Alternative Minimum Tax – Not Just for High Earners Anymore

 Unless things change, the nonpartisan Congressional Budget Office estimates that by the year 2016, AMT will affect 33 million taxpayers to the tune of $81 billion.

Our rulers’ refusal to address this insanity is a blatant dereliction of duty, which is nothing unusual for that bunch of incompetent bumbling bozos in power, of both parties.

 No Change in IRS Interest Rates for the Second Quarter of 2006 – Staying at 7.0%.  I’ve updated this info on my Quick Reference page.

IRS Selects Three Firms to Take Part in Delinquent Tax Collection Effort – The Sopranos will have to wait until 2008, when IRS will contract directly with ten collection firms.  Of course, that doesn’t stop them from sub-contracting for these three who won the initial contracts.

Consumer Groups Contend Regs Would Allow Return Preparers to Peddle Taxpayer Info – In response to the trend of tax prep firms outsourcing the actual work to cheaper workers in India, a topic I have commented on several times.

Senate Budget Proposal Follows White House on Tax Cuts; Would Double IRS Enforcement Funding – IRS’s Tax Gap propaganda campaign, hyping SWAGs as real figures, is paying off quite well for them.

Feds Getting Rid of More Bad Eggs From Our Profession:

Alabama preparer inflated $61,000 of expenses to almost $244,000

Minneapolis preparer claiming false deductions and statuses

Arizona couple promoted bogus trusts

Q:

Subject: material participation

Hate to bother you during tax season, but I have gotten two different opinions from 2 different CPA.

Question:

I currently have several rent houses. I have full time employment elsewhere, so I do not qualify as a “professional,” but I do almost all of the work on the rent property myself. Can I qualify for material participation in this passive activity?

Thanks so much.

A:

The rules are explained in IRS Publication 925.
http://www.irs.gov/pub/irs-pdf/p925.pdf

http://www.irs.gov/publications/p925/index.html

Specifically:
http://www.irs.gov/publications/p925/ar02.html#d0e738

Material participation tests.    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.

You participated in the activity for more than 500 hours.

1. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity.
2. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year.
3. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities, under Recharacterization of Passive Income, later.
4. You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
5. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
6. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

 You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity does not count in determining whether you materially participated under this test if:

• Any person other than you received compensation for managing the activity, or
• Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services).

Participation.   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity.

Work not usually performed by owners.   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true.

• The work is not work that is customarily done by the owner of that type of activity.
• One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules.

Participation as an investor.   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Work you do as an investor includes:

• Studying and reviewing financial statements or reports on operations of the activity,
• Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and
• Monitoring the finances or operations of the activity in a nonmanagerial capacity.

Spouse’s participation.   Your participation in an activity includes your spouse’s participation. This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year.

Proof of participation. You can use any reasonable method to prove your participation in an activity for the year. You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary.

You should work with your own personal professional tax advisor to see if you qualify or not.

Good luck.

Kerry Kerstetter

 

Q:

Subject: quickbooks 2005

 

Hi, I’d like to first say thank you very, very much for the information you post to your website.

If you have time to answer a question I’ve got, please reply.

 

As a student, I have the option of buying QB 2004 pro or 2005 pro for $99.

I am in an introductory accounting class at the Austin Community College, and we’re using 2004 pro.

In one page of your website, you recommended that a reader choose 2004 over 2005 due to importability issues you were having with 2005 (if I recall correctly).

However, in your version section, you suggest buying QB 2005, just not the simple start or online version.

 

Since buying 2005 would give me an extra year of support for the same price, I normally would default to that.

 

But since I am learning 2004 in class, and you at one time recommended staying away from ’05, I’m undecided.

 

Can you advise on this? Has 2005 been updated to the point that it is a better program than ’04, or is ’04 still the better program?

 

Thank you!

 A:

 There are a couple of issues to consider.  If you are going to be using the same data files on both your own and the college’s computers, you must be using the same version of QB.  QB 2004 files can be converted to run on QB 2005; but that is a one-way conversion.  You would not be able to run QB 2005 format data files on QB 2004.

