Taxing Advice

Residential Energy Efficient Property Credit

2012-01-08T16:36:00.001-08:00

IRC Section 25D. The Internal Revenue Service provides for a 30 percent credit for the installation of qualified solar water heating property, qualified solar electric property, geothermal heat pumps, and small wind energy property. This credit will apply for property placed in service through December 31, 2016.

The expenditures that are eligible for this credit include the cost of installation. However, costs that are allocable to a swimming pool or a hot tub are not eligible for the credit. The installation does not have to be in the taxpayers principal residence, but it does have to be in a property located in the United States and used by the taxpayer as a residence (ie, could be a second home).

This credit can be applied against any Alternative Minimum Tax through the 2011 tax year and any unused credit is carried forward. There is no Adjusted Gross Income limitation for this credit.

Items Not Considered Alimony

2012-01-08T16:35:00.001-08:00

Items Not Considered Alimony

In a couple of recent Tax court cases the court ruled on a few items that cannot be considered alimony.

Attorney Fees – The court held in Nicholas v. Comm, TCS 2011-91, that attorney fees incident to a divorce were not alimony. These were attorney fees and costs paid on behalf of a husband’s ex-wife. The court reasoned that because the payments made by the husband were not made contingent upon any factor of event, they did not constitute deductible alimony.

Contingency Related to a Child – In Knoedler v. Comm, TCS 2011-18, the court held that an individual cannot deduct as alimony the payments he made to his former wife under a postnuptial agreement where the agreement contained a contingency pertaining to his child. The court reasoned here that the reduction of payments after the child’s graduation represented a contingency related to a child and, the payments were nondeductible child support.

Also, remember that if a divorce or separation decree provides for both the payment of alimony and child support and the spouse that is to pay the amount does not make payment in full, non-deductible child support will be deemed to be paid first pursuant to IRC Section 71(c)(3).

Foreign – Earned Income Exclusion

2012-01-08T16:33:00.001-08:00

IRC Section 911. Revenue Procedure 2010-40. For 2011 a United States individual that is living abroad can exclude up to $92,900 of foreign-earned income. To take this exclusion the taxpayer must satisfy one of two tests.

The bona fide foreign residence test or the foreign physical presence test.

The exclusion applies separately to spouses. Therefore, if both of the spouses are qualified individuals, the two spouses together can exclude up to $185,800, as adjusted for inflation, from their income.

Remember, that all United States Citizens are taxed on a World Wide basis and must report their income and prepare a United States Income Tax Return. If United States citizens have foreign bank accounts they must be disclosed to avoid criminal and civil penalties. These issues are not the focus of this article, but foreign based United States Citizens must be aware of these issues.

Exclusion of Disability Income for Police Officer

2012-01-08T16:31:00.001-08:00

IRC Section 104 provides that compensation for injuries and sickness are not taxable and are excluded from income. In Bakken v. Commissioner, TCS 2011-55, the court concluded that the disability income of a police officer who was injured in the line of duty and became permanently disabled remained nontaxable under Section 104 when he reached the eligible retirement age under the plan.

Officer Bakken served on the police force for 18 years and was injured in the line of duty, becoming permanently disabled and unable to perform the duties of a police officer. The Austin Policemen’s Benefit Association approved his application for a disability pension as a result of his injuries. He was not qualified for retirement due to his age at the time the benefit was granted by the Association. He was given the same benefit as someone that would have retired at the regular retirement age. Once the officer reached retirement age the Association converted the payments to a pension payment and issued Bakken a 1099-R showing the payments as taxable.

The Tax Court held that since Bakken had completed less than 20 years of service when he attained age 50, he remained ineligible for retirement. Thus, the character of the payments remained unchanged, and he was entitled to exclude his pension distribution from income.

Exclusion of Disability Income for Police Officer

2012-01-08T16:27:00.000-08:00

IRS STILL FOCUSED ON FOREIGN INVESTMENTS IN THE COMING YEAR

2011-10-19T23:23:00.000-07:00

The IRS has set its priorities for the coming year. It is no secret, they are going after those who evade their responsibility to pay their taxes. Foreign banks in bank secrecy jurisdictions have turned over literally thousands of names to the IRS to settle civil lawsuits brought by the United States Department of Justice in an effort to catch those that use foreign institutions to evade U.S. Tax obligations.
The IRS has given these types of taxpayers two opportunities to come forward voluntarily with voluntary disclosure initiatives which were done to give taxpayers fair notice that the IRS would no longer tolerate these types of foreign arrangements,
Approximately 19,000 taxpayers came forward and disclosed their foreign relationships through these two programs.
Now, the IRS plans a renewed effort to uncover hidden assets with new laws, new international information exchange agreements, and further use of the courts. The IRS has found that there is approximately 96 percent compliance with the tax laws where there is accurate information reporting, and only 50 percent compliance where there is not. It is a high priority of the United States to close this gap.
So beware and if you are one of the remaining taxpayers that has a foreign account that is not disclosed, see a tax attorney immediately to discuss your options. Remember that the IRS intends to criminally prosecute these offenders in the future that did not come forward when they had the opportunity.

