Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for June, 2010

Rebirth of the Death Tax?

Posted by taxguru on June 24, 2010

Three Senators Call For Billionaire Estate Surtax –  The grave robbing ghouls in Congress can’t even tolerate the current one year break in the estate tax.  Now they are trying to reenact it retroactively to the beginning of 2010 and make it even more confiscatory for the evil rich. 

There was a time in this country, prior to 1993, when the concept of retroactively increasing taxes to ensnare people who acted on the laws that had been in effect, was considered to be illegal and unfair to the max.  The Clinton gang tossed that concept out with their 1993 retroactive tax hikes, and with the current regime’s utter contempt for any constitutional limitations, we can be sure none of the bozos in power are losing any sleep over the possibility of retroactively changing the estate tax to steal more money from people.

This is just one more of many critical reasons to kick the DemonRats out of power in November.

Another good estate tax article from Forbes:

How To Protect Your Family From Estate Tax Uncertainty

 

Thanks to Forbes Executive Editor Janet Novack for the heads-up on this.

 

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Posted by taxguru on June 23, 2010

IRS Audits Block 10% of First-Time Homebuyer Credits –  IRS has its hands full trying to ensure that the right people are utilizing this special new credit. Although IRS claims to have prevented 1,295 prison inmates from claiming this credit, you have to wonder how many were able to fool the IRS by not using their prison addresses on their 1040s.

 

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Corp Tax Year Selection

Posted by taxguru on June 19, 2010

Q:

Hello…I recently file my articles of incorporation and EIN number. And I wanted to know if it was too late to change my tax year since I already filed a ss-4 and plan on becoming a S-Corp, I read your post on how to choose a tax year and wanted to take your advice and file my Taxes in June. I noticed they ask to pick you fiscal year on the 2553 document to become an S-Corp, could this be an opportunity to change it here.

Any advice or insight you have to give would be greatly appreciated. Also if your services are available for consulting in anyway I would also be interested in hearing about it as well.
Thanks

A:

You definitely need to start working with a professional tax advisor ASAP before you take one more step with your new corp; especially before filing the 2553. I have my doubts as to whether you have evaluated all aspects of your situation thoroughly enough to warrant the decision to choose an S corp as your most appropriate entity type.

Unfortunately, I am still not caught up enough with my current client load to be able to take on any new ones; so you should check with the names of other tax pros on my website.

While you referenced my article on choosing a corp tax year, you are missing some key points. The option to have the corp’s tax year end at a date different than December 31 only applies to C corps.  S corps are required to use a calendar year, ending December 31.  The only main exception to this is if the shareholders have a tax year other than 12/31, because the IRS’s goal is to match the S corp tax year to that of the shareholders.

As you may have seen in the instructions for the 2553, a different tax year can be chosen if there is a strong business purpose for that being the case.  Saving taxes, which is the main benefit of using a different tax year, is not an acceptable justification for IRS because, as you well know, their job is not to help anyone reduce their tax bills. Bottom line, it is for all intents and purposes an impossible task to convince IRS to allow a different tax year than 12/31 when the shareholders all have a calendar tax year for their 1040s.

So, if you are positive that an S corp is a good idea, there is no option with the tax year.  It must be December 31.

If you and your professional tax advisor conclude that a C corp would work out best for your situation, the tax year can end at the end of any month, regardless of what you entered on the SS-4.  As I have said many times on my blog and websites, until you file the first 1120, the C corp’s tax year is still subject to change.  Once the first 1120 has been filed with IRS, that officially locks in the tax year for that corp.

Good luck.  I hope this helps you understand the situation a little better and you see why proceeding any further without competent professional assistance is extremely dangerous.

Kerry Kerstetter

 

 

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Home Selling Costs

Posted by taxguru on June 19, 2010

Q:

Subject: question about selling the house

Hi Sherry and Kerry,

My house is on the market.  I know that I will have to pay for mold and radon mitigation.  If I do the work now before I have a contract on the house, can I deduct the cost as an expense of selling.

A:

Those kinds of costs can be counted as either selling expenses or as additions to the cost basis of your home; both ways reducing your gain on the sale.

Whether this actually will save you any real income dollars will depend on the size of your profit.  The first $500,000 of profit is completely tax free.  Any profit above that $500,000 will be subject to long term capital gains tax.

I haven’t been following housing values in your area; so I’m not aware of what kind of profit you are expecting to make.  If it will be less than $500,000, it will be tax free; so any additional costs you incur won’t save you anything in taxes.

I hope this helps and isn’t too confusing.  Let me know if you have any more questions.

Kerry

 

 

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Vehicles Over 6,000 Pounds

Posted by taxguru on June 19, 2010

Q:

Subject: purchasing a business vehicle over 6000 lbs.

Kerry,
I read your article with interest as I am about to purchase a new (to me) used vehicle. I am a real estate broker in Aspen, Colorado and use my vehicle for business about 85-90% of the time. Do you have a current list of vehicles that qualify?