If you won’t be sharing data files and just want a QB program for your own use, getting the 2005 version will give you another year of support from Intuit because it will be orphaned a whole year later than they will be dumping the 2004 program.

It was true that for the first several months after the 2005 program was released that I had a lot of problems keeping it functioning on my main computer.  I had to uninstall and reinstall the program every three or four weeks.  It seemed to be caused by conflicts with one or more of the other versions of QB that I have installed on this computer, because I didn’t have the same kinds of problems on any of our other computers where only QB 2005 was installed.  One of the QB service maintenance releases must have taken care of the conflict problems because I have had QB 2005 running on my main computer, along with seven other versions, without any problems for the past three months. 

Good luck.  I hope this helps you decide.

Kerry Kerstetter

 

Q:

Subject: basis of inherited mutual fund shares

 

Good Morning Kerry,

I am at a loss to find a good source that tells me if the inherited half of a jointly held mutual fund stock account gets a stepped up basis in a non-community property state. I have found that the entire fund would be stepped up in a Community property state, and perhaps the obvious is to assume half does in a non-community property state, but my tax research library still includes a 1969 court case that says it does not. What is your take on this?

Thanks

A:

 In a non-community property state, only the portion of jointly owned asset that was inherited is given a new stepped up costs basis.  The cost basis of the portion that you already owned will remain the same until you sell it or you pass away.

This has long been the rule.  Any competent professional tax advisor should be able to work with you on this.

Good luck.

Kerry Kerstetter

 

Q:

Subject: British citizen living in US

I pay US income taxes. Does the estate tax apply to me if my estate is over $2,000,000 in 2006?

I also own a home in Scottland that I transferred to an irrevocable trust set up in Scotland. Is there a gift tax return for U.S. that I need to do?

Thanks,

A:

You are really going to need to work with a professional tax advisor who has real life experience with people who pay taxes in more than one country.

However, there are some key issues that will affect your situation.

In the USA, Income and Estate taxes are technically two separate systems.  In most cases, income taxes are owed to the USA government by anyone from anywhere who earns income from sources inside the USA, which could be from personal services conducted inside the USA as well as from property located here, such as rentals.  It is also the case that USA citizens have to report and pay taxes to the USA IRS on all income from anywhere in the world.  There are credits and exclusions for taxes paid to other countries to reduce the double taxation of the same income by multiple countries.

For estate (aka Inheritance and Death) tax, survivors of deceased USA citizens do have to report to the USA IRS the fair market values of all world-wide assets that were owned by the deceased on an Estate Tax Return (Form 706).  Assets that were owned by deceased USA citizens that were located inside other countries would normally have to be reported to those other countries’ tax authorities.  For assets that are subject to estate taxation by more than one country, there are tax credits in a similar fashion to the income taxes in order to reduce the double taxation burden.

In your particular case, since your main estate tax reporting requirement would be to the UK tax authorities, an expert in this matter may tell you that your estate would only need to report assets located inside the USA to the USA IRS.  There would hopefully be a tax credit for your estate on its UK estate tax return to compensate for any estate tax that is required to be paid to the USA IRS.

Again, you should have an expert confirm; but I don’t see how a transfer of a house in Scotland by a British citizen is anything that would need to be reported to the USA tax authorities.

Here in the USA, we actually have similar issues come up with deceased USA citizens who owned property in multiple states.  Each state generally requires those assets inside its borders go through formal probate procedures in that state, as well as be reported on that state’s estate tax return, if that is applicable.  Not all states have estate taxes.

If you do have properties in the USA, there may actually be more of a mess with state probate laws than with estate tax returns.

As you see, it can get complicated.  You should try to address an many of the key issues involved in your estate planning documents so that the settlement process can go as smoothly as possible.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Wash sale question

 

I had a question for you regarding wash sales.  If you make money on a stock sale but lost money on a call or put option for the same security within a 30 day period, does that qualify as a wash or can you count the loss since one is a stock and the other is an option.

Thanks,

A:

If the option is for the same security as you had, the wash sale rules do apply in the same manner as if you were dealing with actual shares on both ends.

Kerry Kerstetter