure 2007-56. There are over two hundred “time sensitive acts” with extended deadlines due to the disaster announcement mentioned in the Revenue Procedure. Tax practitioners should review the list looking for opportunities. I am only going to give you two.
Like-kind exchanges
When you dispose of property you can defer gain recognition by exchanging for property of “like-kind”. Since the buyer of your property is unlikely to have property that you want, you can have the proceeds of your sale go to a qualified exchange facilitator. You then have 45 days to identify a replacement property and 180 days to close on the identified property. Say you live in Fairview NJ (Bergen County) and sold property in early October. The end of the identification period was looming when Hurricane Sandy hit. Now it is extended to February 1, 2013. It gets better. If you fail to find a replacement property, the funds are now released to you in 2013 rather than 2012. That makes your sale an installment sale. You will have until the extended due date of your 2012 return to decide whether you want to recognize the gain in 2012 or 2013.
A problem that you may encounter with this strategy is that your exchange documents do not contemplate the possibility of the extension. I spoke with my friend Charley Egerton of Dean Mead in Orlando He handles a lot of exchanges and disaster declarations are pretty routine in Florida. His exchange documents include a provision extending the 45 days and the 180 days in the event of a disaster declaration.
Required Minimum Distributions
When you are young you can get penalized for taking money out of your IRA. When you get old (70 1/2 doesn’t really seem that old anymore, when I think about it) you get penalized for not taking money out of your IRA. You generally have until December 31 to take your required distribution. The required distribution is a “time sensitive action” so that people in the Bronx, for example, can wait till February 1, 2013 to take the distribution. This has the effect of pushing the income recognition into the subsequent year.
Just because you can do something other people can’t do does not make it a good idea. Time value of money considerations are negligible and there is a good chance that 2013 rates will be higher. If the RMD is pushed into 2013, you will end up with two RMDs in 2013. Nonetheless, it might make sense for some people. Income tax planning is not that straightforward. Perhaps you are also planning on recognizing a lot of gains in 2012. Possibly lowering your AGI drastically in one year will allow you to use losses from active participation real estate that would otherwise be indefinitely suspended.
As I noted these are just two examples of time sensitive acts that might present planning opportunities. Tax practitioners with clients in the affected areas should review the Revenue Procedure closely to see what other opportunities might be available.
You can follow me on twitter @peterreillycpa.
Originally published on Forbes.com Nov 8th, 2012