Since I live in the mountains (it’s snowing as I write this) and since I do a lot of large acreage land sales bashing around in the sage brush, a large SUV fits my needs but I want to make sure it qualifies for the tax break. There seems to be a lot of varying opinions on what constitutes 6000 lbs of curb weight vs. carrying or load weight.

Any information you can share with me on this matter is greatly appreciated.

Regards,

 

A:

I long ago discovered that it wasn’t practical for me to try to maintain a list of all vehicles that weigh more than 6,000 pounds.

With new vehicles, it’s easy to determine the weight because the salespersons are eager to help you qualify for the much more lucrative deductions.

For a used vehicle, you may want to use a simple Google search for the GVW of the vehicle you are considering.  That’s what I do when clients send me their tax info and I need to know whether a newly acquired vehicle is heavy enough for the large Section 179 deduction.  I routinely use Google to locate this info.  That will give you an approximate idea for the models you are looking at.

You can then confirm the qualification of a particular vehicle that you are considering the purchase of by asking the current owner what the documented GVW is on his/her ownership records.  That would be proof positive of the actual weight.

If the documented weight is slightly less than 6,000 pounds, the vehicle may still qualify if heavy enough permanent accessories have been installed on the vehicle after the original weight was documented to push it over the magic 6,000 pound threshold.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

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Calif FTB Targeting Out of State CPAs

Posted by taxguru on June 16, 2010

Contrary to popular belief, IRS isn’t the most ruthless tax collecting agency in this country.  In all of my years in this profession, I have seen countless examples of how much more aggressive the California Franchise Tax Board has been in trying to collect taxes than the IRS.  For decades, FTB has even trained IRS in aggressive tactics.  FTB will levy accounts and put liens on assets much quicker than IRS will.  This includes people and companies not even located inside the PRC.  This has always been the case.  With the once Golden State on the brink of bankruptcy, I’m sure it will get much worse as the rulers in Sacramento become ever more desperate for cash by any means possible, legal or not.

In an example of these new tactics that hits me directly, I just became aware of one of the FTB’s new strategies to investigate people who have California professional licenses, but are located outside of that state to see if they should be paying taxes on Calif. source income.  I was reading the latest newsletter that arrived from the Calif. Board of Accountancy in today’s snail mail and found this item on Page 18.

Things to Know… Franchise Tax Board Requests for Out-of-State Licensee Tax Return

Do you presently live and work out of state, but continue to maintain an active California CPA license? The CBA has some important tax-related information for you. Required by law, the CBA must provide the FTB, upon request, specific information including your name, address, social security number, and license status. The FTB may then use its authority under the Revenue and Taxation Code to generate a request for tax return information from any California-licensed CPA who does not file a California tax return, regardless of his/her state of residence, and require you to provide proof that you did not earn income in California. Failure to respond to the FTB request for tax return information for any reason, including non-receipt of the request, can result in FTB filing a lien against you. The CBA does not receive any notification when such a demand letter is generated by the FTB and the CBA does not have access to any information in this regard. If you have any questions regarding this process or want information, please contact the FTB at (916) 845-7057.

How this is enforced we’ll have to wait and see.  For CPAs, and anyone else, who do physically work in multiple states, their income does need to be allocated between the different states and income tax returns filed for each one that has an income tax.  It’s common practice for professional entertainers and athletes; but also applies to everyone else.

Since I have not been inside California since September 1993, I have not reported any California source income or filed a personal California income tax return since the one for 1993.  I would bet money that FTB will use my out of state license info to inquire about my Calif tax obligations.  FTB has a mixed record in regard to being fair and cooperative in administering the tax laws; so I can only hope that they are fair with me and other persons in the same boat.  As always with tax matters, we have to deal with the fact that they can operate under the beginning presumption that we are guilty of owing taxes and we will have the burden of proving otherwise.

Those of us who listen to Rush Limbaugh know that he has had to go through this same kind of state tax audit every year since he moved from New York to Florida.  Because his show is technically broadcast from a New York facility, the State of New York starts out with the presumption that all of his broadcasting income was generated from inside that state and he is forced to provide documentation of every day during the year that he claims to not have been inside New York.  Rush has been very open about this and even took a vow not to ever do any more shows from the New York facility.  I hope he sticks to that resolution because tax hiking politicians, such as the bozos in Albany, need to know that people will no longer just bend over and accept their higher taxes.  

I will report on my experiences with the Calif FTB in regard to this matter and would appreciate any other CPAs in the same situation sharing their experiences with me and my readers.

 

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Posted by taxguru on June 11, 2010

Tobacco Taxes Finance Terrorism – Another interesting example of the unintended consequences of tax hikes that are put into place by short-sighted politicians who are too stupid to understand that tax increases motivate behavior in many different ways. There’s a lot of money to be made transporting cigarettes from low tax to high tax states.

