Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for July, 2006

Investing In IRA Accounts

Posted by taxguru on July 29, 2006

Q:

Subject: TAX QUESTION

Hi Kerry,

I had heard a rumor that “the only kind of stock options that can be invested in ( or played ) in a self-directed Roth IRA is…..

Covered Calls. ”     True ??  False ???  

My wife  & I both have a Roth IRA,  and we are doing some “covered calls” and also “credit spreads”, straddles, and others……

Are we in trouble already ??

A:

You need to track down the documentation for that rumor because I have never heard of any such restriction.  I checked some of my reference materials and websites (such as rothira.com and fairmark.com) and couldn’t find any mention of such a specific limitation on acceptable investments.

It has always been my understanding that Roth IRAs are allowed to invest in any of the same kinds of things as conventional IRAs, which generally fall under the “prudent man” type of umbrella.  Highly speculative and risky investments, such as lottery tickets, wouldn’t meet the prudent man test; so if any of your options trading techniques fall into that category, you might have a problem defending it.

For self directed accounts, there is generally a governing document that spells out the rules, usually in a very general sense.  If your account’s governing documents don’t specifically mention a limit on the kinds of investments that are acceptable, the general rule should apply.

Basing investment and tax strategies on word of mouth rumors that have passed though who knows how many people already is crazy.  So, anybody who is claiming to have such information that is counter to conventional wisdom should be required to back those statements up with something more substantial than “a friend of a friend told me.”

That’s the best I can come up with.  Please pass on anything more definitive that you come across.  In the meantime, I wouldn’t worry about what you are doing, especially if your Roth accounts are making profits because that on its face would prove that the investments are good.

Kerry

First Follow-Up:

Kerry,
  As always you are wonderful.  Yes I agree that whoever says such things should back them up, etc,etc. but, I wouldn’t trust anything they
would produce as backup.  I trust you, your experience and backup.  You have confirmed basically what I thought to be true.
  I figured that if it wasn’t allowed, then our brokerage wouldn’t allow us to do it. (because some brokerages won’t let their customers do these
kinds of transactions but ours is fairly liberal, therefore, it must be legal for a Roth IRA)
 
  My ultimate “backup” is you. “You’re the Guru”, you’re to “go to guy”.
 
  Thanks for letting me interrupt your day, I appreciate your time and efforts….

My Reply:

You’re absolutely right that, even though they aren’t infallible, stockbrokers that handle IRA accounts should be up on any restrictions of the kind you mentioned.

Kerry


Second Follow-Up:

Talk about timing, 

I swear, I didn’t ask these guys for anything…It just showed up in my mail…..kinda makes you go , “Hmmmmm”
  
——————————————-

Dear Mr. …,

You have requested the ability to engage in options combination trading (including American-style spreads) in your IRA account, for which Delaware Charter Guarantee & Trust Company acts as trustee.  Certain of these transactions may only be recorded in margin accounts according to requirements of applicable rules. 

Accordingly, optionsXpress has approved your IRA account as a Limited Margin Account.  As a Limited Margin Account, you will be permitted to engage in combination options trading, including American-style spreads; however, you will not be permitted to engage in other margin transactions (i.e. utilizing lending).

Please refer to sections 31-34 of your account agreement for margin terms that apply to your IRA account.  Also, please refer to the Margin Risk Disclosure Statement, which is provided to all margin accounts and available on our website.

Your IRA account continues to be subject to the terms of Delaware Charter’s Self-Directed Individual Retirement Trust Agreement. If you have any questions, please contact customer service at 1-888-280-8020 or through the Live Help banners on our website.

Sincerely,

Fred E. Cadena
Assistant Vice-President, Risk and Margin
optionsXpress, Inc.
Member NASD | SIPC 

 
Final Words:

That does seem to be very coincidental timing.

Does your agreement with them have some kind of Big Brother clause, allowing them to monitor your emails?

Kerry

 

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D-I-Y Taxes Can Be More Expensive

Posted by taxguru on July 28, 2006

 

From the daughter of a long-time client:

Subject: Hi Mr. Kerstetter

Hello Mr. Kerstetter,
I’m …’s daughter and just recently used H&R Block’s website to attempt to file my 2005 taxes and ran across some trouble. When I called my dad, he suggested I get in touch with you! I hope you’re well, it’s been a long time. 🙂

Basically, I can file the 1040EZ, and don’t make a ton of money, but when H&R Block’s website did the math, it looked like I owe the IRS over $500. I’m not sure if I filled everything out correctly, and thought maybe you could  offer a tip or two, or if it wouldn’t take long, maybe we could go over the information via phone? Maybe there’s something I’m missing?

My dad trusts you, and speaks so highly of you, especially with regard to your expertise in this area, so I would be very appreciative of any perspective you might be able to offer.