Potential of "Clawback" of Gifts made in 2011 and 2012

2011-10-18T18:36:00.000-07:00

The President signed into law on December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The Act reunified the Gift and Estate Tax when the maximum tax rate for both Gifts and Estates was set at 35 percent, and provided for a $5 Million applicable exclusion amount for both gift and estate tax purposes. This new Act has the same problem as the old Act. It has an automatic sunset provision and the law will then revert back to pre-Economic Growth and Tax Relief Reconciliation Act of 2001.
If this happens the Gift and Estate tax rate will revert back to 55 percent with and applicable exclusion amount of $1,000,000 for gift and estate taxes. The problem with this is that a clawback provision could be imposed for taxpayers that took advantage of the $5,000,000 gift tax exclusion in 2011 or 2012.
If a clawback provision is applied in later years because the applicable exclusion amount goes down, the taxpayer will have to pay tax at the then current estate rate on gifts made in 2011 and 2012 on the difference between the $5 Million exclusion used in those years and the then current exclusion amount.
This is an uncertain area of the law and practitioners and their clients must be made aware of the potential for this to occur in the future. It is likely that Congress did not intend for a clawback to occur, but this does not change the fact that those that might be affected should address the issue in their estate plans.
We still do not have guidance from Congress in this area of the law, and until we do there will be uncertainty in the markets. Hopefully, Congress will see the light and clarify this issue.

Transferee Liability - Paying Someone Elses Taxes!

2011-06-05T10:10:00.000-07:00

It is bad enough these days paying our own taxes, but being responsible for someone elses taxes - how could that be. Yet, it is true that you can be held responsible to pay someone elses taxes and sometimes without even knowing that this could happen to you.
Section 6901 of the Internal Revenue Code provides a method for the IRS to collect on an unpaid tax liability "at law or in equity" of a transferee of property. This allows the IRS to proceed to collect the tax that the transferror owed from the transferee in the same manner as that of a delinquent taxpayer pursuant to the provisions of IRC Section 6901. How the IRS actually uses this provision will depend on your state law regarding transferee liability.
As mentioned, the liability can be established "at law or in equity." In reality, the most common approach for the IRS is in equity. The transferee liability in equity is based on the law of fraudulent conveyances. To find transferee liability in equity, the IRS must prove the following elements: 1) the taxpayer - transferror transferred property to the transferee for less than full and adequate consideration; 2) at the time of the transfer and at the time transferee liability is asserted, the taxpayer-transferror was liable for the tax; 3) the transfer was made after liability for the tax accrued, whether or not the tax was actually assessed at the time of the transfer; 4) the taxpayer - transferor was insolvent at the time of the transfer or the transfer left the taxpayer-transferor insolvent; and 5) the IRS has exhausted all reasonable remedies against the taxpayer - transferor.
If these elements are met the IRS can assert transferee liability and proceed to collect the tax due from the transferee.

Tax Implications of Short Sales and Foreclosures

2011-05-10T08:05:00.000-07:00

Mr. Lively will be presenting "Tax Implications of Short Sales and Foreclosures" on Wednesday, May 18, 2011 before a group of realtors. The focus of the presentation will be:

How to deal with cancellation of debt issues
Understanding the difference between recourse and non-recourse debt
Computation of the potential capital gain on a short sale
Various other tax aspects of short sales

This seminar is sponsored by Bank of America and the Kevin Budde Team.

New Gift Tax Rules May Not Last Long

2011-05-08T13:09:00.000-07:00

On December 17, 2010 President Obama signed into law a new Tax Act, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (The 2010 Tax Relief Act). This Act was a surprise to many, and the changes made to the gift tax area were the most astounding. The annual exclusion for gifts was left alone at $13,000 per person that a donor wants to give to a donee. However, the lifetime exclusion was unified with the estate tax exclusion and changed from $1 Million to $5 Million per individual. That means that a family of wealth can effectively give up to $5 million, $10 million for a married couple, without any gift tax consequences. It is unclear if their will be any recapture of this amount or clawback should the exclusion be lowered in the future. Some members of the government already indicated that it was a mistake to not address this issue in The 2010 Tax Relief Act. The President wanted to get this bill through before the end of the year, and the word on the Hill was to not even change a comma in the Act.
That is the good news. This creates a tremendous planning opportunity for families that have a donative intent toward other family members. However, this opportunity will only last for two years as the Act currently is written. Further, President Obama has already indicated that he would like to modify this portion of the Act before it is set to expire. He wants to see the exclusion back at $1 Million and the tax rate at 45 percent for gifts (it is currently 35 percent). The message from this is that you should not sit and wait on this one. If you want to take advantage of this opportunity you will need to act fast and do your planning, because this one is sure to not last long.

