Tax Guru – Ker$tetter Letter

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Archive for September 11th, 2007

Tax free capital gains?

Posted by taxguru on September 11, 2007

Q:

 I have read that the long term capital gains tax will be zero for the year 2008. Is this true? If so I may delay selling my remodeled house until next year. Please advise.

  

A:

It is true that there is a Federal tax reduction on long term capital gains scheduled for sales in 2008, 2009 and 2010 under current tax law.  This could very easily be repealed, possibly retroactively, if the DemonRats have their way; so there is no guarantee that anyone will actually be able to benefit from this.

Assuming our rulers can keep their hands off of this tax break, the actual size of the benefits is still very limited. As with all tax matters, the reality of its application is much more complicated than we all wish.

Under current Federal tax law, people with long term capital gains that would normally be in the 10% or 15% bracket only have to pay 5% Federal tax on just that portion of the gain in those lower brackets.  The portion of the gains that push the taxable income into the higher brackets is taxed at 15%.  You can see the 2007 brackets on my website.  The 2008 inflation adjusted Federal brackets should be released in a few weeks.

Now for the special tax break. For sales in 2008, 2009 and 2010, that portion of long term capital gains that would otherwise be subject to a 5% Federal tax rate will have a zero Federal tax rate.  The portion of the gain above the 15% bracket will still be subject to a 15% rate.  In addition, depreciation recapture is not considered to be a capital gain and it will still be subject to a 25% Federal tax rate.  State taxes will also still be applicable on the full gains; so the overall tax savings may be relatively minor, especially for the sale of highly depreciated property, such as rental homes.  As Sherry mentioned earlier, 1031 exchanges will still be a very important tool for real estate investors wishing to minimize their taxes.

I hope this isn’t too confusing; but out imperial rulers in DC seem to like to keep the rules as muddy as possible.

Let me know if you have any more detailed questions.

Kerry

 

  

 

Posted in CapGains | Comments Off on Tax free capital gains?

Estate Asset Transfers

Posted by taxguru on September 11, 2007

Q:

Subject: Estate Taxes

My wife died with a will that basically leaves everything to me.  Two houses were right of survivor,  One CD she owned alone that was pod.  Both of her iras were also pod.  The only thing she had in her name alone that wasn’t pod or ros was stock valued at about $13K.  The total value of the above was about 700K.  My attorney says that I can pass any amount of the above to our two children without any tax consequences.  It seems strange that the amount is an option.  I want to pass along to them as much as I can afford without putting myself in a cash bind, however it seems odd that I can pick an amount in lieu of dividing everything in half and giving them her half.

 

I ask my accountant and to be honest I was as confused as I was after discussing it with my lawyer.

 

Thank you,

 

 A:

There is obviously a bit of miscommunication here, both with your attorney and your accountant.  The transfer of ownership of the assets left behind by your wife is neither as simple as you are inferring from your attorney’s comments, nor should it be as complicated as your accountant is making it out to be.

Each type of asset needs to be evaluated separately in regard to its taxability for the recipient, as well as its new stepped up basis for the recipient’s records.  You didn’t say if you are in a community property state or not; but that fact is very important.  If so, the entire cost basis of most of the assets is stepped up to its fair market value as of the date of your wife’s death; while in non community property states, only the half owned by her is stepped up and your original half remains the same.

As your advisors should be explaining to you, most of the assets will pass with no tax consequence, with the main exception of the IRA accounts.  Depending on what types of IRAs those are (conventional, non-deductible, Roth), they will most likely be taxable to the recipient, unless they are properly rolled over.

Your best bet would be to sit down with your legal and/or tax advisors and go over each item in your wife’s estate individually and discuss these points.  If neither of your advisors feels comfortable discussing these items in easy to understand terms rather than blanket generalizations, you will need to find a new advisor to work with; at least just for this matter.

I wish I could be more help, but that’s all I can do for you at this time.  Good luck.  

