Should I worry about the tax gap?The IRS is taking a very close, and somewhat controversial, look at small businesses to close the tax gap. The IRS is targeting small businesses at the time because data from a recent study indicates that small businesses and self-employed individuals are the largest contributors to the tax gap at 43 percent or $134 to $155 billion for underreporting of income.
The tax gap is the difference between what taxpayers owe and what they actually pay. The IRS estimates it to be around $325 billion.
To bring more small businesses in compliance, the IRS recently launched a new education campaign. It recently released the first in a series of "Fact Sheets."
This campaign is designed to give small business owners fair warning of the rules. The next step for the IRS will be to come down hard on the offenders.
Basic requirements
The IRS is reminding small businesses of some basic fundamental principles of taxation. Small business owners and self-employed taxpayers must report all income received by their businesses, unless there is a specific exclusion provided by the law. If there is a connection between any income received and a business, then it is business income. The connection is if the payment of income would not have been made if the business did not exist and operate.
Business income will probably be received in the form of cash, checks and credit card charges. Additionally, any payments of income that are directed to a third party do not remove the requirement to report the income. Business income can also include bartering, real estate rents, interest and dividend income, cancelled debt and damages.
The first Fact Sheet also explains to taxpayers how to calculate a business' cost of goods sold and how to calculate their gross income. The IRS plans to release another Fact Sheet for small business owners on overstated business expenses, a significant factor contributing to underreported income.
Useful tools for small business owners
The IRS recommends setting up a formal set of books and records with strong internal controls. Additionally, small businesses should look into accounting or financial computer software to ease the burden of computations. Most importantly, small businesses and their owners should separate their bank accounts into business and personal to avoid confusion between the income and expenses in the two accounts.
Congress wants action on tax gap
Congress has also become involved in the fight against noncompliance. The Senate Finance Committee and the House Ways and Means Committee have held hearings on what the IRS is doing to close the tax gap.
While Congress wants the IRS to crack down on tax evasion, some lawmakers are concerned that the agency is focusing too much on small businesses and not enough on large corporations.
IRS Commissioner Mark Everson has told Congress that the agency is not just targeting the "little guy" and is combating tax evasion across-the-board.
White House proposals
The White House has also suggested several measures to curb tax evasion by small businesses. One of the proposals would require issuers of credit and debit cards to report reimbursements made to merchants. If the card issuer has no taxpayer identification number on file for that merchant, the issuer would be required to withhold taxes on payments to that merchant.
Congress has not yet acted on this or other White House proposals.
IRS fine-tunes popular domestic production activities deductionIn 2004, Congress enacted a generous new deduction for business, the domestic production activities deduction. The IRS is still working out the details. Its latest estimate is that about 17 million businesses can take the deduction, with small businesses benefiting almost as much as large operations. The developing guidance from the IRS generally has been surprisingly favorable so far, prompting some businesses to evaluate whether to file amended 2005 tax returns and many others to re-think their strategies for this year.
You can claim the new Code Sec. 199 domestic production activities deduction (DPAD) for a variety of U.S. business activities. While dubbed "the manufacturing deduction" by some, its benefits reach far more than just "manufacturers." Not only is "manufacturing" defined very broadly, but the deduction itself also encompasses construction, electrical generation, film production, and services provided by architects and engineers.
Sizeable deduction. You claim the deduction by determining your "qualified production activities income" (QPAI) from U.S. activities, and multiplying the income by a percentage -- 3 percent for 2005-2006, 6 percent for 2007 - 2009, and 9 percent after 2009.
IRS guidance.. The IRS recently issued "final" regulations that explain some of the computations as well as the mechanics of how a U.S. business can claim the deduction. You can expect more guidance in 2006, not only fine-tuning the "final" regulations but also setting out the rules for pass-through businesses such as partnerships and S corps, and specialized business operations, as well as explaining how the just-enacted Tax Increase Prevention and Reconciliation Act changes the rules.
TIPRA
The IRS needs to address changes made by the Tax Increase Prevention and Reconciliation Act (TIPRA). TIPRA made two significant changes to Code Sec. 199. Under prior law, the DPAD was limited to 50 percent of the employer's W-2 wages paid to all employees. TIPRA reduces this limit to 50 percent of W-2 wages paid only for qualifying business activities. TIPRA also amended the allocation of W-2 wages to partners and S corporation shareholders.
Earlier this year, the IRS issued a revenue procedure that provides three methods for calculating the W-2 wage limit. It reasoned that it would be easier to revise a revenue procedure than to amend regulations because the area is so complicated and subject to change that even the IRS could not lay down rules that it could be sure would have some permanency. Sure enough, because TIPRA changed the limits, the IRS will have to issue a new revenue procedure to implement the new wage limit. IRS officials have indicated that this guidance, along with companion regulations, should be released sometime this July or August.
Computer Software
A major area of controversy in claiming the DPAD has been the treatment of the creating of online computer software. The IRS has already issued temporary regs that provide favorable treatment of online software "as a matter of administrative convenience," throwing in the towel over holding many taxpayers to the precise letter of this complicated law.
Favorable treatment is available if the taxpayer has receipts from online software and also sells computer software from a diskette or by customer downloads. Examples would be payroll software and tax software. Another safe harbor applies if an unrelated business regularly sells or disposes of "substantially identical" software through diskettes or customer downloads. Unfortunately, the IRS is not done with this area. It will hold a hearing and issue final software regs later in 2006 that address a broad array of issues now left hanging.
Expenses
The final regs limit the item-by-item calculation to the determination of gross receipts and allow expenses to be determined using one of three cost allocation methods. Businesses have been clamoring for the green light to use statistical sampling for calculating income items and related expenses. The IRS says that statistical sampling may be appropriate and that it will likely issue a go-ahead in late summer or early fall.
One of the cost allocation methods is based on the treatment of interest expense and research expenditures as U.S. or foreign source deductions under Code Sec. 861. Taxpayers who had made elections under Code Sec. 861 may want to change their allocation methods to take advantage of Code Sec. 199. The IRS expects to issue a revenue procedure on this in July or later in the summer.
Partnership Attribution
Current rules do not allow partnership activities to be attributed to partners. Treasury said it may revisit this approach in future regulations. An exception is provided for in-kind partnerships that produce a product, such as oil, and distribute the entire product in-kind to partners who then sell the product in their business. The IRS designated three industries - oil, electricity, and petrochemical -- that qualify for in-kind treatment. It may designate additional industries.
Stay Tuned
The domestic production activities deduction is by far one of the largest business tax write-offs to come along in a number of years, perhaps only rivaled by the Section 179 expensing deduction started in 2001 and recently also amended. For some businesses, taking the DPAD is straightforward. For others, the developing rules from the IRS may demand a look back at how a 2005 DPAD was calculated, which in turn could mean a refund by filing an amended return. And for many others, the developing IRS rules indicate the benefits to be gained from a second look at how to structure business operations to better maximize DPAD for 2006 and beyond. Please call our offices for further details.
Tough new requirements for offers-in-compromise take effect in JulyThe new Tax Increase Prevention and Reconciliation Act (TIPRA), signed into law in May, makes some important changes to offers-in-compromise (OIC). The new rules now require taxpayers to make nonrefundable partial payments with a submission of any OIC made on or after July 16, 2006. Taxpayers should be aware of the new requirements as the IRS is known for granting few OICs. Not complying with the new rules will likely increase the chances that the IRS will reject your offer.
Often a measure of last resort
OICs are often a measure of last resort to be used by taxpayers who are unable to pay tax liabilities in lump sums or through installment agreements. OICs must be in the best interest of the government and the taxpayer and must promote voluntary compliance with future payment and filing requirements.
In general, there are several requirements to file a valid OIC. These are:
- File Form 656, "Offer in Compromise" and Forms 433-A and 433-B, "Collection Information Statements";
- Submit a $150 application fee, or Form 656-A, "Income Certification for Offer in Compromise Application Fee";
- File all required tax returns;
- File and pay any required employment tax returns on a timely basis for the two quarters prior to filing the OIC and must be current with the deposits for the quarter in which the OIC is submitted; and
- Must not be a debtor in bankruptcy.