Recourse v. Non-Recourse Debt in California

2011-04-25T09:38:00.000-07:00

A big question that arises in California these days is whether the debt on your real estate is recourse or non-recourse. The difference can be quite significant if you are going through a foreclosure, deed in lieu of foreclosure, or a short sale. If the debt is non-recourse and you go through a foreclosure, deed in lieu of foreclosure, or a short sale, there is no potential for a deficiency on the loan and there is no income from any cancellation of debt. However, if the debt is recourse there is a potential for a deficiency and income from cancellation of debt. Recourse debt creates personal liability for the debtor for the portion of the debt that is not repaid to the lender. That is why this determination of recourse v. non-recourse is so important as an initial hurdle.

A note can be non-recourse if the contract that creates the debt indicates that it is a non-recourse note. Purchase money notes in California are also non-recourse by definition. A purchase money note is a note whereby the borrower borrowed money to purchase a principal residence and the funds went directly into escrow and then to the seller of the property for the purchase of a one to four unit property. Thus, seconds, HELOCS and Refinanced Loans on property would typically not be a purchase money note and would create personal liability in the event of a default on the note.

California has come to the rescue with SB 931 with regard to short sales. If a lender agrees to a short sale in writing in California the First Trust Deed on a one to four unit property is non-recourse and the lender can only look to the property for repayment. Notice that this Bill does not exclude rental properties. Therefore, if a borrower has a potential issue with a deficiency on a first trust deed, whether it is a rental or a principal residence, the borrower should attempt to short sale the property to avoid a deficiency judgment of the property. SB 931 does not work for foreclosures or deeds in lieu of foreclosure. It is only for short sales.

When you are disposing of distressed real estate there are numerous tax and legal issues that you must address and be aware of prior to closing the transaction. Make sure that you consult with a tax attorney to make sure you do not have any hidden costs that you will be later surprised by when it is too late.

Tax Implications of Short Selling Real Property

2011-04-24T20:13:00.000-07:00

Short Sales of Real Estate

When you sell real property in a Short Sale Transaction there are numerous tax implications that you will want to consider. First, just what is a Short Sale. A short sale is when you sell a property and the sales proceeds are not sufficient to pay off the loan that you have on the property and you ask the lender to accept less than the full amount they are due to pay off the loan.

When you short sale a property the tax considerations revolve around two basic issues. First, the income from the cancellation of the debt, and next any gain that may have to be recognized on the sale. Cancellation of debt income occurs when you pay less than the full amount back to the lender. When you borrowed the money from the lender you did not have to pay tax on the borrowed money because you were obligated to pay back the debt. However, when the debt was canceled and you did not have to pay it back that is income. The lender will send you a 1099C informing you and the IRS of the canceled debt. You will also have to determine if there is a gain on the property you disposed of in the transaction. The IRS considers this disposition a sale and you must report the sale less the tax basis in the property. This could result in a gain if you have a low basis in the property and refinanced it pulling out cash.

The next thing that you need to consider is whether the income from the Cancellation of the Debt is actually taxable. There are four exclusions that must be considered. First, if the debt is non-recourse (as determined by state law) there can be no income from the cancellation of the debt; Second, if the home was your principal residence the debt is excluded up to $2,000,000 by the Mortgage Forgiveness Debt Relief Act of 2007; Third, if you are insolvent the cancellation of debt is forgiven to the extent that you are insolvent at the time the debt is forgiven; Fourth and finally, if you are bankrupt the cancellation of debt is forgiven if it was included in your petition.

The cancellation of debt and how you handled it for tax purposes is reported on Form 982 that is included with the filing of your form 1040. This is where you also adjust the basis for assets where debt was canceled.

Basic Asset Protection Strategies

2010-12-12T22:36:00.001-08:00

Today I am going to talk to you about Three Methods to Provide Asset Protection to Your Wealth. This is not a complete list, but Three easy to implement common methods that any estate can take advantage of to shore up their Asset Protection planning. But before I discuss why you need asset protection let’s first discuss what asset protection is.

According to Jay Adkisson in his book Asset Protection, asset protection is pre-litigation planning to deter lawsuits and promote settlements. The primary goal of asset protection is to bring closure to actual or potential litigation with as little disruption to the debtor’s business and with as little loss of wealth as possible. What asset protection planners do is best described as Wealth Preservation.