Thanks Mr. Kerstetter,

My reply:

Trying to do your own tax return is not a good idea.  If you’re still doing the music thing, there are hundreds of possible deductions that you could easily be claiming that could zero out your taxes.  That would require you to file a full 1040 with a Schedule C for your music business.  You shouldn’t use any of the EZ or other short forms because they don’t allow for the kinds of deductions to which you are entitled.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances, ideally someone who has experience working with musicians. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone 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.

I wish I could be of more assistance; but I wish you the best of luck.  

Kerry Kerstetter

 

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Getting rich quick

Posted by taxguru on July 28, 2006



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Posted by taxguru on July 28, 2006

Interesting articles from Nolo Press:

Preparing for a Business Audit – Some good tips from Nolo. However, the best strategy would be to work with a tax pro who can help you avoid saying the wrong thing to an auditor, a very common way people cut their own throats.


When & Whether to Sell Your Business

Top Myths About Retirement Plans

Minimal Requirements for Working as an Independent Contractor

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S Corp Election Is A Binding Contract

Posted by taxguru on July 27, 2006

 

Q:

Subject: S-corp vs C-corp question

Dear Kerry,

First of all, thank you very much for all your postings on the Web. I recently came across your writings and found them very helpful and much more concise than I was able to get from anyone else.

My question is, I’ve incorporated this year (2006) in CA and my accountant at the time suggested that I should apply for S-corp status. So we did file Form 2553 and got approved. However, after reading your pages, I’m now thinking a C-corp might actually be more beneficial for me, especially since I don’t intend to take all the money out of the corporation, but let it sit there and get invested in the corporate accounts.

I was wondering, since I have not yet filed any taxes yet, if I still have the option to go ahead and file as a C-corp when I file for the first time. If not, are there any other remedies?

Thanks very much,

A:

Now that you have been approved by IRS as an S corp, they will be expecting an 1120S, so that is what you must file.  You committed to that status by sending in the 2553 and can’t just ignore it because you have changed your mind.

You should work with an experienced professional tax advisor to see if it makes more sense to revoke the S election and switch back to a C corp or just start up a new C corp.  As I’ve mentioned several times, the downside to a conversion is that you will be stuck with a December 31 fiscal year-end. 

As I’ve also frequently mentioned, there are plenty of times when having both an S and a C corp make a lot of sense.  I have no way of telling if that is the case for you.  Only a thorough interview with an experienced tax pro will determine if that is a better way for you to deal with your current situation.   The downside to having two California corps would be the hassle and expense of filing two tax returns each year, plus the $800 minimum annual tax for each corp.

Another topic that you should discuss with your personal professional tax advisor is whether any of your business operations can be set up in another state, such as Nevada, in order to avoid the high taxes in the PRC.  This is a tricky issue, but an experienced tax advisor should be able to see if that is a realistic possibility for your unique circumstances.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

I appreciate your help and quick reply.

Best

 

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Moving From Quicken to QB

Posted by taxguru on July 27, 2006

Q:

Subject: purchase

It looks like the basic (simple start) Quickbooks no longer imports Quicken data at all? Must use a Pro version or above? Is this correct?

Any suggestions?

Thanks

A:

As I wrote previously, the QB Simple Start program is a crippled version of QB and is to be avoided.

As I also wrote earlier, starting with the 2006 program, the Basic version has been dropped, so Pro is the lowest price version you can buy.

Depending on which version of Quicken you are converting from, you might be able to get by with an inexpensive version of QB from before 2006, which are widely available on eBay. The QB program has to be equal or newer than the version of Quicken the data is from.  For example, if you are using Quicken 2004, its data can be imported into QB 2004, 2005 or 2006.  If you are using Quicken 2006, you will have to have QB 2006.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank you very much for your response!!

I did make it work with an old version of QuickBooks.

 

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Posted by taxguru on July 27, 2006

Does a Vacation Home Qualify For a 1031 Exchange? – The WSJ looks at a questions that I receive quite often.

 

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Occupational Prestige

Posted by taxguru on July 27, 2006

The free section of the WSJ has an interesting survey on how members of the public view various professions in terms of prestige.

Those with the highest number of people putting them in the Very High Prestige column are not surprising: Firefighter (63%), Doctor (58%), Nurse (55%).

What is surprising from a selfish perspective is how low we Accountants are viewed, with just 17% placing us in the Very Great Prestige column.  To add even more insult, this is lower than Lawyers (21%) and Congress Critters (28%).  At least we’re higher than a few other professions, such as Stockbroker (11%), Realtor (6%).

According to the chart below the main survey results, we have been at around this level for well over 20 years. 

I wonder if this kind of attitude will further discourage young people from entering our profession.

 

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These usually happen around April 15

Posted by taxguru on July 26, 2006



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New Jersey’s Titanic

Posted by taxguru on July 26, 2006



(Click on image for full size)

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