How much money is included?
In addition to the $150 nonrefundable application fee, taxpayers must now include partial payments with their OICs. Taxpayers submitting OICs offering to make a lump-sum payment must include a payment of 20 percent of the amount offered.
Taxpayers who submit OICs offering to make periodic payments must include the first payment with the OIC. They must continue making payments as proposed in the OIC while the OIC is being considered by the IRS.
The partial payments as well as the application fee are nonrefundable but are applied towards the taxpayer's liability. Also, in situations where taxpayers have more than one liability, they may decide towards which liability they want the payments to apply.
Non-compliant OICs
If taxpayers do not include the required payments with their OICs, the IRS will return the OICs as "unprocessable". In addition, taxpayers offering a periodic payment OIC will be deemed to have withdrawn their offers if they don't submit their periodic payments under the terms of their offers.
Other changes
The new tax law deems as accepted any OIC that has been submitted to the IRS but has not been rejected in 24 months. This period does not include time periods when the liability is in question in a judicial proceeding.
Since the IRS is known for taking a long time to review OICs, this may speed up the process. Although a more speedy evaluation period seems like a pro-taxpayer provision, some commentators have said that it may lead the IRS to reject offers when it has not had enough time to fully evaluate them
Contact our office if you have any questions about the new rules for OICs. Although the IRS has historically been very reluctant to grant an OIC, there are times when an OIC is the best course of action and the IRS recognizes this.
How do I?...Compute gain in a like-kind exchange when some cash is receivedWhen you receive cash other than the like-kind property in a like-kind exchange, the cash is treated as "boot." Boot does not render the transaction ineligible for non-recognition treatment but it does require you to recognize gain to the extent of the cash received. The same is true for other non-like-kind property. In other words, anything you receive in addition to the like-kind property, such as relief from debt from a mortgage or additional property that is not like-kind will force you to recognize the gain realized.
An illustration
An example helps to show the gain computation and basis adjustments in a like-kind exchange where boot is received:
You want to transfer land with an adjusted basis of $70,000 and a fair market value of $100,000 in a like-kind exchange. As replacement property you will receive land from Charlie that is like-kind to the one you will transfer. However, Charlie's land has a fair market value of only $80,000. To equalize the value of the like-kind properties being exchanged, Charlie will give you $20,000 in cash. Because the $20,000 is not like-kind property, the like-kind exchange rules treat it as boot and you will have to recognize gain to that extent. Your computation will be as follows:
$80,000 FMV of like-kind land received
+ $20,000 cash received
________
$100,000 Your amount realized
- 70,000 Your adjusted basis of the land transferred
________
$30,000 Realized gain
However, because you will receive only $20,000 of cash (boot), you will recognize only $20,000 of the gain realized. The rest of the gain or $10,000 will be preserved for a future date when the acquired property is recognized in a taxable transaction.
Basis adjustment. Gain that is not recognized when cash is present in a like-kind exchange will be "preserved" by adjusting your basis in the new property to reflect the remaining gain. The basis rules achieve the gain preservation by first allocating the gain realized to boot to the extent of its fair market value, then to the like-kind property in proportion to its relative fair market value.
The basis of the acquired property will be the adjusted basis of the property transferred, increased by recognized gain and decreased by loss recognized or money received in the exchange. In the above example, your adjusted basis in the replacement property will be $70,000. Because the fair market value of the replacement property is $80,000, the $10,000 of realized but unrecognized gain will be preserved in your adjusted basis.
Cash in excess of gain. In addition, if the fair market value of boot received exceeds the gain realized, only this amount of realized gain is recognized.
If, in our example, your adjusted basis were $90,000, your realized gain would only be $10,000 ($100,000 amount realized minus $90,000 adjusted basis). In that case, your recognized gain would be limited to $10,000 even though you received $20,000 in cash.
Choosing the type of legal entity for your new businessThe decision to start your own business comes with many other important decisions. One of the first tasks you will encounter is choosing the legal form of your new business. There are quite a few choices of legal entities, each with their own advantages and disadvantages that must be taken into consideration along with your own personal tax situation.
Sole proprietorships. By far the simplest and least expensive business form to set up, a sole proprietorship can be maintained with few formalities. However, this type of entity offers no personal liability protection and doesn't allow you to take advantage of many of the tax benefits that are available to corporate employees. Income and expenses from the business are reported on Schedule C of the owner's individual income tax return. Net income is subject to both social security and income taxes.
Partnerships. Similar to a sole proprietorship, a partnership is owned and operated by more than one person. A partnership can resolve the personal liability issue to a certain extent by operating as a limited partnership, but partners whose liability is limited cannot be involved in actively managing the business. In addition, the passive activity loss rules may apply and can reduce the amount of loss deductible from these partnerships. Partners receive a Schedule K-1 with their share of the partnership's income or loss, which is then reported on the partner's individual income tax return.
S corporations. This type of legal entity is somewhat of a hybrid between a partnership and a C corporation. Owners of an S corporation have the same liability protection that is available from a C corporation but business income and expenses are passed through to the owner's (as with a partnership). Like partners and sole proprietors, however, more-than 2% S corporation shareholders are ineligible for tax-favored fringe benefits. Another disadvantage of S corporations is the limitations on the number and kind of permissible shareholders, which can limit an S corporation's growth potential and access to capital. As with a partnership, shareholders receive a Schedule K-1 with their share of the S corporation's income or loss, which is then reported on the shareholder's individual income tax return.
C corporations. Although they do not have the shareholder restrictions that apply to S corporations, the biggest disadvantage of a C corporation is double taxation. Double taxation means that the profits are subject to income tax at the corporate level, and are also taxed to the shareholders when distributed as dividends. This negative tax effect can be minimized, however, by investing the profits back into the business to support the company's growth. An advantage to this form of operation is that shareholder-employees are entitled to tax-advantaged corporate-type fringe benefits, such as medical coverage, disability insurance, and group-term life.
Limited liability company. A relatively new form of legal entity, a limited liability company can be set up to be taxed as a partnership, avoiding the corporate income tax, while limiting the personal liability of the managing members to their investment in the company. A LLC is not subject to tax at the corporate level. However, some states may impose a fee. Like a partnership, the business income and expenses flow through to the owners for inclusion on their individual returns.
Limited liability partnership. An LLP is similar to an LLC, except that an LLP does not offer all of the liability limitations that are available in an LLC structure. Generally, partners are liable for their own actions; however, individual partners are not completely liable for the actions of other partners.
There are more detailed differences and reasons for your choice of an entity, however, these discussions are beyond the scope of this article. Please contact the office for more information.
Please contact the office for more information on this subject and how it pertains to your specific tax or financial situation.
Recordkeeping Basics: Individual TaxpayersAfter your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.
The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:
Copies of returns. Recent legislation has not changed the basic guidelines regarding retention of copies of your tax returns: your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It’s recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.
Personal residence. With the new tax provisions allowing couples to take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:
- Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It’s also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
- You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.
Individual Retirement Accounts. The Taxpayers' Relief Act of 1997 created two new types of individual retirement accounts: the Roth IRA and the education IRA. These new IRAs, along with the traditional IRA, require varying degrees of recordkeeping:
- Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.
- Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
- Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.
Investments. Capital gains rates may have headed south recently but the recordkeeping requirements have remained unchanged. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.
Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.
Take steps to protect your computer dataThe rise of paperless processing and remote access to computer systems has made increased computer security imperative. Establishing an effective password system can help keep your data secure while allowing you greater control over the access to your company's vital information.
Your best weapon to combat illegal access is a password system. Once it is installed, take the following steps to support it and ensure its effectiveness:
Create password guidelines. Clearly worded and easily accessible password guidelines can nip a computer security problem in the bud. Keep in mind that an outside hacker does only 15 percent of computer break-ins - 85% of such security breaches comes from inside, usually from disgruntled employees.
- Make and enforce rules about not using easy-to-guess passwords. Experts suggest passwords be a minimum length of six characters, using numbers (or symbols) as well as letters to make guessing nearly impossible. Try to avoid easily obtainable information such as birthdays, anniversaries, initials or mother’s maiden name.
