Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for February, 2005

Posted by taxguru on February 28, 2005

Former communist countries lead the way in adopting flat tax rates – This seems to be a healthy repudiation of the “progressive” tax rate structure that  is part of Karl Marx’s Communist Manifesto.  It’s too bad we can’t seem to get rid of it here in the USA.

 

Due Diligence Is Essential With Latest Loan Pitches – Check that fine print because a lot of dastardly lenders will sneak all kinds of expensive traps in there.

 

IRS Announces the 2005 Dirty Dozen Tax Scams – For the benefit of morons such as Adam, who continues to write me insisting I am wrong and Irwin Schiff is a tax genius, here is number two from the IRS’s list:

Frivolous Arguments. Promoters have been known to make the following outlandish claims: that the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; that wages are not income; that filing a return and paying taxes are merely voluntary; and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. Such arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law. 

 

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Posted by taxguru on February 27, 2005

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Posted by taxguru on February 26, 2005

Southern States See Green in Cigarettes – Might as well squeeze some more money out of the nicotine addicts before they die off.

 

‘Accidental’ Landlords Face Headaches, Costs – There are more potential hassles than most people think, especially in landlord hating states, such as the PRC.  Even though we have two extra houses on our ranch here in the Ozarks, we have refused to rent any of them in spite of several requests.  We are still smarting from the terrible experience we had renting the second home on our California ranch back in the early 1990s to a psycho who was trying to steal our property by  following Michael Keaton’s character’s strategy in the movie Pacific Heights, the scariest movie ever made for landlords or property owners.     

 

Are Foreclosure Deals Too Good to Be True? – They’re not as easy to do as touted by the hucksters on late night TV, who make their money selling books, tapes and seminars, and not by actually doing real estate deals. (I used to prepare tax returns for some of them; so this is fact and not speculation.)

 

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Offending Tax Protestors

Posted by taxguru on February 26, 2005

Deep down, I know it’s not politically correct to make fun of people with low intelligence and learning disabilities; but these morons who continue to hold onto the idiotic tax protestor arguments deserve it, especially this time of year.

Adam, the tax protestor whose letter I shared yesterday, wasn’t happy with my response.  It sounds as if he is a lonely fellow and has a lot of time on his hands, so I’m sure he would love to hear from others on this matter as well.

From: Kungfurez@aol.com

Subject: name calling

Kerry,
       I understand your frustration after having dealt with this issue for so long. While I can see that you no longer want to deal with this issue, I found it a bit insulting that you would respond to my questions with more name-calling. I did file taxes last year and don’t need you telling me that I’m a “protester” because I have some legitimate questions that your webpage didn’t answer. This is the same name-calling that labels someone protesting our government’s position in Iraq as “unamerican.” I have written to acknowledged tax protesters and asked them a slew of questions as well, often challenging their less than adequate answers. Perhaps your ideal client is one who just hands you a check and doesn’t ask any questions.
       I’ve gone to quatloos. They questioned whether Joe Bannister actually even attended the college he says he did, which is just plain stupid as a 2-minute call to the university could verify or disprove that information. Again more name calling and less factual information. You could have responded to me with something like, “I no longer deal with this issue. Here is a webpage you can go to for more information.” Yet more name calling to someone asking legitimate questions–whether you heard these questions before or not–does not in my mind strengthen the argument. I would suggest you remove your webpage which contains no information and just name calling if you don’t want anyone to pursue any questions regarding it.

Adam

My Reply:

Adam;

I’m not sure what you consider to be name calling.  If it’s referring to tax protestors like Irwin Schiff as “nut jobs,” that is simply a statement of fact.

If you are upset about being considered as a tax protestor just because you sent me the exact same letter as hundreds of other tax protestors have, that’s your problem.  You could have phrased things in a more original fashion so as not to be lumped together with the rest of your ilk.

I was actually quite lenient with you in my earlier email.  Anyone who is more than 12 years old who doesn’t understand that income taxes are not voluntary has some intelligence problems that I didn’t want to be insensitive to.

If you don’t like my web sites, just don’t visit them any more.  There are millions of others that will more than keep you occupied.  Most of them use words that are simple enough even for folks like you to understand.