Tax Hikes and the 2011 Economic Collapse – Famed economist Arthur Laffer has dire predictions for the 2011 economy due to businesses front-loading their income into 2010 in order to avoid the humongous tax increases next year as the Bush tax cuts expire.

Nobody Likes a Tax Hiker – It’s great when voters get a chance to really punish a RINO tax hiking lying politician, as they did in California to this scumbag.  Of course, as with pretty much all ousted politicians, he will most likely go on to a lucrative multi-million dollar career as a lobbyist, bribing and otherwise influencing his former colleagues on behalf of his well paying clients.  

Reforming the ‘Glorious Privilege.’ Why the tax code is like daytime television. – George Will looks at possible changes in taxes.  I’ve recently started watching Glenn Beck’s TV show and he makes it plain that his least favorite US President is Woodrow Wilson, for several very valid reasons.  If this quote that George Will attributes to Wilson is accurate, it’s definitely another good reason to despise him.

Woodrow Wilson, that incessant moralizer, said paying taxes is a “glorious privilege.”

Obamacare’s Avalanche of Paperwork – Deroy Murdock looks at the increased requirements for the filing of 1099 forms under the new socialized medicine scheme that our rulers are forcing down our throats.

Frequently Asked Questions on the Expiring Bush Tax Cuts – Useful info from the Tax Foundation.



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Gifting A Home

Posted by taxguru on June 10, 2010



From a CPA:

Subject: Gift tax

Hi Kerry,

I have a question for you. I will be the first to admit that I am not well versed on estate and gift taxes. A new client of mine is thinking of giving his current residence to his father (probably a bad idea). Based on what I have read, my client would have to pay a gift tax on the transfer equal to the fair market value of the house multiplied by the tax rate in effect at the time of transfer. Is that correct?

Further, am I understanding correctly that the father’s basis would be the son’s adjusted basis? This hardly seems fair in that since a gift tax has been paid on fair market value at the time of transfer, why wouldn’t the father’s basis for a future sale be the value of the house at the time of the gift. Perhaps I’m reading the regs incorrectly. Please enlighten me.

Thank you,

A:

There are a lot of issues to be reviewed here.

First is whether a gift worth more than the $13,000 annual exclusion will even require the payment of an actual gift tax.  There is still a lifetime exclusion of one million dollars per person; so that is generally needs to be used up before any gift tax is required to be paid.  You didn’t specify the value of the home or any prior use of the lifetime exclusion; so I don’t know if the gifted home will trigger an actual tax obligation.

Next is the calculation of the gift tax.  It is not a flat rate as you seem to believe it to be.  It is a “progressive” graduated tax rate schedule, much like the one used for income taxes.  In fact, it is the same rate schedule for Estate taxes on Form 706.  As you can see, the rates range from 18% up to 45% for 2009.  For 2010, the maximum rate is 35%.

Attached are two versions of the gift tax rate schedule; one from the official 2009 IRS instructions for Form 709 and one from Page 21-1 of the 2009 Small Business Edition of TheTaxBook.

Next is the issue of the cost basis for the gift recipient (aka Donee).  It has always been an unfair double standard that the gift tax is based on the current fair market value, while the basis for the recipient is the same as it was for the previous owner (donor).  This creates some critical tax planning issues when dealing with gifts of highly appreciated assets.  The donee is literally accepting personal responsibility for the previously accrued capital gains taxes on any future sale.

In this particular situation, there may be an opportunity to minimize overall taxes.  If the current home owner qualifies for the Primary Residence Section 121 tax free exclusion of $250,000 of gain per person, he may want to sell the home to his father at the current market value.  This will establish the current market value as the cost basis for the father.

If the home had been used for rental or other business purposes and has a lot of accumulated deprecation that would need to be recaptured under a sale, that might not be a wise move tax-wise.  You would need to crunch the numbers to see the trade-off.  A gift of depreciated rental property would transfer the future capital gain to the father, but if he lives in the home long enough, he may be able to use the Section 121 exclusion to shield all or part of the gain from actual taxation.

One other misconception that I noticed in your email.  If there is gift tax required to be paid, that amount can be added to the cost basis of the home for the father.  It’s obviously not as good as using the full market value; but it is a small help in reducing his future profit.

I hope this helps you see that there are a lot of issues to be considered when discussing gifting plans with your clients.

Kerry Kerstetter

Follow-Up:

Thx Kerry. Forgot about the lifetime exclusion.

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

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Debt Relief Is Same As Cash Sale

Posted by taxguru on June 3, 2010

Q:

Kerry, need to know this am if you can answer please. I have an offer on a lot I own. If I had the buyer pay a note directly off for me, would the sale have to be reported to IRS and would the bank report?? Thanks.

A:

The answer is yes.  IRS considers relief of debt (the pay-off of a loan) to be the same as a cash sale.

Kerry

Follow-Up:

Figured as much. Thanks.

 

 

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There seems to be a Fantasy Camp for everything else…

Posted by taxguru on June 2, 2010

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