- In the office, don’t allow passwords to be written down. Instead, have your employees memorize them or use a special computerized password program to keep track of them.
- Suggest that employees change passwords regularly - many businesses do this every 90 days.
- Erase default passwords and carefully monitor guest passwords or stations. Remember to promptly delete former employees' passwords.
Create a clear access rights policy and be sure everyone knows what it is. Certain levels and certain positions will have rights to specified parts of the system. Review log-in registers to see if a change in pattern pops up. Investigate anything suspicious immediately.
Control remote access. An off-the-shelf program, such as a firewall or encryption program, will add the security you need. A firewall system will allow access only to specific programs from the outside. Unfortunately, it’s often the protected information your workers need. Encryption programs use codes to "scramble" data. Although persistent hackers can crack codes, these programs can make your information relatively safe.
If you take these steps to better your company's data security, you can be certain that the investment will pay off in the end. If you have any further questions, please feel free to contact our office.
Passing the torch: Succession planning for the family owned businessKeeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.
In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.
Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:
Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.
Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.
Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.
Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.
Other considerations
A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.
Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.
Thinking of selling your business? It pays to be preparedAre you considering retiring from your business? Or has financial hardship forced you to try to find a way out? Whatever your reason for wanting to sell your business, it pays to do a substantial amount of preparation well in advance to ensure that you get the best return on your investment of time and money.
Make sure your financial house is in order. A very important part of the valuation process during the sale of a business is financial records. It will pay off in the form of a higher valuation if your financial records show your business in its best light. A thorough examination of your accounting records by a qualified financial professional (audited or not) will result in a better foundation when any of the more common valuation processes are applied.
Examine your contracts. The old saying goes that "you are judged by the company you keep". This can be applied to your existing contracts with vendors and strategic partners. If you have contracts that are clearly underperforming, a potential buyer may see these as a negative. When possible, cut loose contracts that are underperforming, outdated, or costing your company more money to service than the benefit you are receiving.
Document your processes and procedures. The reality is that a potential buyer's vision for your company may not include you or your staff -- whether that is your intention or not. It will be necessary for you to make sure that all processes, procedures and policies that are in place -- formally or informally -- are properly documented to ensure the smooth operation of your company after the sale.
Inform your employees. If your employees are an invaluable part of your company's success, it is in your best interest to keep them well informed regarding your intentions to sell your business -- particularly key employees. Employee retention may suffer if your employees are caught off guard by a sale. Make sure you are as specific as possible about how a potential change in ownership will affect their position and address all concerns that they may have regarding the sale. If employees express that they will not choose to stay after the sale, it may be best that they leave prior to the sale to avoid the appearance of a mass exit when the sale is finalized.
Make appointments with your business advisors. In most cases, consulting with your attorneys and financial professionals such as tax and investment advisors is a critical part of the preparation process. These professionals can give you valuable guidance regarding potential changes you may want to consider such as a change your business' entity type (e.g., from sole proprietor to corporation) and make sure that all of your legal and financial documents are in order.
Selling your business may be the biggest transaction that you are involved in in your life so it pays to take the steps necessary to ensure a smooth transaction. If you are planning to sell your business in the near (or not so near) future, please contact the office for additional guidance.
How do I? Administer an estateBeing named as the executor of a decedent's estate is an honor as well as a huge responsibility. The role of an executor comes with many legal obligations as well as the possibility of personal liability. In order to properly fulfill your duties as an executor and reduce the chance of exposure to personal liability, it's wise to be familiar with the duties and responsibilities required in your new role as executor.
As you begin your duties as an executor, it will be helpful to follow these steps:
Step 1: Take preliminary steps. The first steps in the administration of an estate can be difficult as the people involved try to deal with the necessary business side of their loved one's death while they are still mourning. However difficult, it is the duty of the executor to begin administration of the estate as soon as possible.
- Locate and review will.
- Assist with funeral arrangements, if necessary.
- Confer with attorney who drafted will.
- Hire an attorney to handle relevant legal matters, prepare petition, and be ready to defend the will (if necessary).
- Hire an accountant for assistance with estate/trust accounting and tax related issues.
Step 2: Probate the will. Probate is a process by which a will is admitted, giving the will legal effect by the court. Once the court has determined the validity of the will, the executor is given the power to administer the estate.
- Locate witnesses, if will is not self-proved.
- Notify creditors.
- Arrange for bond, if necessary.
- File petition to probate will and appoint executor.
Step 3: Manage the estate's assets. The executor has a legal obligation to protect and properly manage the assets of the estate. Failure to fulfill this fiduciary responsibility can expose the executor to personal liability.
- Locate, assemble and inventory estate assets, including safe-deposit boxes, securities, real estate, etc...
- Transfer title of all assets to the estate.
- Prepare and file inventory document with court, if required.
- Send notification of death to insurance companies.
- Arrange for appraisal of certain assets, if necessary.
- Estimate cash needs for the estate during the administration period.
- Liquidate and manage estate assets as deemed necessary.
- Determine and pay outstanding debts of the estate.
Step 4: Handle tax matters. The executor is responsible for the preparation and filing of estate tax returns, as well as payment of any taxes due. These duties are best handled with the assistance of a competent tax professional.
- Obtain employer identification number for the estate.
- File final income tax return for the decedent.
- File fiduciary tax returns for estate during administration.
- Ascertain lifetime gifts.
- File estate tax returns. Arrange for valuation of the estate and determine whether estate is to be valued as of date of death or six months later.
- Secure federal estate tax release so that distributions can be made as promptly as possible.
Step 5: Distribute estate assets. After the estate tax release has been secured and all debts and expenses of the estate have been paid, the executor can distribute the remaining assets of the estate as outlined in the will.
- Ascertain if any assignments are on file, pay legacies, and deliver specific bequests according to the will.
- Secure releases for beneficiaries and discharge from the court.
- Prepare information for the final accounting, including all assets, income and disbursements.
- Set up trusts created by will and arrange for payment of any income due trust funds for regular remittances to beneficiaries, if applicable.
As illustrated above, the role of executor is one of many duties, great responsibility and should not be taken lightly. The duties outlined above are but a few of the many duties of the executor -- each estate will be different. If you have been named executor of an estate and require additional assistance as you begin your duties, please contact the office for guidance.
Tax aspects of divorce and separationWhen it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.
Dependents
One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.
The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.
Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.
A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.
Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.
Alimony
Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.
Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.
There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.
Property
Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.
Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.
Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.
Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.
Retirement
When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.
Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.
Tax Prepayment and Joint Refunds
When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.
Legal and Other Expenses
To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.
Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.
Should you Web-enable your business?Many traditional brick-and-mortar businesses have managed to not only survive the recent Internet fall-out, but actually thrive, adding online revenues on top of their existing sales. But before you call up your local Web designer to join these successful companies, you will need to carefully consider if -- and to what extent -- you should make your company's presence known on the Web.
Before you make the move to the Web -- in total or as a complement to your traditional storefront, you may want to consider the following:
Can your product or service be easily, profitably, and securely sold to non-local customers online? Selling large products that are easily delivered to your local customers can be a logistical nightmare when offered to non-local customers online. Hefty shipping costs may make the item unattractive to potential non-local customers and could cause a hardship for you if you do not have the resources to prepare these orders for shipping. If you sell non-tangible items that you would like to deliver via the Web (such as software or other intellectual property), will you be able to adequately secure these items to prevent online piracy?
Will you have the ability to effectively integrate online sales transactions into your accounting system? While some online storefronts provide adequate back-end reporting, many don't, leaving it up to you to figure out how to keep track of your online transactions. Building a custom Website from scratch may take even more planning. This can be a particular nightmare if your business needs to keep a very close eye on inventory levels to ensure timely fulfillment of orders and to keep costs down.
Do you have time to keep your Website updated, current and free of technical glitches? A Website that features out of date product images or pricing information can leave visitors with a bad impression of your company. Do you have the ability to maintain your Website yourself? Do you have the resources to hire someone to maintain it for you?
These questions are just a few that you should address before making the final decision about if and to what extent your business should get online.