Kerry Kerstetter

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Posted by taxguru on February 25, 2005

IRA Rules Made (Somewhat) Simple

 

Feds Cracking Down on Get-Rich-Quick Schemes

 

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Tax Protestors Still Upset With Me

Posted by taxguru on February 25, 2005

Q:

From: Kungfurez@aol.com

Subject: question from your website about a “voluntary income tax”

Hello,
    Thank you for your website’s attempt to help clarify some questions regarding the income tax. I was looking into and researching a lot of these “voluntary income tax” claims, including statements made by ex-IRS agents, CPA’s and lawyers.
     My conclusion is that I am certain that there are many scam artists around. I have not come to a conclusion if the income tax is voluntary or not. You say how if someone fails to file tax returns the IRS “is willing to use force.” This doesn’t answer anything regarding the issue of whether the filing and paying of income taxes are voluntary and only raises the question of whether or not the IRS is correctly applying the law or, in Irwin Schiff’s words, are behaving like a “federal mafia.”
       I have researched the constitutionality of the income tax as well. What I don’t understand, and I hope you can clarify for me, is this: if the Constitution allows for direct apportioned taxes and indirect unapportioned taxes, and if the 16th Amendment, according to a Supreme Court Case, offers “no new powers of taxation,” where does the income tax fall? It is clearly a direct, unapportioned tax, isn’t it?
       You said that mentioning these arguments in front of an IRS employee will result in an automatic $10,000 fine and that constitutional protections are “null & void when it comes to taxes for the federal government.” Can you show me where it says that a Citizen’s constitutional protections regarding taxes for the federal government are null and void? I personally am not proud of a system that will result in a $10,000 fine for just posing a question, much like the questions I’ve posed for you in these emails. In the mission statement of the IRS it states that one of their goals and duties is to make the code clear to the Citizens. If asking questions results in large monetary fines then this is clearly a bogus statement.
       I remember seeing a report where a New York Times reporter asked the IRS Commissioner to respond to the claims that the income tax is voluntary and if he could directly answer where in the IRS code it says that one is liable and he answered with, “Ever since I was a young man and started working I felt the desire to contribute my share to the country…” While this can tug on a few heartstrings, any investigator like myself can see that that didn’t answer the question.
       I don’t want you to think I am being difficult or a “tax protester.” Like Commissioner Rossini, I too have paid income tax since I started working. But I am not satisfied with simple name-calling and would like it if you could provide me with some answers–if you are capable–starting with:

-The question of the constitutionality of the income tax with respect to the 16th Amendment providing “no new powers of taxation,” and
-Where it says that all constitutional protections are null and void when it comes to the issue of federal government taxation.
-why does the IRS constantly use the term “voluntary compliance” when the word “compliance” would imply that it is done voluntarily anyway?

  Thank you so much for your help.

Sincerely,
Adam

 

A:

 Adam:

I am very familiar with the tax protestor movement’s long running attempts to muddy the waters by trying to force us tax practitioners to answer a slew of ridiculous questions, such as those you posed here.  I did go through those motions several years ago and do not have the time to do any more of that.  It is not my place in the big picture, or that of any tax practitioner, to defend the IRS or the tax code against every crazy argument that can be conceived by nut jobs who seem to be more interested in selling their books, tapes and seminars than in actually affecting real change in this country’s tax system.

If you are serious about researching the tax protestor arguments, you should start with the info on the Quatloos website.

You claim to not be a tax protestor yourself, yet your letter resembles exactly hundreds of others I have received from tax protestors over the past decades, each claiming to be doing independent research on the legality of the tax system.  You need to come up with a new angle because this one is worn out.

Kerry Kerstetter

 

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State Tax Refunds

Posted by taxguru on February 25, 2005

Q:

Subject: Taxing Tax Returns

Mr. Kerstetter,

How is it that a personnel tax return from the previous year can be taxed?  This seems like double taxation on the income.  Am I off bases here?

Love your web site. Thanks for taking the time to keep it up.

 

A:

 I think you are misinterpreting things in regard to the taxation of tax refunds.

There is no taxation of federal income tax refunds because there is no deduction for federal income tax payments.  Occasionally, IRS does include some interest with their refund checks, such as from amended returns.  The interest portion only is required to be reported on the taxpayer’s Schedule B for the year in which it is received, as is interest from banks and most other sources.

It is a different story for state income taxes.  Payments are deductible on the federal Schedule A for the year paid and withheld.  Under the long standing tax benefit rule, if any portion of the tax payments that were deducted on one year’s tax return, and actually resulted in lower federal income tax, is received back as a refund from the state, it is required to be reported as income on the 1040 for the year in which the refund was either received or applied against future year state taxes.

I am as vocal a critic of the tax laws and the IRS when things are unfair as anyone.  In this regard, there really is no double taxation.  If they didn’t have that requirement to pick up the state tax refund as income, it would be possible to literally manufacture bogus deductions.  A person could send in a bunch of state tax payments, deduct them on his federal Schedule A, and then get that same money back from the state tax free.  That wouldn’t be fair.

