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Archive for April, 2006
Tax Mistake?
Posted by taxguru on April 16, 2006
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Posted by taxguru on April 16, 2006
Taxes: Who Pays, and How Much? – From free WSJ.
The U.S. tax system continues to be “progressive,” which means that people with high incomes generally pay a higher percentage of their income in taxes than those with low incomes.
Just as Karl Marx wanted it to be. His disciples sure seem to greatly outnumber those of us who believe in capitalism and private property rights.
Are You a Clueless Investor? A Quiz…
Selling an Investment Property In a Cooling Real-Estate Market
It’s April 15, and the alternative minimum tax means many unhappy returns. – How so many of our rulers can defend and maintain this insane tax is just one more example of their utter incompetence at fiscal matters.
The best advice on personal investment. – Jonathan Clements recommends five good books on investing.
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DemonRat Tax Policy
Posted by taxguru on April 16, 2006
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Payoff of Installment Note
Posted by taxguru on April 16, 2006
Q:
Subject: Installment Sale IncomeI have found your insight helpful. I was hoping you would be able to help me.Purchased investment property 05/2004 secured by a bank loan. In 9/2004, I borrowed funds from father’s trust to pay off the bank loan. I am a trustee on the trust account. Payments were made to the trust account until 2/2005.Another investment property was sold in 2002. The Installment Sale Income, Form 6252, was used for this transaction, and since 2002 I have recieved interest income from this property. In 2/2005, I transferred my interests in this property to father/trust in return for relief of debt to the trust.It is my understanding that this Installment Sale Income, since it was disposed of, will be taxed as capital gains. However, because the “gain” was used to purchase like property, is it a wash? If a gain, how is the gain reported?I asked my accountant and he has not gotten back to me. I want to be sure I know what questions to ask and know what needs to happen.Thanks.
A:
The proper time to research the tax consequences of an installment note payoff is before you receive the payoff. Once that is done, it’s too late to do anything about it.
A common misconception is that using proceeds from an installment note payoff to invest into new property can save on the tax bite. That is flat out wrong. It has no effect.
A 1031 exchange involves like kind properties. Real property can only be exchanged for other real property. An installment note, even though originally arising from the sale of real property, is itself considered to be personal property. Personal property is not like kind for real property.
There are ways to delay taxation on installment note payoffs by substituting new borrowers and/or collateral. It is similar to re-loaning the money. However, this all has to be set up beforehand, with no actual payment received. Once you receive the payoff, it is a taxable event. What you do with the money, including loaning it to someone else or buying new property, will have no effect on the taxation of the note payoff.
Good luck. I hope you will be more careful next time you are faced with this kind of situation.
Kerry Kerstetter
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The Two Extra Days
Posted by taxguru on April 15, 2006
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Other Client Services
Posted by taxguru on April 15, 2006
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Donating Services
Posted by taxguru on April 15, 2006
Q:
Subject: question for blogI am a film/video producer and I donated a project I made for a museum (non-profit) exhibition.I understand that I cannot deduct “services” nor can I currently deduct an “artwork” as such. My point is thatI have created a piece of property (a finished DVD) that has tangible value. It is a professional piece of workthat would normally cost around $8000.00. I am having trouble finding tax law that will enable me to donate these sorts of projects to non-profits though I have heard of examples where this has worked. An Ad agency, for instance, will shoot a few thousand feet of film for a non-profit organization and will then donate the footage to the organization. They are deducting, I suspect, more that just the value of the film stock and processing. Thanks in advance for your advice.
A:
You are very mistaken about the value of the deduction being claimed by ad agencies. It is a common misconception that other people are getting a better deal than you are. They are no more able to inflate the value of their donations for tax purposes than you are.
With almost all tax issues, you have to have a cost basis in an item that is being donated. Obviously, if you purchased an item and then turned around and donated it to a charity, you could deduct what you actually paid for it. For things that you make yourself, you can only claim the out of pocket costs that you incurred. The profit that you would have earned under a normal sale of the product cannot be counted as a deduction, unless you want to increase your basis in the item by reporting that profit as income subject to income and self employment tax; which would end up costing you more than twice as much in taxes as the taxes you would save by the higher Schedule A charitable donation deduction.
You really should be working with a tax pro, who will explain to you that Schedule A deductions are only worth about one half the overall tax savings as are Sch. C business deductions. You would normally be better of running your production costs through your normal business schedule under the premise that the donation is a form of advertising and promotion for your services. That’s how I have always handled my charitable tax and accounting work, and is what ad agencies and other businesses do.
I am never shy about pointing out the many unfair aspects of the tax law. On this issue, there is no such problem. While it may still seem as if you should be able to claim much higher amounts for items you donate, the law as it is does make sense and is fair.
Again, your personal tax pro should be able to show you exactly what the differences would be between Sch A and Sch C deductions.
Good luck. I hoped this helps you understand the matter.
Kerry Kerstetter
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Big refunds are nothing to brag about.
Posted by taxguru on April 15, 2006
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Tax Guru - Ker$tetter Letter 