When should Asset Protection be done? The answer is simple – the earlier the better. It is like buying insurance. You cannot wait until after the accident to do the planning or purchase the insurance. Then it is too late. The same goes for asset protection planning. The biggest hurdle for asset protection is the Fraudulent Transfer Laws.

According to Adkisson, it is not the structure that is created for asset protection that should be given the greatest emphasis. It is the method and timing of the transfer into the structure that is most important. So what is a Fraudulent Transfer? It is a transfer in derogation of the rights of a creditor to satisfy his judgment against the assets of the debtor. What happens if the Court determines that a transaction is fraudulent? The transaction is unwound as though it never happened.

Why should we be concerned with Asset Protection? According to SixWise.Com there are over 16 million lawsuits filed in the United States each year and this number is rising by about 12 percent each year. The group Lawsuit Abuse indicates that of these 16 million lawsuits 1.4 million lawsuits are filed in California each year. That is almost 7000 lawsuits filed each day the courts are open. Therefore, the question has become not if you will be sued in your lifetime, but when. And if you are a person of wealth you have a 100 percent chance of being suit once if not multiple times in you life.

According to SixWise.com, many of these lawsuits are filed against doctors and other professionals. With the economy that we are in and the ease of filing lawsuits many lawsuits are being filed with the “I have nothing to lose mentality” with the hope of winning the lawsuit lottery.

So what can you do to protect yourself? Here are three Methods to Provide Asset Protection to Your Wealth:

1) Protecting Your Home – Your home should not be held in your name or in the name of a living trust if you have any equity that your want to protect. It is a myth that a living trust provides any type of protection. Instead the home should be transferred to an irrevocable trust such as a Qualified Personal Residence Trust or an Irrevocable Defective Grantor Trust. Both of these vehicles will add substantial asset protection. A cheap and easy protection is filing a homestead exemption on your home.

2) Protecting Your Retirement Assets – Many people believe that the assets they have in an IRA are protected from creditors. Nothing could be further from the truth. Only qualified pension plans such as 401K’s and Defined Benefit plans that have multiple common law employees in the plan are protected by ERISA – the federal law that protects pension assets. If you have a significant sum in an IRA you should consider transferring the assets to an ERISA plan for the great asset protection benefits that they offer. This may be the single best Asset Protection devise that exists. If you remember, the Goldman’s have been unable to reach O.J. Simpsons pensions assets even though they have a $38 Million judgment against him. This is how strong ERISA Protection can be.

3) Other Protections – Equity Stripping – This is an effective technique to remove equity from property by borrowing against the property. The cash is either spent or protected with asset protection vehicles such as asset protection trusts.

The bottom line is that we should all practice some form of asset protection. Most of us already do without realizing it. For instance, when we buy insurance we are practicing asset protection. The difference is whether we have a comprehensive plan to protect our assets and whether we use any of the techniques mentioned above or various other techniques that are available. The greater your wealth the more asset protection you may need, and even this will depend on your aversion to risk and the cost benefit of the plan you design. However, I think that in this litigious society we live in all of us should engage in asset protection based on the amount of wealth we possess.

Sale of Closely Held Businesses to Defective Grantor Trusts

2010-08-22T00:30:00.000-07:00

Owners of closely held businesses can benefit for tax purposes with the sale of the business to an intentionally defective grantor trust. This is one of the most effective techniques to freeze the value of the business owner's estate and transfer the future appreciation of the business to future generations of heirs of the taxpayer.

Due to current economic conditions and the lowest interest rates we have seen in a long time, now is the time to consider the technique of selling assets to an intentionally defective grantor trust, and take advantage of a tremendous wealth transfer opportunity. It is almost a certainty that the estate tax will come back in some form next year. If current law does not change, we will have a maximum estate tax rate of 55% and a life-time exclusion of $1,000,000. If this comes to pass, this will be the highest estate tax rate we have had in ten years.

To properly utilize this technique the deal must be structured properly. The trust document created must intentionally violate one or more of the grantor trust rules, the grantor must not retain any powers that would cause inclusion in their estate, and the document must ensure that the dispositive scheme created by the grantor is successfully created paying particular attention to extending the duration of the trust to as many future generations as possible.

The end result will be a trust that is treated as owned by the grantor for income tax purposes, but not for estate tax purposes. Thus, removing the business from the estate of the Grantor and transferring future appreciation in the business to future generations.

If you will have a taxable estate in 2011 and own a business, you should give this technique some consideration this year. It is one of many methods we can use to lower your estate tax bill with the coming return of the estate tax in 2011. Remember, the estate tax is a tax that we can completely eliminate with proper and timely planning. Leaving more of your legacy to your family.

