Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Archive for February 11th, 2006

Paybacks can be a…

Posted by taxguru on February 11, 2006

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For those who believe everyone is a tax cheat:

Posted by taxguru on February 11, 2006

 

Think Twice Before Taking that ‘Standard Deduction’ – According to Gail Buckner, a GAO study showed that 2.2 million tax returns intentionally overpaid because the filers were too lazy to itemize their deductions rather than claim the standard deduction.

 

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It usually evens out in the end.

Posted by taxguru on February 11, 2006

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Gift Limits

Posted by taxguru on February 11, 2006

Q:

Subject: Gift Question
 
Hi,
I found your website while looking for an answer…. I understand the single gift limit of $11k per person. However. Is there a annual limit of gifts. In other words… How many $11k (or $12k etc. depending on the year) gifts can I give? As long as each gift is to a different person is there a limited number?
 
Thanks

A:

You really should be working with your own personal professional tax advisor on matters such as this because you are misunderstanding the rules.

As you can see on my website, the annual allowance of $12,000 (as of 1/1/06) is not per gift.  It is total per recipient per calendar year.

There is no maximum number of people to whom you can make gifts.  The gifts do have to be bona fide to the original recipients without conditions.  For example, you can’t give 100 people each $12,000 with the requirement that they pass that money on to another person in order to avoid the per person limit.

Gifts totaling more than the annual allowance won’t automatically cost you any actual gift tax.  You will have to report them to IRS on a Gift Tax Return (Form 709), but they can be offset against your one million dollar lifetime exclusion.

Again, any competent professional tax advisor should be able to help you set up an appropriate gifting strategy for your particular circumstances.

Good luck.

Kerry Kerstetter

 

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QuickBooks vs Quicken

Posted by taxguru on February 11, 2006

Q:

Subject: Quickbooks -vs- Quicken H&B -vs- Peachtree

Sir,

I notice that your comparison was published 2003.

What is your opinion and comparison of the subject programs.

The user is a non-accountant type, non-for-profit form Quicken H&B bookkeeper.

What’s best?

Thank You.

A:

As I’ve said in numerous blog posts, each year’s versions of the Quicken and QB programs makes them more and more dissimilar.  Each year, I have a lower opinion of Quicken and a higher opinion of QB for proper handling of double entry accounting.

A non-profit organization should definitely be using QB and not Quicken.

Kerry Kerstetter

 

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Annuities & Trusts

Posted by taxguru on February 11, 2006

Q:

Subject: Annuities in a irrevocable trust – Tax Deferred?

 Hello Kerry,

I am considering purchasing an annuity for my brothers trust.  This trust is an irrevocable special needs trust where my brother is the beneficiary.  The trust was designed to preserve the bequest from my dad, target it for growth should the money be needed to take care of John, and to be careful not to disqualify John from and State or Government benefits.     

I have posed the question that since the trust is a non-natural personal will the tax deferral benefit of an annuity be void and will the trust be taxed on growth each year.

The investment representative says no it will not be taxed, the growth will be deferred.  However, the CPA who has been managing the returns says the gains will lose their tax deferred status.

Can you shed any light on this matter?

Thanks for you insight.

A:

Unfortunately, there is no easy answer here.  I browsed through the annuity and trust sections of my reference books and things are different depending on what kind of annuities are involved, the details of the trust, along with the actual ownership and beneficiaries of the annuities.  Each combination of those factors changes the net tax effect.

It would be best to have both your annuity salesperson and CPA lay out their evidence for their conclusions in terms to the factors I mentioned.  I obviously don’t know either of those persons, and this may seem a bit biased; but in similar cases like this, I have found the CPA’s objective analysis of the facts to be more trustworthy than the opinion of a person who is looking at earning some very substantial commissions from the sale of annuities.  Too often, I have seen cases where annuity salespeople say anything the clients want to hear just to close a sale, without doing any actual research as to its accuracy. 

Good luck with that.

Kerry

 

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Corporate Withdrawals

Posted by taxguru on February 11, 2006

Q:

Subject: just wandering

Can cash withdrawals from the corporations business account be considered a payroll expense if it’s withdrawn from an ATM machine at a casino?

Seriously,

A:

As you know, every bit of activity in the corp bank account has to be accounted for on the corp’s books and reported on the 1120.

If an employee receives his payroll via ATM withdrawals, you could post it that way on the books.  Of course, if it’s a W-2 employee, you will need to gross up the actual cash taken out to arrive at the gross pay and applicable tax withholdings, which you will also have to report on the 941.

There are obviously many other ways to treat ATM withdrawals, such as loans from the corp, or even as straight 1099 pay.  You obviously need to work with the persons concerned to make sure everyone is in agreement with how the withdrawals are being posted on the corp books.

Good luck.

Kerry Kerstetter

 

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Penalties On Failed Exchange

Posted by taxguru on February 11, 2006

Q:

Subject: Exchange Question

If a Section 1031 exchange is set up, but cancelled when one of the partners cashes out, are there any IRS penalties?

Thanks.

A:

If an exchange falls apart before being finalized, the disposal will be reclassified as a fully taxable sale, which would generally result in high taxes and possible late payment penalties.  There is no separate penalty on the failed exchange itself.

Kerry Kerstetter

 

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Tax Prep Fees

Posted by taxguru on February 11, 2006

Q:

Subject: Schedule C

Hello.

What do you charge for an EBAY type Schedule C and SE?

Thanks,

A:

If you are asking this in order to compare with what other tax preparers charge, that is not possible.  I have never used a flat rate or per schedule fee system.  I have always charged based on my actual time spent, at my current billing rates.  Clients who have their books in good order pay much less than those who have messy or non-existent accounting records.

If you are asking because you want me to prepare your tax return, that is also not possible.  We are still in the pruning back phase of adjusting our work load and are not accepting any new clients.

If you haven’t already done so, please check out my info on selecting a new tax pro on my website.

Good luck.

Kerry Kerstetter

 

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Vehicle Swap

Posted by taxguru on February 11, 2006

Q:

Subject: 179 Depreciation
 
I have a vehicle placed in service December 19, 2003.  I used the full first year depreciation in the 2003 tax year.  I am now considering trading it off and leasing a different vehicle.  What are my tax consequences for the vehicle I trade off and for my new vehicle? 
Example; Would I owe back depreciation.  I have a $12,000 payoff on my current vehicle.

 

A:

If you expensed the entire cost of your vehicle on your 2003 tax return, its adjusted cost basis on your books is zero.  Whatever you sell it for will be taxable as depreciation – Sec. 179 recapture.  Even if you don’t receive any money and the loan is paid off, you will have a sale for the $12,000 loan balance.

If you trade it in for the purchase of a more expensive business vehicle, the gain can be deferred by reducing the cost basis of the replacement vehicle.

Selling the current vehicle and then leasing a new one will not qualify unless you trade it in and the lease is treated as a purchase, such as with a one dollar buy-out at the end.  If the buy-out is the vehicle’s fair market value at the end of the lease, that is not the same as a purchase.

You really should be working with personal tax pro to see what is the best strategy for you.  I have almost always found that leasing vehicles is a much more expensive (rip-off) way to go than a normal purchase; so you should work with your personal tax advisor to see if that makes sense.

Good luck.

Kerry Kerstetter

 

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