Once you have made the decision to expand your business online, it will pay to heed this advice:
Do your homework. There are many different methods available for setting up shop online including turnkey online storefronts; custom designed "brochure ware" and extensive custom-written e-commerce applications designed to integrate into your accounting system with a click of a button. In order to get exactly the program for your business' needs -- no more, no less, it is important that you spend the time necessary to further educate yourself regarding your options or consult with a trusted, experienced person knowledgeable in this area. This careful upfront evaluation process can keep you from investing in a Website that is not robust enough or, on the other hand, over the top, which will ultimately benefit your business' bottom line.
Include your accounting professional in the decision process. Integration of your online ordering and fulfillment process into your existing accounting system can be difficult -- particularly if you have inventory -- and in some cases, very time-consuming. Depending upon your business' unique circumstances, this can be a very big issue that needs to be addressed thoroughly before the first line of code is written. Having your accounting professional on hand to ensure that critical accounting issues are addressed as the reporting and tracking systems are designed, can save you time, money, and headaches in the long run.
Make the commitment. Having a Website that is outdated or appears abandoned will ultimately hurt your existing business -- online and offline -- resulting in the exact opposite effect than you had expected. If you do not have time to make required changes to your site in a timely manner, it is critical that you have someone available -- a tech-savvy employee or independent contractor -- who can take responsibility for keeping your Website current and running smoothly. If you cannot make this commitment of time or resources, consider postponing your decision to go online until you are ready.
Doing business on the Web can be an exciting and profitable way to expand your existing business but as illustrated above, the decision to make the move online should not be made hastily. For additional guidance related to the accounting issues that may need to be addressed, please contact the office for an appointment.
Provide for family members while achieving your giving goals with charitable lead trustsRecent tragic events have resulted in an unprecedented outpouring of charitable giving, as Americans look for ways to fulfill their desire to help those less fortunate than themselves. In addition to direct giving during their lifetimes, many people are looking at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.
Fixed payments to charity
When you set up a charitable lead annuity trust (or CLAT, for short), the intention is for the assets of the trust, and the income they generate, to ultimately one day pass to one or more non-charitable beneficiaries, for example, your children. Before then, however, you may want one or more charities to receive some of the funds. Under a typical CLAT, the charity receives a fixed payout for a pre-determined number of years or, in some cases, for the lives of specified persons. The payments to the charity remain the same regardless of how the trust performs and no minimum payment is required. In most cases, the rules do not allow your beneficiaries to receive anything from the trust until the trust ends.
Last year, the IRS imposed some new rules on CLATs. Individuals who can be used as the measuring lives would be restricted to the donor’s life, the life of the donor’s spouse, or a lineal ancestor of the beneficiaries. The IRS did this to prevent abuse of CLATs. Some people had tried to artificially inflate the tax benefits of CLATs by using unrelated individuals, who were seriously ill and were expected to die prematurely, as the measuring lives. As a result, the charity received much less than it would have had the person survived. The new rules have some complicated exceptions depending on the precise drafting of the trust.
Tax benefits
When the trust ends, the assets of the trust and the income earned by the trust pass to your beneficiaries tax-free. That is a potentially huge savings of federal estate and gift taxes. The top federal estate and gift tax rate in 2002 is 50 percent. If the original trust assets were passed directly to your heirs, taxes could reduce significantly your bequest. Placing the assets in a CLAT helps to preserve – and more importantly – grow them. The estate tax is fixed when the CLAT is created and not when the assets pass to your beneficiaries.
Generally, income paid to the charity is subject to tax by the owner of the trust. However, careful planning, such as funding the trust with tax-exempt bonds, can reduce or eliminate any tax liability on the part of the owner.
Timing the creation of a CLAT
CLATS need not be set-up after you die. You can fund a CLAT today and see the benefit of your gift as a charity makes good use of it. However, if you want to create a CLAT during your life, keep in mind that you will not be able to use assets in the trust.
A CLAT -- created either before or after your death -- can continue your legacy of giving to your favorite charities, while yielding overall tax savings for you and your family. Please contact the office if you have any questions on how a CLAT, or another variety of charitable trust, might work for you.
Estate planning for retirement plan assetsThroughout all of our lives, we have been told that if we don’t want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes. What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together.
Retirement plan assets are part of taxable estate
When we begin to think about estate planning, one of the first things that we usually do is to take an inventory of what our current assets are and then we project into the future and try to estimate the assets we will have when we die. If you take a moment and think about this right now, aside from your residence, the most valuable asset you currently own (and that you will own at the time of death) is most likely to be your retirement savings (your IRAs, 401(k) accounts, and other employer-sponsored retirement plans). Looking at things from this perspective really drives home the importance of estate planning in connection with saving for retirement.
One of the reasons why we may not think about estate planning in connection with our retirement benefits is that we may have the false notion that these benefits are not part of our “estate” and therefore are not subject to estate tax. This is not true. All of your assets, regardless of the source are part of your estate and subject to estate tax (or, in other words, part of your taxable estate). This means that all of the issues that you may address with a lawyer or accountant or other financial professional regarding planning your estate will also need to be considered when planning for your retirement. When you sit down with a professional to help you plan your estate it is critical that you gather and provide as much information as possible regarding any and all retirement plans in which you participate—all IRAs, 401(k), and other plans sponsored by your employer.
Special issues involved with estate planning for retirement plan assets
Even though the funds that you have in your retirement plans are subject to the same estate planning rules and considerations as any other assets that are part of your estate, there are certain special or unique issues that come into play when you incorporate retirements savings into estate plans. Decisions made with respect to these issues may also have income tax consequences as well as estate tax repercussions. Some of the most important of these issues are:
- Whether to elect for survivor benefits to be paid to a spouse (sometimes referred to as a joint and survivor annuity);
- Whether you should choose or designate a beneficiary with respect to your interest in an IRA or another retirement plan;
- The tax differences to beneficiaries who receive benefits on your death but before you have begun to receive pay-out of your benefits and those beneficiaries who begin receiving benefits after retirement payments to you have commenced; and
- Benefits that may be subject to both income tax and estate tax (and are sometimes provided an income tax deduction due to the double taxation)
It is also important to understand that for the next 10 years, federal estate taxes will be in a state of flux. From now until 2010, the amount of your estate that is shielded from tax will increase annually and the rate at which your estate is taxed will decrease annually. In 2011, there will be no estate tax. Unless Congress acts, the old exemptions and rates reappear in 2011. You must plan carefully to ensure that you get the best possible results regardless of the estate tax rules that are in effect. As you consider becoming more involved in estate and/or retirement planning, please contact the office for additional guidance.
How do I? Minimize the risk of identity theftIdentity theft has become a growing problem as the personal and financial information of others has become increasingly accessible. Our mailboxes are crammed with this information – pre-approved credit offers, blank checks, bank statements, credit card statements – all loaded with such personal information such as your income; your Social Security number (SSN); your bank account numbers; and your name, address and phone numbers. Taking certain precautionary steps, however, can help minimize your risk of becoming the next victim of identity theft.
What is identity theft?
The Federal Trade Commission (FTC) defines identity theft as the appropriation your personal information without your knowledge to commit fraud or theft. Here are examples of some of the most common instances of identity theft:
- Someone opens a new credit card account, using your name, date of birth, and Social Security number. When they use the credit card and don’t pay the bills, the delinquent account is reported on your credit report.
- Someone calls your credit card issuer and changes the mailing address on your credit card account. The thief then runs up charges on your account. Because your bills are being sent to the new address, you may not immediately realize there's a problem.
- Someone establishes cellular phone service in your name. Again, since bills are most likely sent to another address, it can take time to discover this fraud.
- Someone opens a bank account in your name and write bad checks on that account. This can not only damage your credit, but can lead to inquiries from the authorities.
How does an identity thief obtain the vital information required to commit these types of crime? By taking advantage of the ever-increasing flow of personal and financial information that is used on a daily basis in our everyday transactions. Information is obtained from documents found in mailboxes, trashcans, over the Internet – in your home and in your workplace. Identity thieves exploit our busy lifestyles and the resulting carelessness with dealing with critical information, stealing pre-approved credit offers, credit card statements, and tax returns not properly disposed of when no longer needed.