Disabled Beneficiaries Will Benefit From A Special Needs Trust

2010-06-17T22:46:00.000-07:00

If you are the parent of a disabled child you must consider how to leave property to your child, and whether you can provide sufficient assets to provide for your child for their lifetime. This is not as easy as it first may seem. A disabled child may never have the mental capacity to manage their own financial affairs, you may not have assets that can fund the needs of the child for the rest of their life, and if your child receives assets directly they may lose access to essential government benefits.

Fortunately, there is a solution to this dilemma that is relatively straight forward and cost effective. A Supplemental Needs Trust, or more commonly called a Special Needs Trust, can be created for the benefit of the Special Needs Child. A properly drafted Special Needs Trust will solve the above mentioned problems, and more. The trust can provide for an advocate to make sure your child receives proper care and the services that he or she needs when you are no longer there to do so. The trust can pay for your child's personal items, vacations, and social events.

There are occasions where Medicaid will not pay for certain medical care or treatments that you would have provided for if you were there to make the decision. The trustee for the trust, your child's advocate, can then step in and provide for these services if necessary. The trust is drafted such that the trustee can pay for items in their discretion so that the means test for essential government benefits is not violated.

If you do not have the wealth necessary to fund the Special Needs Trust, the trust can be funded with Life Insurance. A very cost effective strategy is to fund the trust with a second to die policy that pays out the benefit to the trust when the second parent dies. Since the policy is based on two lives, the cost is substantially less than a policy based on a single life.

A Special Needs Trust requires specific language to accomplish its goal. For example, it must state that it is intended to provide supplemental and extra care over and above what government benefits may provide. It also must state that it is not intended to be a basic support trust. It should also reference the various relevant government codes and statutes that authorize the creation of this type of trust.

It is a good idea to create a Special Needs Trust early in a child's life as a long-term means to hold assets for the child benefit, and provide for the child in the event of the untimely and early death of the parents. The trust can be created as part of the parent's estate plan. The trust can be established at any time before the child's 65th birthday.

Who should prepare your Special Needs Trust? An estate planning or tax attorney that is familiar with the special issues and provisions of this type of trust. A poorly written Special Needs Trust can cause loss of government benefits, and other financial assets. An attorney that specializes in this area knows the special concerns of this type of trust, and drafts special language into the trust document to preserve and protect the assets for the benefit of the special needs child.

Do You Need a Tax Lawyer That is A Certified Tax Specialist?

2010-06-06T11:50:00.000-07:00

Why would you need a tax lawyer that you hire to be a Certified Tax Specialist? The State Bar of California certifies attorneys as Tax Specialists who have demonstrated proficiency in the specialized field of tax law. The specialist program with the State Bar for tax law encourages the maintenance and improvement of attorney competence in the field of tax law.

What does the State Bar require to certify an attorney as a specialist? A Certified Specialist is more taht an attorney who specializes in a particular area of law. Technically, an attorney cannot refer to themself as a specialist unless they are certified by the State Bar. A California attorney who is certified by the State Bar as a Taxation Law Specialist must have (pursuant to the State Bar of California Board of Legal Specialization):

Taken and passed a written examination in Taxation Law;
Demonstrated a high level of experience in Taxation Law;
Fulfilled ongoing education requirements;
Been favorably evaluated by other attorneys and judges familiar with her or his work.

What can a Certified Specialist do for you?

Help you plan your personal and business activities to reduce income taxes, property taxes, and death taxes;
Protect your rights by representing you in tax controversies with the Internal Revenue Service, the Franchise Tax Board, or State Board of Equalization;
Reduce tax problems by planning your estate and advise you on your retirement benefits and life insurance;
Show you how to make title to your home and how to transfer real estate or other property without unnecessary income or death taxes;
Assist you with complicated business transactions such as partnerships, corporate tax planning, and business sales.

"Whether your situation is simple or complex, you should consider hiring an attorney who specializes in Taxation Law and who is committed through certification to maintaining her or his proficiency through continual practice and continuing education." (The State Bar of California).

7 Tax Deductions You Don't Want to Forget This Year.

2010-03-24T09:46:00.000-07:00

We are nearing the filing deadline for individual income tax returns once again on April 15, 2010. It is time to start thinking about reducing your tax bill as much as possible. Below are 8 often missed tax deductions that can give you big savings on your return.

1) Contributions to IRA's - You can still make contributions to your 2009 IRA until the due date of your return.

2) Points on Mortgages - If you refinanced during the year and paid points on your mortgage you can amortize and deduct the points over the life of the loan. More importantly, if you have old points that you are currently amortizing, you can now write the balance off in full since the mortgage was paid off.

3) Non Cash Contributions - You can take a deduction for non-cash contributions that you made to charities. This includes mileage on your car for charitable activities.

4) Energy Savings Home Improvement Credit - If you purchased Energy Saving devices that are eligible for a tax credit, do not forget to take the credit this year.