Kerry Kerstetter

 

 

 

Posted in Estates | Comments Off on Estate Asset Transfers

Buy vs. Lease

Posted by taxguru on September 11, 2007

Q:

Subject: Buy vs. Lease Analysis

 

Kerry,

 

I’m in the equipment leasing business and am constantly running up against our lease programs being compared to traditional bank financing.  I believe leasing to be a better option in most cases because of banks “compensating balance” requirements and the fact that they usually place “blanket liens”.  In addition, Section 179 write-off vs MACRS depreciation also has real financial advantages.  However many customers fail to take this into consideration, and instead focus solely on “interest rate”.

 

Have you ever put together a Buy vs Lease analysis template which could show the real after-tax cost of leasing vs traditional bank financing which will move the focus off of what banks are selling….interest rate…and give me real numbers instead of me attempting to explain the differences over the phone?

 

A:

I haven’t designed my own such template because there are so many already available on the net for free, such as this one

I haven’t tested this one out for accuracy in real life situations, so you may want to run some tests before recommending it to your clients.

Good luck.

Kerry

 

 

Go Daddy Domain Names

 

Posted in Leasing | Comments Off on Buy vs. Lease

Section 179 and Income Limits

Posted by taxguru on September 11, 2007

Q:

Question about Section 179 Deduction

Dear Kerry – This is in response to an answer you posted regarding the ability to use Section 179 deduction amounts against wages.

1) If you have both business income and wage income, but the business income does not allow you to use the full Section 179 deduction, can you use the remaining dedution amount against wage income?

For instance, if you purchased an automobile for $10,000 and use it 50% for a business which you own, then you would have the right to a $5,000 section 179 deduction.

If however you could use only $2000 of this available deduction amount on Schedule C, then could you use the additional $3,000 as a deduction against wage income on Schedule A — in the same year, same tax return?  

2) As a separate but related question, if you cannot use the Section 179 deduction on Schedule C at all, are you required to use the available Section 179 deduction against wages in the same year the car was put into service… or can you carry the deduction forward to a Schedule C in a future year at your own discretion?

I hope that these questions are written clearly and I very much appreciate any advice you may have the time to offer!

With many thanks, 

 

A:

The interplay between the allowable Section 179 deduction and the taxable income limitation is trickier than you think and is not the kind of analysis you should be doing on your own. 

For example, the way the taxable income limit works is that it is very possible to have a Section 179 deduction create a large net loss on Schedule C.  The actual deduction is required to be shown on the schedule for which the asset was used.  In your case, if it was used for your Sch. C business, that is where the full allowable Section 179 would be shown, even though W-2 income may be what actually allows the deduction.

Another possible mis-statement that you need to clarify is the weight of the automobile.  If it is under 6,000 pounds GVW, the allowable Section 179 deduction is much less than for a vehicle weighing more than that.  Since you specified an automobile and not a truck or SUV, I wasn’t sure you understood that important distinction, since most autos weigh much less than 6,000 pounds.

I hope this gives you the sense that you are in dangerous territory trying to do this kind of tax planning on your own.  You should be working with a professional tax advisor who can show you with real numbers how such deductions would work out on your tax returns.

Good luck.

Kerry Kerstetter

 

 

 

Posted in 179 | Comments Off on Section 179 and Income Limits

Capital Gain or Ordinary Income?

Posted by taxguru on September 11, 2007

From a Reader:

Since when is annuity income anything other than ordinary income under IRC Sec. 72 ? If there is capital gains treatment it’s a new one to me. The typical deal on taking a lump sum from a deferred annuity is that the amount received net of any surrender charge less the amount invested in the contract is ordinary income shown on 1040 line 16b. 

 

My Reply:

If the surrender of the annuity were reported on a 1099-R, you would be correct.

However, there were more assumptions contained in my analysis of the situation than I had time to explicitly spell out. My main one was that this was not a deferred comp retirement account that was being cashed in, but an investment vehicle sold by an insurance company that would have produced ordinary annuity income during its life.

When it was sold back to the insurance company, that would be treated as the sale of a capital asset, much like the sale of a stock or bond that also produces ordinary taxable dividend or interest income during its holding period.

I have actually had several real life cases of this kind of transaction with clients over the years.  Reporting those sales (redemptions) on Schedule D never once created a problem with IRS; so this is more than just a theory on my part.

This is why it is so important for the taxpayer to have a tax professional review the actual transactions and the underlying documents to know with more certainty how something should be reported. 

I hope this better clarifies my answer to that reader.