Minimizing risk
While its impossible to prevent the possibility of identity theft entirely, you should take the steps needed to minimize your risk. By managing your personal information wisely, cautiously and with an awareness of the issue, you can help guard against identity theft. The FTC has these tips for consumers to minimize their risk of becoming a victim of identity theft:
Pay attention to your billing cycles. Follow up with creditors if your bills don't arrive on time. A missing credit card bill could mean an identity thief has taken over your credit card account and changed your billing address to cover his tracks.
Guard your mail from theft. Deposit outgoing mail in post office collection boxes or at your local post office. Promptly remove mail from your mailbox after it has been delivered. If you're planning to be away from home and can't pick up your mail, call the U.S. Postal Service to request a vacation hold. The Postal Service will hold your mail at your local post office until you can pick it up.
Put passwords on your credit card, bank and phone accounts. Avoid using easily available information like your mother's maiden name, your birth date, the last four digits of your SSN or your phone number, or a series of consecutive numbers.
Travel light. Minimize the identification information and the number of cards you carry to what you'll actually need on a daily basis. Don't carry your SSN card; leave it in a secure place.
Beware of “strangers”. Do not give out personal information on the phone, through the mail or over the Internet unless you have initiated the contact or know who you're dealing with. Identity thieves may pose as representatives of banks, Internet service providers and even government agencies to get you to reveal your SSN, mother's maiden name, financial account numbers and other identifying information. Legitimate organizations with which you do business have the information they need and will not ask you for it. Before you reveal any personally identifying information, find out how it will be used and whether it will be shared with others. Ask if you have a choice about the use of your information: can you choose to have it kept confidential?
Keep items with personal information in a safe place. To thwart an identity thief who may pick through your trash or recycling bins to capture your personal information, tear or shred your charge receipts, copies of credit applications, insurance forms, physician statements, bank checks and statements that you are discarding, expired charge cards and credit offers you get in the mail.
Be diligent at home and work. Be cautious about where you leave personal information in your home, especially if you have roommates, employ outside help or are having service work done in your home. At work, find out who has access to your personal information (e.g., human resource personnel) and verify that the records are kept in a secure location.
Guard your SSN. Since your SSN is particularly valuable to identity thieves, give your SSN only when absolutely necessary. Ask to use other types of identifiers when possible.
Check your credit report periodically. Order a copy of your credit report from each of the three major credit reporting agencies every year. Make sure it is accurate and includes only those activities you've authorized. The law allows credit bureaus to charge you up to $8.50 for a copy of your credit report.
If, despite your best efforts, you've been a victim of identity theft, you can call the FTC's Identity Theft Hotline toll-free at 1-877-IDTHEFT (438-4338). The FTC puts your information into a secure consumer fraud database and may, in appropriate instances, share it with other law enforcement agencies and private entities, including any companies about which you may complain. For more information on how to protect yourself from identity thieves, visit the FTC’s Website at www.ftc.gov or contact the office for additional guidance regarding keeping your financial information secure.
The “nanny – housekeeper” taxQ. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?
A. Cooking, cleaning and childcare: domestic concerns – or tax issues? The answer is both. A few years ago, several would-be Presidential appointees were rejected -- when it was revealed that they had failed to pay payroll taxes for their domestic help. The IRS is aggressively looking for cheaters so it’s particularly important that you don’t stumble through ignorance in not fulfilling your obligations.
Who is responsible
Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers’ comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?
In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn’t matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.
What it costs
In general, if you paid cash wages of at least $1,300 in 2001 to any household employee, you must withhold and pay social security and Medicare taxes. The tax is 15.3 percent of the wages paid. You are responsible for half and your employee for the other half but you may choose to pay the entire amount. If you pay cash wages of at least $1,000 in any quarter to a household employee, you are responsible for paying federal unemployment tax, usually 0.8 percent of cash wages.
Deciding who is an employee is not easy. Contact us for more guidance.
Legal considerations in gifts to minors shouldn't be overlookedIs a property transfer to your child or other minor a possible event on your horizon? If it is, just don't cover yourself on the tax consequences of such transfers. There are important legal considerations over and above the transfer's tax impact.
If you're considering a substantial gift to a young child, usually you don't let him or her take direct control of the property. Instead, one of two popular ways of transferring property is generally used -- through custodianships and trusts. Here are some points to consider.
Custodianship
Most states have adopted the Uniform Transfers to Minors Act (UTMA), with some variations. Under the UTMA, a person can transfer any type of property to a custodian (an adult), who manages it for a minor's benefit (the minor owns the property) until the minor reaches a certain age (the "age of majority," which is 18 or 21, depending on state law).
Since a minor or custodian could face possible personal liability problems via ownership of cars, real estate, etc., the UTMA in general gives protection for the minor and custodian from personal liability (if they are not personally at fault) to third parties.
However, custodianships can have drawbacks:
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When the minor reaches the specified age, there is no guarantee he or she will handle the property in a responsible manner.
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Once a person transfers the property to a custodial account, that donor can no longer get it back. Taking money from the custodial account could cause someone to be sued, or it could be prosecuted as a criminal act.
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Custodial accounts may cause financial aid from colleges to be reduced -- those amounts are considered to go 100 percent toward what a student is expected to contribute for his or her educational expenses.
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A custodianship can be set up for only one beneficiary -- for instance a parent cannot legally transfer money from the custodial account of one of their children to the custodial account of another.
Trusts
People often opt to use custodianships rather than trusts because there is less paperwork and generally lower administrative costs. Custodianships can be set up quite informally, while trusts can be more elaborate and require more formalities.
When large amounts are involved, most people use trusts rather than custodianships even though there are greater administrative costs. For instance, a trust will give someone more flexibility to specify at what age a trust beneficiary will be distributed trust funds. A trust can also allow the donor to split benefits among several beneficiaries.
If you are thinking about making a cash or other property transfer to a minor, please contact this office so that we can further discuss how to use the various options to properly carry out your intentions.
How do I...Compute required distributions from my retirement accounts?Once you retire or reach age 70 ½ (depending on your retirement plan), the law requires that you start making –at a minimum—some periodic withdrawals. These withdrawals are called required minimum distributions.
Why required minimum distributions?
First, the tax policy behind letting you save in a tax-deferred account was to allow you to use those funds in your retirement, rather than to use them as just another way to build up your estate for your heirs. Second, because those accounts are usually tax-deferred, withdrawals after retirement are taxed to you as ordinary income. As a result, the IRS wants you to withdraw at least a minimum amount from those accounts each year so that it can be taxed.
New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years.
Good tax news
Good news for taxpayers who are interested in retaining funds in their IRAs and their tax-qualified plans because it means deferring income tax on the funds even longer.
If you are alive in the year in which you must begin required minimum distributions, your new MRD is calculated each year by dividing the account balance
by your life expectancy, as determined by the uniform distribution period table (the “Uniform Table”) in the new IRS rules.
Example. At the time his required beginning date is reached (usually retirement or 70 ½), John Smith had a balance of $1 million in his IRA, as of the previous December 31. He previously named a beneficiary, who is age 67.
The difference in the computation of the RMD under the new rules is dramatic.
Under pre-2001 rules, he checks the joint and last survivor table and finds that his divisor for his $1 million account is 22.
Under revised rules in effect in 2001, his divisor is 26.2.
Under the new Uniform Lifetime Tables now in effect, his divisor is 27.4.
The difference in required distributions is significant.
Under pre-2001 rules, John must withdraw at least $45,454 this year.
Under the 2001 rules, John must withdraw at least $38,168 this year.
Under the new tables, John must withdraw at least $36,496 this year.
Because of the new regulations, John has an extra $8,958 in his IRA at the end of the year over what he could have kept under the rules only a few years ago. This amount can then continue to accumulate earnings. This savings can be realized—and compounded—every subsequent year for the next 27 years. As a bonus, John’s federal income tax (assuming a marginal rate of 35 percent) is more than $3,135 less ($12,773 instead of $15,908).
If you die before reaching your retirement having designated your spouse as beneficiary, distributions must begin by December 31 of the year following your death or the year that you would have turned 70½, whichever is later. At that time, RMD is computed over your spouse’s life expectancy.