5) Investment and Tax Expenses - Fees that you pay for investment planning, tax planning, and tax preparation are tax deductible.

6) Casualty Deduction - If you suffered any theft or had any damage to property due to acts of God, you may be able to take a casualty deduction.

7) Educator Expenses - If you or your spouse are a qualified educator, you may be able to deduct a protion of your educator expenses.

Congress Lets 50 Tax Breaks Expire at the End of 2009

2010-01-01T16:32:00.000-08:00

If you were not paying attention you would not have noticed, but congress along with doing nothing about the estate tax at the end of 2009 let 50 tax breaks expire. These tax breaks are traditionally extended at the end of each year by congress. However, this year the congress was so tied up in other issues like the health care bill that they did not bother to pass an extender bill. This has happened before and when it did it took congress until October to pass an extender bill retroactive to January 1. However, there is no certainty that this will happen again, and if it does it will most likely not extend all 50. Congress is in a budget crisis year and they will be looking for areas to increase revenue, so watch out.

Below is a list of items that were not extended that are most like to affect the most taxpayers:

The annual Alternative Minimum Tax patch. If this is not extended, over 4 million additional taxpayers will be snagged by the Alternative Minimum Tax.
Research Tax Credit.
Deduction state and local sales tax for those that itemize.
The $1000 property tax deduction allowed for those that do not itemize.
The $4000 deduction for college tuition.
The $250 deduction for teachers that buy their own supplies for classrooms.
The provision that allows those 70 1/2 or older to transfer up to $100,000 from an IRA to a charity.

The uncertainty of these provisions being extended will make it difficult to determine estimated tax payments for 2010. If taxpayers assume that the deductions will be extended and they are not, they could be subject to penalties for not paying enough estimated taxes.

Still Looking for that Perfect Christmas Gift? - Avvo.com

2009-12-21T22:22:00.000-08:00

Still Looking for that Perfect Christmas Gift? - Avvo.com

Year end Tax Planning is Complicated by the Unknown

2009-11-22T22:58:00.000-08:00

Year End Tax Planning

Tax planning at the the end of 2009 is a little more complicated than in recent years due to pending legislation that we have to consider. Regardless, as this year comes to a close it is still a good idea to review your tax situation before the end of the year to determine if there are any moves that you can make to lower your 2009 tax bill before it is too late.

Congress is considering many items now. All of the following items are on the table and have to be factored into your plan: Health Care Reform, Additional Stimulus Bills, Extension of Tax Breaks.

Congress is working feverously to figure out a way to fund health care reform. A surtax on higher-income taxpayers is one proposal, another proposal is to charge a tax on high-dollar health care plans. Further, changes are being proposed to Flexible Spending Arrangements and Health Saving Accounts. Flexible Spending Arrangements are likely to be capped at $2500, and the additional tax for HSA withdrawals before age 65 that are not used for qualified medical expenses could double. Other changes are proposed to these plans, so we will have to watch them closely.

Congress will most likely extend unemployment benefits before year end. They have already extended the new home buyer credit. Many other extensions are in the works.

These items have to be factored into your tax plan. You also need to consider the effects of the Alternative Minimum Tax in your plan. Not to mention possible tax ramifications of debt restructuring, or debt relief.

The sooner you address these issues the better chance you will have to lower your tax bill.

Lower Self Employment Taxes for LLC Owners

2009-10-23T23:39:00.000-07:00

We have developed a technique based on a proposed IRS regulation that allows for the bifurcation of the LLC interest, whereby each owner would own a managing member, and a member (investment) interest. Rather, than just a managing member interest. This requires that the company be a non-professional type business, and that the allocation of the member/managing member interests have substantial economic effect.

If this is the case and the managing members receive guaranteed payments that are reasonable compensation for services provided to the LLC, then the managing member interest would be subject to self employment tax and the member interest would not be subject to SE tax. This is much the same way that an S-Corporation works.

But remember, that this is based on a proposed regulation, and is not without risk. It would not be subject to judicial review, but the IRS could not charge penalties if you relied on it. If you own an LLC as a managing member, and would like to structure it such that you could lower SE tax, please contact our office for an appointment at 714-708-2593.

Tax Deadline is October 15, 2009

2009-10-13T22:08:00.000-07:00

It is now upon us. If you extended your individual income tax return prior to April 15, 2009, the day has come to file. October 15, 2009 is the last day to file, and there are no additional extensions available. If you file past this date you will be late and incur a late filing penalty.

If you cannot possible make your filing by October 15, 2009, you need to file as soon as possible after that date as you can. It is a crime to not file an income tax return. President Obama has proposed raising the criminal penalty for non-filing to that of a felony. That tells me that the government is taking non-filing very seriously.