State tax refunds aren’t always taxable.  Obviously, they wouldn’t be for people who don’t itemize their federal deductions.  Likewise, for 2004 1040s, people who choose to deduct their sales tax instead of state income tax won’t have to pick up any state tax refund as income.  I have also seen several cases where people have had large negative taxable incomes on their 1040s. Since the taxable income would have been negative even without the deduction for state income tax, any subsequent refund of those state taxes is not subject to federal income tax.  This is a classic illustration of the tax benefit rule.  If the deductions didn’t result in any tax savings (benefit), its refund is not required to be included in future taxable income. 

I don’t want to imply that the current system is a perfect offset.  Deducting too much of something on Schedule A is not accurately repaid by picking that same amount up on Page 1 of the 1040 (aka above the line adjusted gross income).  As I constantly mention, increases in AGI trigger dozens of additional ways in which taxes are increased because so many phase-outs and denials of tax deductions and credits are based on AGI, including the taxation of Social Security benefits.  To be perfectly fair with this, the state tax refund would be entered as a negative amount on the following year’s Schedule A.  However, I’m not holding my breath for that to ever be the case.

I hope this adequately explains the issue of taxation of tax refunds and allays your fears of double taxation.

Kerry Kerstetter

 Follow-up:

 Wow.  Thanks for taking the time.  It is much appreciated.

 

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Handling Cash In 1031s

Posted by taxguru on February 25, 2005

Q:

Quick question.

Can an investment property be sold for cash and then the proceeds be used to purchase another investment property to qualify under 1031?

If the answer is yes – why would a facilitator be needed?
Or does the property actually have to be traded to defer the gain.

I am somewhat confused about the rules.

 

A:

Under Section 1031, you are not allowed to touch any of the proceeds from the disposal leg, even for a second.  If  you do have actual or constructive receipt of any cash, it is taxable to you, regardless of what you do with the money.

The facilitator parks the cash for you so that you won’t be considered to have had access to it.

We don’t make the rules.  Congress and IRS do that part.  We just help you understand and comply with them.

Kerry Kerstetter

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Use Of 1031 Proceeds

Posted by taxguru on February 25, 2005

Q:

Subject: Exchange Question
 
Can I payoff raw land I currently own with a 1031 exchange?
 

A:

 Absolutely not.

Proceeds from 1031 exchanges may only be used to acquire new like kind property. 

Kerry Kerstetter

 

Follow-up:

thank you, I’ll have to go to plan B ! We might can do some business
sometime. Thanks again.
 

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Section 179 & Depreciation For SUV

Posted by taxguru on February 25, 2005

Q:

Hi Kerry –
 
Section 179 deduction :
 
Purchase price of SUV (over 6000 lbs) $50,892. minus trade-in of 17,892.  total sales price is 33K which was purchased 12/2004. 
 
I use my vehicle 80% for real estate.  Does this mean I can deduct 80% of 33K up to 25K (or 80% of 25K)?
 
Also when calculating basis for future years deductions would that be $4000. (half of the difference between 33-25K)?
 
Thank you for your time!

 

A:

First, my standard admonition that anyone in the real estate profession, who is serious about minimizing their taxes, should be working with a tax pro, who would be able to answer questions such as these very easily.

In the example you gave, there are a few different things to consider. 

First is the amount that is eligible for the Section 179 deduction. For this, you can only count the additional cost paid for the vehicle, without counting the trade-in value.  In this case, it would be the $33,000 figure you mentioned (50,892 – 17,892).

Next is the maximum Section 179 which you may claim.  As you stated it was used 80% for business miles during 2004, we multiply $33,000 by 80% to arrive at $26,400.  Since you bought it after the law regarding SUVs changed in October, you may claim only $25,000 of the cost.

Next is the issue of the remaining cost basis for depreciation purposes.  You were on the right track, but you forgot to add in the adjusted cost basis of your trade-in vehicle.  Whenever there is a trade, the cost basis of the previous vehicle is added to the additional amount you pay for the new one to arrive at its cost basis.  You will need to refer to the depreciation schedule for your old vehicle to determine its adjusted cost basis at the time of the trade.  From that total, you will subtract the $25,000 Sec. 179 to arrive at the remaining cost for depreciation purposes.  From the other direction, that would give your new SUV a cost basis of $8,000 (33 – 25) plus the adjusted basis of the traded in one.

I hope this helps.  I also hope this illustrates why you need to use the services of a tax pro.

Good luck.

Kerry Kerstetter

 

Follow-up Q:

Thank you!!!

Do you know of good tax professional in the Boston (Billerica/Burlington) area?  I don’t even know where to start……

A:

Unfortunately, we don’t have anyone else to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you at:
http://taxguru.org/incometax/prepare.htm

Good luck.

Kerry Kerstetter

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