Caution!
The new rules—although more flexible—leave little room for mistakes in timing. Failure to take the minimum required distribution by the RBD will result in a 50 percent excise tax equal to half of the amount that should have been paid out but wasn’t. Although early versions of proposed legislation included a decrease in the penalty from 50 percent to 10 percent, that provision is not the law.
If you’d like more specific advice on how the new Minimum Required Distribution rules apply to your retirement strategies, please contact this office.
Emergency withdrawals from retirement plans: Making the right movesParticularly in the case of retirement plans in which we voluntarily invest our own money, such as 401(k) plans and IRAs, most of us want to know how we can access these funds if we have an emergency. The same question comes up when we participate in a pension or profit-sharing plan to which our employer contributes funds on our behalf.
General rules
The rules governing tax-qualified plans generally do not contemplate the idea of an emergency withdrawal. The plan distribution rules, especially for traditional pension plans, are strict. For the most part, these plans permit distributions in the event of:
Issuance of a qualified domestic relations order (QDRO);
Termination of employment; and
Hardship distributions
Although many plans only allow distributions to be made under limited circumstances, 401(k) plans, and in some instances, profit sharing plans, permit what are known as hardship distributions. A hardship distribution, by its very nature, is meant to be taken in the event of an emergency. A hardship distribution is made to satisfy your immediate and heavy financial need and cannot exceed the amount necessary to satisfy that need.
Most often, hardship distributions are only made out of the elective contributions that you make to your 401(k). These are the contributions that you make through an agreement with your employer to take a portion of your salary and invest it in the company’s 401(k) plan.
Immediate and heavy financial need expenses are:
Expenditures to purchase your personal residence (not including mortgage payments);
Post-secondary tuition expenses; and
Expenditures to avoid eviction from your home.
To demonstrate that you have an immediate and heavy financial need, you must show that you have exhausted any other plan distributions available to you regardless if the distribution is taxable, including plan loans.
Tax consequences
Any distribution you receive, including a hardship distribution, must be included in your income. If you are under age 59 ½ when you receive the distribution, you must pay an additional tax of 10 percent as an early distribution penalty.
Loans from tax-qualified plans
You can avoid paying tax if the distribution is a “loan.” That means:
By its terms, the loan is repaid within five years; or
The loan proceeds are used to purchase a home.
If you fall under one of these exceptions, you still have to jump another hurdle. The amount of the loan, when added to the balance of all other outstanding plan loans, cannot exceed $50,000 or one-half of the value of your plan account.
Withdrawals from your traditional IRA
When you take a distribution from your traditional IRA, it is subject to tax as regular income. Distribution taken before reaching age 59 ½, may also be subject to the additional 10 percent tax on early distributions. There are exceptions. For example, IRA funds may be used to pay for medical insurance premiums, education expenses, and the expenses of first-time homebuyers, without paying the 10 percent penalty.
The distribution must meet one of four other requirements.
60-day rollover rule
If you need emergency funds on a very short-term basis, you can withdraw money from your traditional IRA. The funds must be returned (or rolled over) to the same IRA or another IRA within 60 days.
The 60-day time limit has traditionally been very rigid. Recently, the IRS has given taxpayers a small amount of wiggle room. However, it is still important to carefully ensure the funds are back in the IRA within 60-days.
Seek professional help
Since these rules are extremely complex, it is critical to review possible distributions with your tax advisor. If you can afford to pay back the funds, it generally is wiser to take the money from a retirement plan as a loan. If the “loan” meets all of the requirements to avoid being taxed as a distribution, you can avoid the 10 percent penalty on distributions before age 59 ½. The terms of such a loan must be very close to the terms you would get from a bank.
Estate planning tool: Qualified Personal Residence TrustsIn many parts of the country, residential property has seen steady and strong appreciation for some time now. In an estate planning context, however, increasing property values could mean a potential increase in federal estate tax liability for the property owner's estate. Many homeowners, who desire to pass their appreciating residential property on to their children and save federal estate and gift taxes at the same time, have utilized qualified personal residence trusts.
What is a QPRT?
The qualified personal residence trust, referred to as a "QPRT," is an estate planning technique used to transfer a personal residence from one generation to the next without incurring federal estate tax on the trust property. This type of irrevocable trust allows a homeowner to make a future gift of the family home or a vacation property to his or her children, while retaining the right to continue living in the home for a term of years that the homeowner selects.
Creating a QPRT
The homeowner transfers title to his or her residence into trust for a set time period (for example, 10 years), but retains the right to live in the house during the trust term. At the end of the term, the trust property is distributed to the donor's children without passing through the donor's estate, thereby avoiding federal estate tax on the trust assets. However, if the donor wishes to continue living in the residence after the end of the trust term, the donor must pay fair market rent to his or her children, the new owners of the residence.
Gift tax advantage
Through the use of a QPRT, the full value of your residence can be transferred to your children. However, for federal gift tax purposes, the property is valued at a discount. The actual value of the gift (and the gift tax savings) depends upon your age, the length of the QPRT term, and the federal interest rates in effect at the time you transfer the house to the trust. For example, the longer the trust term, the lower the gift value for gift tax purposes and the greater the gift tax savings. Also, the higher the applicable federal interest rate, the greater the potential gift tax savings.
If you would like to discuss how a QPRT might work for you as part of your overall estate plan, or if you currently have an established QPRT and you wish to review its effect in light of current interest rates and other factors, please do not hesitate to contact this office.
Fiduciary liability - a hidden danger in retirement plan sponsorshipDespite the current slump in the job market, employers looking toward the future are often faced with the question of how to attract and retain good employees. With increased job-to-job mobility and an aging workforce, the employee retention issue takes on a special significance. An option most utilized by employers seeking to accommodate a fickle work force is the offering of some type of employee benefit plan, such as a 401(k). Though these benefit plans offer an easy means of satisfying employee demands, they do not come without pitfalls.
You as fiduciary
One key issue that an employer establishing an employee benefit plan should consider is the extent to which its actions impose upon it fiduciary status under ERISA. Though fiduciary status may sound harmless, the duties imposed on fiduciaries under ERISA are far reaching and may have significant consequences for employers who fail to properly observe their fiduciary duties.
Fiduciary status is generally only imposed where a party has exercised authority with regard to plan assets or with regard to the administration of the plan. In other words, fiduciary duties are not imposed upon an employer until the plan has been established. This allows employers to design and establish a plan without imposing on them the more burdensome duties of a fiduciary.
The role of an employer as "settlor" of a plan quickly gives way, however, to the imposition of the fiduciary duties under ERISA once the plan is up and running. It is at this point when an employer must begin to carefully consider its role with respect to plan management and administration because, as a plan sponsor, the employer is virtually a "per se" fiduciary and there is essentially no way to circumvent the imposition of fiduciary obligations.
What protection is there?
An employer may attempt to delegate its fiduciary duties by hiring a trustee to administer the plan and/or an investment manager to manage plan assets. And, to the extent that the employer has properly delegated these duties, the employer is no longer a fiduciary. However, in selecting and hiring a trustee or investment manager, the employer is acting in a fiduciary capacity and must act prudently. The prudence standard generally requires that the employer engage in an adequate amount of research with regard to hiring parties to fulfill fiduciary roles for the plan, which largely depends on the facts and circumstances of the situation.
The employer's role as fiduciary does not end upon a proper delegation of fiduciary responsibilities. Instead, the employer has an on-going duty to supervise the parties it has selected to fulfill the fiduciary duties in order to ensure that those parties are properly executing the responsibilities delegated to them.
An ounce of prevention
The fiduciary provisions of ERISA are, by no means, intended to scare employers away from offering retirement benefit plans to their employees. They are merely intended to protect employees' retirement savings from the acts or omissions of unscrupulous employers. To protect itself, the employer needs to act diligently with respect to the management and/or administrative decisions it makes with respect to the plan. Employers observing these standards should, however, have no cause for concern. Please contact this office if you have any questions about how this relates to you.