Bottom line, file on time if at all possible.

Home Mortgage Interest Deduction

2009-10-08T14:07:00.000-07:00

How Much of My Mortgage Interest Can I Deduct?

So just how much interest can you deduct from your home loan? This is a basic tax question that is often answered incorrectly. You may not deduct interest on more than $1,000,000 of home acquisition debt for your main home and secondary residence. Home acquisition debt means any loan whose purpose is to acquire, to construct, or substantially to improve a qualified home. The limit is reduced to $500,000 if you are married filing separately.

Just because you receive a Form 1098 from your lender, it does not mean that you get to deduct 100% of the interest indicated. If you refinance your home in an amount greater than the original acquisition loan, you cannot deduct the interest that is represented by the loan amount that exceeds your original acquisition loan. Also, you can only deduct the interest if you are responsible for the debt, and actually pay the interest. However, the U.S. Tax Court has allowed a joint obligor to deduct their payment of interest on behalf of another obligor, if the payment was made to avoid loss of the property, and the payment was made from the separate funds of the obligor claiming the deduction. This can become important in this economic environment where so many mortgages are going into default.

Further, you can deduct interest on an additional $100,000 of loan amount for a home equity loan. The home equity debt limit is reduced to $50,000 if you are married filing separately. Your deduction for home equity interest may be reduced even below the $100,000 limit if your indebtedness exceeds the fair market value of your home.

What Can You Predict for Our Tax Rates in the Future?

2009-10-02T00:36:00.000-07:00

What can you predict for our tax rates in the future? This is a question that I get asked quite a bit. If you remember, President Obama said in his campaign that he would raise taxes for the rich, and this was defined as those that have taxable income in excess of $250,000. These are the same folks that are already footing about 65% of the taxes already. In fact, if you taxed these "rich" people at 100%, it would not solve the trillion dollar annual deficit we are now expected to carry for the forseeable future. Next thing to consider is that the people making over $250,000 are generally the same people that are providing the jobs. When they are over taxed, they hire less and make cutbacks. You can see where I am going here.

How does this affect future tax rates? Well, if we cannot get enough taxes from the "rich", and Congress does not cut spending (they have not shown a propensity to do this), then Congress must raise taxes further. This will mean lowering the bar from the $250,000 level. My best guess is that Congress will have to raise taxes for those that make $75,000 and above to make any headway on the deficit, and fund current programs. Thus, your tax planning for the future should consider this as a highly probable event. Consult with your tax adviser to determine what this means to your individual situation.

Required Minimum Distributions on Retirement Accounts

2009-09-29T13:25:00.000-07:00

Required Minimum Distributions ("RMD"): IRS Grants Relief with Notice 2009-82

There is good news if you withdrew required minimum distributions in 2009 without knowing that the 2009 RMD was waived by the Worker, Retiree, and Employer Recovery Act of 2008. The IRS has extended the deadline to November 30, 2009 for you to put the money back so that you do not have to pay tax on the unnecessary withdrawal. The authority for this is Notice 2009-82.

Under this Notice, individuals generally have until November 30, 2009, or 60 days after the date the distribution was received, whichever is later, to roll over the distribution.

So, You are going to short sale your home.

2009-09-27T22:23:00.000-07:00

There is a second wave of foreclosures that are in process now. People that can afford to pay their mortgage, but choose not to, because they are so upside down on their real estate that there is little or no possibility of recovery in the near future. One might term this a strategic foreclosure. They typically are short sales or deed in lieu of foreclosure transactions.

If you are considering one of these transactions, please consider it carefully with your tax adviser. If you pay less back to the bank than you borrowed, then you have income from debt relief. When you borrowed the money, it was not taxable. However, when you do not pay it back the portion that you short the lender by is income.

The next question you have to ask is whether the income is somehow excluded from taxation. The traditional relief comes under the code if you are either bankrupt or insolvent. Some relief may also be available if the home is your principal residence, or the debt was a purchase money loan. Your situation must be analyzed to determine if you fit within any of these exclusions. Otherwise, you have taxable income.

What Happens if You Can't Pay Your Payroll Taxes?

2009-09-27T00:08:00.000-07:00

You are a small business owner, and due to the current economic conditions, you used the funds that you set aside to pay your payroll taxes for other business expenses. Now, it is time to pay your payroll taxes and you do not have the money to pay them. This is a common problem right now.

