Posted by taxguru on February 10, 2005
They’ve set up a new website to publicize their activities at: http://taxreformpanel.gov/ I’ve already added it to my preset group of tax sites that I pop up and check every day.
I’m still waiting for them to discuss the various reform issues with some of us real life tax practitioners. They’re starting off with a number of bureaucrats and academicians.
Posted in Uncategorized | Comments Off on Tax Reform Panel
Posted by taxguru on February 10, 2005
Posted in Uncategorized | Comments Off on The DemonRat Mantra
Posted by taxguru on February 10, 2005
Q:
Hi,
Was perusing your site and saw the wealth of information you provide. Clarifying question I did not find referenced:
If you purchase a qualifying vehicle (6,000 LB+ SUV) and take the $25K deduction in 2005 (regardless of if the vehicle is financed), can you sell that vehicle in ’06, purchase another qualifying vehicle, can you take another $25K deduction in ’06 (assuming the guidelines and limits remain unchanged)? My question is, if the guidelines for weight and maximum allowable deduction remained the same for the next five years, could you sell your vehicle annually, replace it with another qualifying vehicle annually, and take an annual 179 deduction each year?
Thanks for any insight you can offer.
Regards,
A:
You can buy new vehicles each year and claim the Section 179 for them, as long as each one meets the weight and over 50% business usage tests.
If you sell the previously deducted vehicles, you need to report the sales on Form 4797 and show anything that you get for it above its depreciated book value as depreciation recapture ordinary income. A sale only makes sense tax wise if the price you can get for it is less than the adjusted depreciated book value, so that you can claim the loss on Form 4797.
If you trade the old vehicles in on new ones, you will avoid having to report the gain because that will be rolled over into the new replacement vehicle on Form 8824. In regard to them claiming Section 179 deductions on the new replacement vehicles, you will only be able to do so on the additional amounts paid for the new vehicles after the trade-in allowance. To count the full cost before adjusting for the trade-in would be effectively double-dipping.
This is why it’s so important to keep tabs on the depreciation schedule for your business vehicles and why I am so upset when I hear that tax pros are not providing their clients with detailed depreciation schedules with their tax returns for both the year being prepared, as well as the following year. Most tax prep programs will print out both years’ schedules automatically. To not provide clients with those detailed schedules is wrong.
Good luck. I hope this helps. Your personal tax pro should be able to give you more specific advice for your circumstances.
Kerry Kerstetter
Posted in 179 | Comments Off on Section 179 Recapture
Posted by taxguru on February 10, 2005
Q:
Kerry,
I ran across your website online and I like the way you think. I have a tax question and I was wondering if you mind answering it. It is my understanding that you do not pay taxes on borrowed money. Well what if you know you are about to sell property and have a bundle of equity built in. Traditionally this would be capital gains and we don’t like those so we would put the money into a tax deferred account (1031 exchange) but with a tax deferred exchange we are not allowed to touch one red dime—it must go towards the purchase of property. What if I was to refinance this property pulling a portion of my equity out. At this point it is equity and borrowed money. Would I have to pay tax on this for the year as income or would it be considered borrowed money of which tax is not owed?
Thank you,
A:
While there have been occasional discussions about making cash taken out of a property’s equity in anticipation of an exchange taxable, those have never gotten very far. As it stands, if you borrow money against your rental or investment property, the proceeds are not taxable as long as the refi is a completely separate event from the exchange transaction.
However, if you sell the property, and don’t do a 1031 exchange, the relief of debt (paying off the loan) is treated the same as cash proceeds. Many people make the mistake of assuming that only the actual cash received is counted.
If you do a 1031 exchange after having refinanced, there will obviously be less cash to reinvest via your facilitator. This means that the additional amount of the cost of the replacement property will have to be financed with a loan. Basically, the loan on the new property should be at least as much as the loan on your old property. As with any exchange, whatever you miss your target replacement price by will be taxable as boot.
Your personal tax advisor should be able to help you with more specifics for your situation.
Good luck.
Kerry Kerstetter
Posted in 1031 | Comments Off on Refinancing Prior To Exchange
Posted by taxguru on February 10, 2005
Q:
Subject: Stephen Moore’s Tax Plan
Mr. Kerstetter,
First let me say thanks to both answering my question about DoD Social Security contributions for military members and then for posting the letter “In the Same Boat” on 2/2 on the socialsecuritychoice.com blog.
Secondly, I went over to your personal blog site and saw three posts about Stephen Moore’s postcard tax plan. The original one on 1/30 linking to his WSJ article
The second one on 2/2 by Bruce Bartlett at the Washington Times was negative
The third one on 2/4 by Terry Savage at the Chicago Sun Times was positive.I was curious about your opinion on the matter or to any other flat tax proposals.
I know you’re busy, but would appreciate hearing from you. If you already have a published opinion on the matter, that would be fine if you could send the link.
Thanks
A:
I don’t seem to be able to find the time to discuss the various pros and cons of a flat tax in as much detail as I would like. If you do a search on my blog, you will find several previous mentions of flat tax ideas.
As the articles you cited mention, there are plenty of pros and cons to every taxation scenario, including the various flat tax proposals.
As should be very obvious in all of my writings, I have always been a big opponent of the graduated tax rate structure in this country that penalizes success. I have never been shy in pointing out that such a method of wealth redistribution has its roots in the Communist Manifesto, in spite of claims by many on the left claim that it is from our Constitution. Replacing the punitive rate structure with one single rate would be a great step towards fairness.
What I have long warned about is that it is a fallacy to think that any flat rate tax system would put the IRS out of business or reduce the workload for us tax pros. The fun and games are with arriving at the taxable income figure. Figuring the tax, whether with a single rate or the current sliding scale, is the easy part. To keep everyone honest would still require the IRS to operate just as they do now. The only way to really get rid of the IRS would be to repeal the 16th Amendment and replace the income and estate taxes with a national sales tax, as proposed under the Fair Tax plan.
Stephen Moore’s idea of allowing people to compute their taxes under two different methods and then choose the lower one is an interesting concept that could be a way to make a smoother transition to an easier method. From my perspective as a tax preparer, I can see that such a plan would create even more work for us, since we would have to prepare two different returns for clients.
If any of the big tax reform proposal ever makes it further than just idle talk, I will probably pipe up with more commentary.
Thanks for your interest.
Kerry Kerstetter
Posted in Uncategorized | Comments Off on The Flat Tax Debate
Tax Guru - Ker$tetter Letter 