FAQ: How do I go about valuing the goodwill of my small business?An appraisal is a good starting point. A professional valuation will tell you the price that an average buyer may pay for your business. However, an actual buyer may have a different opinion. A particular buyer may have a strategic reason for acquiring your company and may be willing to pay more than what an average buyer would. Another buyer may be looking for various assets to augment its business and not be willing to pay for your company’s goodwill at all. Ultimately, value is subjective.
More than bricks and mortar
The value of a typical small business should be greater than the value of its physical assets. Buyers are not only looking for equipment and inventory, they need to continue sales and the flow of revenue. Much of the success of a business is intangible…it’s goodwill. It’s your reputation, especially your relationship with customers and the community. It’s the quality of your product or service. Unlike physical assets, it is often a challenge to put a value on goodwill.
Valuation methods
Appraisers use several methods to value the key aspects of a business, including goodwill. Business valuation methods fall into different categories depending on what the major focus is.
--Asset based valuation: At a minimum, your company should be valued at the sum of the value of its easily salable parts. Two valuation methods, book value and liquidation value, look at the value of your hard assets.
--Historical earnings valuation: Historical earnings methods allow an appropriate value for goodwill over and above the market value of hard assets. The assumption here is that your business’ history indicates the amount, predictability and growth trend of future earnings.
--Assets and earnings valuation: The excess earnings valuation method takes both assets and historical earnings into consideration. The IRS has sanctioned this method for estate and gift tax situations.
--Market based valuation: Several valuation methods are based on the market price for similar businesses. These market-based methods are often used in conjunction with an examination of historical or projected earnings.
--Future earnings valuation: A valuation based on expected earnings, discounted back to arrive at their net present value, theoretically comes closest to determining how much a business is worth today. In practice, however, valuations based on future performance are very difficult to calculate because they require many estimates and projections about the future.
These are just thumbnail sketches of different valuation methods. The mechanics of each method, and variations of these methods, are extremely complicated. Don’t be tempted to try them yourself…the result will likely be unrealistically high or inaccurately low. Contact our office for professional guidance so your appraisal will reflect all the years you’ve worked to build your reputation and business.
Health plan options grow more creative … and complexThere are a number of options available in today's marketplace that are aimed at defraying some of the cost of health and medical related expenses. Such choices include Health Reimbursement Arrangements (HRAs), Archer Medical Savings Arrangements (MSAs), Flexible Spending Accounts (FSAs) and the newly created Health Savings Accounts (HSAs). With so many options available, it is difficult to assess which plans are appropriate.
HRAs
Let's begin with HRAs. An HRA is an employer funded plan that allows employees to pay for medical expenses and/or health insurance premiums. The employer will determine the amount of the contribution, and reimbursements from an HRA are excluded from the employee's gross income. The unused portion of the account rolls over from year to year. However, HRA funds are not portable.
To qualify, HRAs cannot be linked to a deferred compensation arrangement or salary reduction plan. Thus, an HRA cannot be used in conjunction with a cafeteria plan in such a way that the HRA is funded through salary reductions. In addition, reimbursements from HRAs must be substantiated. However, the IRS has authorized the use of debit and credit cards for reimbursement purposes. The employee will use the card at authorized serviced providers for eligible expenses. Presumably this mechanism will aid in meeting the substantiation requirements.
FSAs
In stark contrast to HRAs are FSAs. FSAs are also used to provide reimbursement for medical expenses. Such reimbursements are excludable from an employees gross income. Unlike HRAs, an FSA may be offered as part of a cafeteria plan option allowing for contributions to be made on a salary reduction basis.
Under these arrangements, the employee, not the employer, will determine the amount to be contributed to the plan, subject to an annual cap. This amount can be altered on an annual basis by the employee. However, any unused contribution cannot be rolled-over and instead will be lost if not used by the end of the year. And, as with HRAs, contributions are not subject to either income or employment taxes such as FICA, Social Security and Medicare.
HSAs
Recently, Congress enacted legislation that would largely replace Archer MSA in the form of an HSA. Both plans are aimed at providing tax benefits for individuals with high-deductible health plans. Both plans would allow a contribution limit of up to $2,600 for individuals and $5,150 for families for 2004. However, the definition of a high-deductible health plan is less restrictive for HSAs than for MSAs. In any event, after 2003, contributions can no longer be made to an MSA account (provided legislation does not grant a further extension). Instead, MSA participants may either roll the funds into an HRA or simply continue to use the MSA until it is gone.
HSAs offer a number of significant tax benefits. Contributions by employees are deductible in determining adjusted gross income, in other words, they are "above-the-line" deductions that may be taken by all taxpayers. Alternately, a contribution by an employer is made on a pre-tax salary reduction basis on behalf of the employee and will also generate a deduction for the employer. Thus, the contribution is tax-free to the employee and tax-deductible to the employer. Employers may offer HSAs either as a stand-alone benefit or through a cafeteria plan.
Distributions from HSAs are also made on a tax-free basis, provided the distribution relates to a qualified medical expense. Such expenses generally include expenses incurred to diagnose, cure, treat or prevent disease. Expenses that are not qualified will be treated as taxable income to the recipient and may result in the imposition of a ten percent excise tax. Finally, and most significantly, contributions to HSAs grow tax-free and roll-over from year to year, allowing a significant build-up in such accounts as employees age. For those in the 55 and older category, the contribution limit is raised by $500 in 2004, increased $100 annually, to $1,000 in 2009.
As you consider each of these arrangements, keep in mind the following concepts and which will be of most value to your business: retention, portability, tax benefits, flexibility, cost savings (through insurance expense reduction, for example), administrative expenses and the overall needs of your employees.
What is an asset protection plan?Asset protection planning is the process of organizing one's assets and affairs in advance to guard against risks to which the assets would otherwise be subject. The phrase "in advance" warrants strong emphasis. One who is planning to protect assets must be cautious and avoid the negative implications that may follow if there are creditors who are entitled to remedies under applicable fraudulent transfer and similar laws. Asset protection planning may be applied to protect every type of asset, including an operating business or a professional practice.
Why asset protection planning? Safeguarding assets from the many risks involved is not a new idea or planning goal. However, asset protection is more in the forefront of planning because of expanding theories of liability. New liability theories are sometimes coupled with results-oriented judges and juries who decide things based more upon a perceived desired outcome than upon the law. An ever-present concern includes some of the high dollar amounts of jury awards that we hear about today.
Planning tools. Although developing an asset protection plan can be a difficult undertaking, there are many common techniques that exist for protecting assets from potential creditors. No single asset protection technique will unconditionally protect all of a taxpayer's assets. A plan needs to involve a mix of the various tools and techniques available to the planner. Various "ladders of asset protection vehicles" represent one tool used to identify the various tools available to the asset protection planner who arranges them in ascending order of efficacy. At the bottom of the ladder is gifting, midway up the ladder is the family limited partnership, and close to the top of the ladder is the foreign integrated estate planning trust (IEPT).
As important as it is to know what an asset protection planning component is, it is equally important to know what it is not. Asset protection planning will not aid a client in evading the payment of taxes. Asset protection planning does not use the concept of hiding assets but works in general to protect those assets. A hidden asset may be found, but a protected asset is a more secure one.
Please contact this office if you would like to know more about how an asset protection plan might be designed specifically to address those risks that you may face now or in the future.
Prove it! IRS demands less proof of business expenses in certain situationsThe general rule on business expenses is that you must prove everything in detail to be entitled to a deduction. Logs, preferably made contemporaneously to the business transaction, must show date, amount, and business purpose and you must produce receipts. Fortunately, the tax law has a practical side. Congress, the IRS and the courts each have applied their own brand of practicality in allowing certain exceptions to be made to the business substantiation rule.
Here is a quick review of the major exceptions to the "prove-it or lose-it" rule that exist for business expense deductions. Some are relatively new; one is brand new.
General business expenses
Deductions are a matter of legislative grace, and the taxpayer must establish that he or she is entitled to them. A business taxpayer is required to maintain books and records sufficient to substantiate the items of income and deductions claimed on the return.