What is going to happen and what can you do? First, make sure you file the payroll tax return that is due, whether you can make the payment or not, currently. Once this is done, if you do not make payment timely, the IRS will send you a letter to request payment of the taxes due. You should attempt to pay as much as you can now, because the penalties are stiff for non-payment (approaching 50%). Then, either you or your tax adviser needs to contact the IRS, and inform them of your situation and what you are planning to do. Within a short period of time the IRS will file a lien for the unpaid taxes, and possibly assess a trust fund recovery penalty against all responsible parties, making them personally responsible for the taxes. If you are going to make a partial payment on the taxes due, consult your tax adviser so that they can insure that the payments are being applied against the trust fund recovery penalty first. Now make it a priority to pay off the balance of the taxes due. Your tax advisor can discuss the possibility of a structured payment plan with the IRS to prevent enforced collection.

Is Tax Planning Illegal or Unpatriotic?

2009-09-24T21:58:00.000-07:00

I often get the comment "Isn't tax planning illegal, or at the least unpatriotic?" When I get this comment I love to quote the following case: Gregory v. Helvering, 293 U.S. 465 (1935). In that case, famed Supreme Court Justice Learned Hand was quoted as saying:

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

In fact, Congress establishes tax laws for the primary purpose of motivating our behavior. We get reduced capital gains tax rates to encourage us to invest. We get a deduction for home mortgage interest to encourage us to buy real estate. We get exemptions for children to encourage us to have families. The list is long and goes on and on. When we are taking advantage of a tax break, we are doing what Congress is motivating us to do through the tax code.

So, go ahead and do some tax planning and make Congress proud.

Life's short. Don't represent yourself in an IRS audit.

2009-09-24T00:23:00.000-07:00

Have you received a letter from the IRS? Go ahead and open it. I can't tell you how many clients come to me with unopened letters from the IRS. The clients simply don't want to see the "bad news." Next, if you are being audited, do not contact the IRS yourself. This is like representing yourself in a criminal matter. Remember, if you represent yourself in a criminal case you have a fool for a client. Same holds true for an IRS audit.

Call a qualified tax attorney if you get the IRS letter. Otherwise, if you start representing yourself you may cause damage to your case that is irreversable. Tax attorneys know how to deal with the IRS, and can establish a strategy for your case from the beginning to get the best result possible for your particular situation. This may include keeping you out of a criminal investigation. In the long run your savings with the IRS may exceed what the tax attorney will charge you.

S-Corporations Can Reduce Self - Employment Taxes for Small Businesses

2009-09-22T21:21:00.000-07:00

Is there a way to reduce the amount you pay for self-employment taxes on your small business? An S-Corporation may be the answer for you. An S-corporation is formed in the same manner as a C-Corporation. However, once the corporation is formed you must elect to be taxed as an S-Corporation for tax purposes under Subchapter S of the Internal Revenue Code. You then pass-through the income and expense items of your corporation to your personal return where it is taxed at your individual rates.

So what is the advantage of this structure over just operating as a sole proprietor? Well, as a sole proprietor you pay self employment tax on all of the income you make fully up to the FICA limit, and Medicare on the entire amount with no cap. However, with an S Corporation you only pay self employment taxes up to the salary you claim. What is the catch? You need to at least pay yourself a reasonable salary amount, which will vary for each individual/business. Your tax advisor can help you determine this amount. The bottom line is that you can save a significant amount with this technique. So it is worth taking a look to see if it can help you with your own situation.

New Homeowner Tax Advantages

2009-09-21T14:13:00.000-07:00

So you just bought your new home and you are wondering what tax advantages it is going to offer you, or everyone has been telling you to buy a home for the tax advantages. What does this mean? Well, as a new homeowner you will be filing a Schedule A with your tax return to take advantage of owning your new home. On this form you will be able to deduct the interest that you pay on your mortgage for up to a loan amount of $1,000,000. You will also be able to deduct your property taxes that you pay for the property. These deductions will directly offset your wage income when it is deducted from your adjusted gross income in determining your taxable income.

You may also be entitled to a first time homebuyer credit. This credit is as much as $8,000 and is available for a limited time to first time homebuyers. A first time homebuyer is defined as someone that has not owned a home within the last three years. All purchasers must be first time buyers to qualify.

Net Operating Loss Carrybacks Can Enhance Your Cash Flow!

2009-09-20T16:30:00.000-07:00

Are you looking for a way to increase your cash flow in a troubled economy? Well, look no further -- The Federal government is here to help. One of the favorable changes that the Obama administration made to the tax code was to allow for a five, rather than the previous two, year carryback of net operation losses.

What does this mean to you? If you had a loss from your business in 2008, and had income in any of the previous 5 years, you may be eligible for the 5 year net operating loss carryback provisions. These provisions allow you to make a request for a refund, by carrying back your losses to the income years. How long does this take? Not long. We have averaged a turn around of about 2 to 3 months for most refund requests. The Treasury has issued regulations that have clarified many of the issues that come up when requesting a refund. Some of the issues can be complicated, but a tax advisor well versed in this area should be able to lead you through it. Best of all, the refund is not taxable income.