Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for January, 2004

Posted by taxguru on January 30, 2004

There’s such a thing as too much cash – Good summary of the rules requiring reporting of cash transactions of more than $10,000.

David Coursey has a good piece on using the do it yourself tax prep programs.

GOP Wake-Up Call. A conservative revolt over runaway spending.

Poor Props – Practically as often as they use the “for the children” line, DemonRats exploit the “poor” to justify all kinds of Marxist government programs. As with all such perceived problems, the worst thing for the Dems would be to actually make progress towards solving it. Their entire existence depends on perpetuating the suffering for all eternity. When was the last time a “temporary” government program was actually ended, or even scaled down? It always has to be made bigger and more powerful.

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Posted by taxguru on January 29, 2004

Fix The Flaw In The Freedom Index – There is some validity to the comparison between slavery and taxation. Every year that point is made with the announcement of “Tax Freedom Day” in early May. Up until that point, all of our labor is for the massas and we can’t keep any of it until after they are paid off. (Thanks to Donald Luskin for the heads up on this).

D-I-Y Tax Software – CNET’s reviews of the big selling consumer tax prep software for do it yourselfers.

Mutual fund whistleblower tells senators about beating – It’s not just a culture of silence that keeps employees from disclosing excessive fees charged to investors. There is actual physical violence on some occasions. Of course, what else would you expect from the Tony Soprano Investment Fund?

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Posted by taxguru on January 28, 2004

Now, why would conservatives be unhappy with Bush?

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Posted by taxguru on January 28, 2004

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Posted by taxguru on January 28, 2004

Haunted by tax cuts past – The DemonRats hate it when anyone reminds them that their hero, John F. Kennedy, believed in tax cuts.

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We all know how this turned out last time.

Posted by taxguru on January 28, 2004

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Harrison Abstract Update

Posted by taxguru on January 28, 2004

It’s been several months since there has been any news about the collapse of Harrison Abstract, with the potential loss of over a million dollars from Dian Brown’s looting of the escrow accounts. According to a recent hearing, everyone who made a claim against the company by the deadline will be paid in full. This is much better than the earlier report before the hearing, where it was expected that claimants would have to settle for a percentage of their losses.

I hope the IRS is checking on whether or not Dian Brown reported her loot on her tax returns. As we all know, our rulers consider all other kinds of crime (murder, theft) as small potatoes in comparison to tax evasion.

It’s been pretty well documented that, besides buying several expensive vehicles, Dian Brown used some of the stolen money to buy up a lot of real estate in the area. Last Friday, Sherry and I, as fire fighters with the Hilltop Volunteer Fire Department, helped battle a house fire up here on Gaither Mountain. We later learned, from the previous owner of that house, that Dian Brown is the current owner of that 98 year old house.

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Which is the "Smaller Government" party?

Posted by taxguru on January 27, 2004

Bush Creates New Department of Deficit Obliteration

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Posted by taxguru on January 26, 2004

It has long been said that the lottery is a tax on stupidity; so maybe this makes sense.

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Transferring Property

Posted by taxguru on January 26, 2004

There is a big difference in the carryover basis and potential capital gains taxes between having the transfer take place as a gift or as an inheritance. Besides the issues covered in the following email exchange, another common misconception I’d like to dispel is that a gift doesn’t have a zero cost basis just because the recipient didn’t personally pay anything for it. That idea has come up in a few recent conversations with clients.

I received the following question:

I am an attorney in Kentucky. I have a question about your website. You said that if a gift of non cash is made and the item is a highly appreciated one, the fair market value is used as the cost basis for the gift. In a case with a piece of real property here in Kentucky, the FMV of the property when the donor acquired it was $60,000. The FMV right now is $149,332. Would this be a situation where the FMV of the property becomes the recipients’ basis. If so, can you please point me to some statutory authority on this please. Thank you very much, keep up the good work on the website.

My response:

There seems to be a misunderstanding regarding the basis issue.

When a gift is made of an appreciated asset, the gift tax (Form 709) is based on the item’s current fair market value. However, the cost basis of that item on the books of the recipient is the same as it was for the item’s previous owner (giftor/donor) plus any gift tax that was paid on that item. As I explain to people, this means that responsibility for the future capital gains taxes on that item is also transferred to the recipient (giftee/donee). In your example, the $60,000 cost basis would transfer to the recipient.

This is quite different from how the basis is affected when items pass through inheritance. The fair market value at the time of death is used for estate and probate purposes, and it also becomes the basis on the heir’s books. The capital gain that had accumulated during the previous owner’s lifetime is literally wiped off the books. This stepped up basis for the heirs makes this one of the biggest tax saving opportunities available and is why gifting appreciated assets is not normally the best strategy.

This is also why the “swap ’til you drop” strategy of continuously using 1031 exchanges normally means that the accumulated gains are never subject to capital gains taxes. It has always bugged me to hear people say that they want to just sell their highly appreciated assets and pay the taxes so they won’t burden their kids with that responsibility. The exact opposite is true.

For decedents leaving an estate under the taxable threshold (currently $1,500,000), this means the gain is never taxed. For those whose estates are large enough to require an estate tax, there is a trade-off between wanting a high or low valuation on the estate tax return (Form 706) because of the normally higher estate tax rates.

I hope this clears things up.

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