If the taxpayer is unable to substantiate expenses through adequate records, the courts have allowed the taxpayers to deduct an estimate of the expenses under the so-called Cohan rule named after the precedent-setting case of that name. This rule states that when a taxpayer has no records to prove the amount of a business expense deduction but the court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate. However, in determining the amount deductible, the courts may bear heavily on the taxpayer "whose inexactitude is of his own making."
The courts, however, cannot apply the Cohan rule to unsubstantiated travel or entertainment expenses. The Cohan rule also may not be applied to expenses for vehicles and other listed property, such as personal computers.
Travel & entertainment
Expenses for travel, meals, and entertainment are subject to strict substantiation requirements. Travel expenses in this case include meals, lodging, and incidental expenses. The Internal Revenue Code, however, gives the IRS an "out" and allows it to create exceptions to this general rule through its own regulations. The IRS has chosen to do so in a number of limited circumstances. The reason behind most of these exceptions is "administrative convenience" both for the business to maintain records in certain circumstances and for the IRS to spend an inordinate amount of audit resources in policing them. Here are the principal recordkeeping exceptions:
$75 rule. Documentary evidence, such as receipts, paid bills, or similar evidence, is required for: (1) any expenditure for lodging while away from home; and (2) any other expenditure of $75 or more, except for transportation charges if documentary evidence is not readily available. For expenses under $75, you do not have to provide receipts but still must maintain adequate records, such as a diary, account book, or some other expense statement.
Per diem. IRS provides an optional per diem method for substantiating expenses reimbursed by the employer. The method applies to travel expenses for lodging, meals and incidentals, or for meals and incidental expenses (M&IE). Using per diem rates can avoid a great deal of paperwork.
Expenses are deemed substantiated if they do not exceed the per diem rates recognized by IRS. The per diem allowance must cover lodging, meals, and IE, and is not available for an allowance that only covers lodging. The employer still must be able to substantiate the time, place, and business purpose of the travel.
The current rates apply to travel within the continental United States (CONUS) on or after October 1, 2003. Rates vary by locality; where the employee sleeps determines which rate to apply. Different rates apply to travel outside the continental United States, including Alaska, Hawaii, and Puerto Rico.
IRS also provides a separate per diem rate for unreimbursed meals and incidental expenses. These rates can be used only by employees and self-employed individuals to compute the deductible costs of meals and incidental expenses. Lodging expenses still must be substantiated.
Standard mileage rate. Taxpayers may use a standard mileage rate for the costs of using their car, rather than actual expenses. The 2004 business mileage rate is 37.5 cents per mile. Parking fees and tolls may be deducted separately.
Small fringe benefits. De minimis fringe benefits are excluded from income and do not have to be substantiated. Examples of these benefits include monthly transit passes and occasional meal money and transportation for employees working overtime.
Statistical sampling. Recently, the IRS provided significant relief from the substantiation requirements for certain meal and entertainment (M&E) expenses. By using a statistical sampling method specified by IRS, employers can avoid the need to review every meal and entertainment expense deduction. The new sampling method is available for tax years ending after May 2, 2004.
The sampling method can be used for expenses that are not subject to the rule that normally limits M&E expense deductions to 50 percent. These exceptions include meals and entertainment treated as compensation, such as a paid vacation; recreation benefits for rank-and-file (but not highly compensated) employees, such as a company party; tickets to charitable sports events; and meal expenses excludible as de minimis fringe benefits. An employee cafeteria or executive dining room used primarily by employees comes under this exception.
The sampling method cannot be used for the costs of entertaining business clients.
If you need advice on how your current recordkeeping practices for travel, meals and entertainment square up against these exceptions, please do not hesitate to call this office.
Roth IRAs grow more attractive in 2005More taxpayers will be able to convert to a Roth IRA in 2005 thanks to expanded eligibility requirements. Roth IRAs, which generally permit tax-free withdrawals of accumulated savings, are an important component of an overall retirement savings strategy.
Special savings vehicles
Unlike contributions to traditional IRAs, contributions to Roth IRAs are not tax-deductible. Instead, withdraws generally are tax-free. Qualified distributions are excluded from gross income. To be treated as a qualified distribution, taxpayers must satisfy a five-year holding period and other requirements.
Roth IRAs have many other advantages. During lifetime, there are no required distributions from a Roth IRA. When a trust is the beneficiary of a Roth IRA, there are additional tax advantages. A Roth IRA can also save on estate taxes.
Sometimes taxpayers want to convert a traditional IRA to a Roth IRA. Personal finances may change, a spouse may die or other events trigger the interest in conversion.
Conversion is not automatic. There are important restrictions. Only taxpayers with adjusted gross incomes below $100,000 can use the Roth IRA rollover provisions. Generally, amounts converted from a traditional IRA to a Roth IRA must be included in gross income. However, they are not considered when determining the $100,000 AGI threshold.
Repositioning income
The Roth IRA income limitation can sometimes be circumvented by shifting income. A taxpayer may be able to reposition various sources of income so adjusted gross income remains below $100,000. Income may include Social Security benefits, annuity payments, and pension payments.
Many taxpayers contemplate converting to a Roth IRA after the death of a spouse. Depending on the circumstances, a surviving spouse may be able to reposition assets to bring income below $100,000.
Possible roadblocks to conversion
Even with all the advantages of Roth IRAs, some circumstances may preclude conversion. These include:
- Inability to pay the tax on conversion;
- Other assets with low basis;
- Repositioning assets would trigger capital gains tax;
- Age
Conversion may push the taxpayer into a higher income tax bracket. In those cases, an alternative is to spread the conversion over several years. This technique may avoid bunching income.
Required minimum distributions
Many taxpayers have been unable to get under the maximum adjusted gross income bar because of their required minimum distributions from a variety of tax-deferred retirement investment vehicles. In good news for taxpayers, RMDs will no longer be taken into account when calculating the $100,000 income threshold for Roth IRAs.
If you are thinking about converting to a Roth, give our office a call. We can review your personal finances and anticipate if conversion is the best tax strategy for you.
Is the "wash sale" rule only for active traders?The purpose of the "wash sale" rule is to prevent you from recognizing artificial losses. Generally, the rule does not generate problems for most investors. If your trading is minimal, maybe just a few transactions each year, you probably don't have to worry about the wash sale rule. Active traders, on the other hand, depending on the volume of stocks they trade, must be very aware of the rule and its consequences.
Important time frames
The wash sale rule bars an investor from selling a stock for a loss and then re-purchasing the stock within a short period of time. The wash sale window starts 30 days before the sale of the stock. It includes the date of the sale and ends 30 days after the sale. The total period is 61 days.
If an investor sells his or her stock at a loss and then buys a substantially identical replacement stock during this 61-day period, the loss is deferred until the replacement shares are sold. The pro rata loss is added to the cost basis of the replacement shares purchased. The holding period of the replacement shares includes the holding period of the original shares sold. However, the deferred loss will eventually be recognized when the replacement shares are sold.
Complex calculations
The wash rule is very complex. It is often nearly impossible for active traders to keep up with the rule. They frequently struggle with complex wash sale calculations.
If an individual's trades are large, the wash sale calculations can be very difficult to calculate manually. Several companies offer electronic programs that continuously monitor a customer's account for wash sales.
If your trading has passed the volume of a typical investor and moved into active trading, give us a call. Your status, as an investor or active trader, has important tax consequences. Moreover, you may not be calculating the wash sale rule correctly for all your trades. We can help you understand this complex rule and prevent some unpleasant surprises.
How do I? Calculate my tax benefits for "green" vehicles?Congress has provided generous tax benefits to encourage purchases of vehicles that are better for the environment. Cars, vans and trucks powered by clean-burning fuels qualify for a special deduction that increases with the weight of the vehicle. Consumers who buy an electrically powered car also are eligible to take a credit.
Clean-fuel deduction
A clean-fuel vehicle must be powered by an alternative energy source, such as natural gas. The deduction is based on the cost of the vehicle's engine that uses electricity or another clean fuel. If the vehicle is a hybrid that uses both gasoline and electricity (or other clean fuel), the deduction is based on the increased cost of the electric motor and related equipment.
The maximum deduction for most passenger vehicles and light trucks is $2,000. For a truck or van that weighs over 10,000 pounds, the maximum deductio