Thanks for writing.

Kerry Kerstetter

 

  

TaxCoach Software: Finally! Plain-English Tax Planing That Builds Your Business!

 

Posted in CapGains | Comments Off on Capital Gain or Ordinary Income?

Mineral Lease Income

Posted by taxguru on September 11, 2007

Q:

Subject: Lease Income

Kerry,

 If you had a mineral lease to receive payments as “rents”, would you take payment as personal income and avoid the 15% SE tax, or structure a sole proprietorship/farm or LLC and receive it as income and take deductions? “Rents” are projected @ between 1K-6K/month for 8-12 years.

I realize that there are potentially more deductions than the 15% SE, however I’m near retirement and don’t want to do a business full-time.

Also, to minimize liability, should I consider a family partnership/trust and sell or transfer the lease to it?

Thanks for any insight you may give.

A:

This is the kind of thing that you really need to be addressing with your own personal professional tax advisor.

I’m not sure where you got the impression that the mineral lease payments would be subject to SE tax because that is not normally the case.  SE tax would only be appropriate if you will be physically working to extract the minerals, such as with some gold miners I had as clients.  However, if you are merely the property owner and are being paid for the use of the property, that income would be reported as Rent and/or Royalties on Schedule E, which is not subject to SE tax.

Whether there is a need to set up a separate entity for this or anything else in which you are involved is a subject nobody can competently comment on without detailed discussion and analysis of your unique circumstances.

Good luck.  I hope this helps.

Kerry Kerstetter

 

Become a Power User

 

Posted in Rentals | Comments Off on Mineral Lease Income

Reduced Sec. 179 For Vehicles?

Posted by taxguru on September 11, 2007

Q:

Subject: your comment about vehicles

Hello Kerry,

 

In searching on the net for some credible comments about expensing 100% of movable business property, your website was the only one I found that seemed to have any straight forward comments.  What I’ve found varies so widely, it all would go good with an Alice in Wonderland story.  Also, what I’ve read (including on the IRS website) is that trucks with GVW over 6,000 had reverted back to a $2,600/yr max expensing, yet I had heard and read that the 100% (up to 100,000) had been extended, but all comments seem to be vauge at best.  Other than your website, can’t find much on this subject.

 

Is per what you have posted on your website correct, that trucks with a GVW over 6,000 can still be expensed out in one year?  Did the IRS/congress indeed extend this through 2009 or ?

 

I found your website refreshing, as you seem to not beat around bushes.  Also, it appears you are in Arkansas.  Am looking to maybe find a state to live in where the real estate markets haven’t gone out through the roof…  Do you do CPA work in just a particular location in Arkansas?  Does Arkansas have a personal income tax or corporate income/franchiese tax?

 

Thanks!

 

A:

I’m not sure where that rumor started about the reduction in the vehicle Section 179, but that’s completely bogus.  As I’ve explained several times, the 6,000 pound exception to the Luxury Vehicle rule has been around since 1984 and has never been repealed. 

I have a lot of info on Section 179 on my website

As I frequently explain to people who ask me to prove that a certain item of tax law hasn’t been changed, it’s difficult to prove a negative (that something hasn’t happened) and I don’t have time to debunk every crazy tax rumor that’s floating around.  The burden of proof should be on those who claim that something has changed.  Make those people who are telling you that the law has been changed prove their statements

Arkansas does have an income tax on both individuals and corporations.  You can see the rates and other details on the DFA’s website

As you can see in my email signature, I haven’t been accepting any new clients for a number of years and don’t know if or when I will take any new ones on.

Good luck.  I hope this helps.

Kerry Kerstetter


Follow-Up:

Hello Kerry,

 

I can see why you’re booked up.  Your web page below is very clear and straight forward.  I’m amazed from what I found on many other “tax” sites and even when searching the IRS website about this, what I found was that for vehicles over 6,000 GVW, the yearly maximum had reverted back to something like 2,600, and yes, I kept trying to make sure I was searching for trucks, not SUV’s.  It’s hard to find competent and knowledgable tax accountants.  Appreciate the feedback and best wishes.

 

  

Business Plan Pro

 

Posted in 179, Vehicles | Comments Off on Reduced Sec. 179 For Vehicles?