Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for November, 2007

2008 IRS Standard Mileage Rates

Posted by taxguru on November 27, 2007

IRS has officially released what it will allow for 2008 tax returns:

Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

  • 50.5 cents per mile for business miles driven;
  • 19 cents per mile driven for medical or moving purposes; and
  • 14 cents per mile driven in service of charitable organizations.

As always, the official IRS statisticians are hip to the fact that vehicles being used for medical or charitable endeavors magically burn less fuel and suffer less wear and tear than they do when used for crass money making ventures. This disparity has never made sense in the past, and with the largest gap ever in these new rates, it continues to baffle me.

 

Posted in IRS, Vehicles | Comments Off on 2008 IRS Standard Mileage Rates

S Corp & Vehicle Sec. 179

Posted by taxguru on November 24, 2007

Q:

Kerry:

For an S Corp purchasing as automobile in 2006, used more than 50% for business, is there a limitation on 179 deduction?

Thanks

 

A:

There are several limits on Section 179 expenses for cars purchased by an S corp; both at the corp level and at the shareholder’s 1040 level.

The amount of the potential Section 179 deduction will also depend on the car’s weight.  If it’s under 6,000 pounds, the maximum deduction is a tiny fraction of the amount possible for a vehicle weighing more than that much.

I have some general info on Section 179 on my website; but you  really  need to go over any plans in regard to how it would work out for your particular situation with your personal professional tax advisor.  S/he may even find that the deduction could be higher by purchasing the vehicle in your own personal name, especially if the S corp is generating large net losses.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

Posted in 179, Vehicles | Comments Off on S Corp & Vehicle Sec. 179

Cooking license?

Posted by taxguru on November 24, 2007

Posted in Accounting, comix | Comments Off on Cooking license?

Countering IRS ASSumptions…

Posted by taxguru on November 21, 2007

Q:

Subject: Question re OinC

 

Mr Guru – have a situation with IRS to run by you.  One of my tax clients is working on an Offer in Compromise (OinC) on back payroll taxes he owed thru his prior business.  The IRS just sent him a letter saying, based on his 2007 pay stubs, he should have approx $5,305 in FIT w/h.  They demanded that he make an immediate est tax payment of $3,979 and another one of $1,326 in January “in order to proceed with an evaluation of your OinC”.  In looking back at his 2006 1040, he had a tax liability of $1,784 with gross income of $48,000, but a rather large alimony AGI deduction of $25,000 and Sch A deductions of $6,077.  The client expects the same for 2007.

 

When I did his 2006 1040, I advised him to stop FIT w/h, for it looked like he had enough w/h at that point to cover his 2007 taxes.  Therefore, can IRS make this kind of demand that he make est tax payments?

 

Let me know,

A:

I’m sorry about the delay.  The main computer I use for email has been crashing a lot.

As you know, part of the OIC process is convincing the IRS that, in exchange for compromising on past tax debts, the TaxPayer promises to be a good boy in the future and never have similar delinquency problems.  This means staying current on all new taxes.

Also, as you well know, IRS has no burden of proving the accuracy of their claims.  We have to provide suitable documentation to rebut any claim, no matter how idiotic, an IRS employee makes.

That appears to be the case here.  The IRS employee is estimating your client’s taxes for the year based on nothing more than pay stubs; ignoring any of the other deductions and losses that will be reducing the actual taxable income well below the gross pay figure.

To refute that erroneous ASSumption, I would prepare a pro-forma 2007 1040, using your 2006 software if you haven’t yet received your 2007 programs, and submit that in addition to a letter from you explaining that your client’s current level of withholding is more than enough to cover his 2007 tax obligations.  That should be more than adequate documentation to get the IRS employee to back down from the request for your client to send in more money for 2007.

If appropriate for your OIC claim, I would also make the point in my cover letter that intentionally paying in too much in taxes for the current year will deplete his cash reserves that would otherwise be available to pay off the past year taxes being negotiated as part of this OIC.

Good luck.  I hope this helps.

Kerry


Follow-Up:

Mr Guru – my client sent in the responses & told IRS that he didn’t have to pay the amounts so dictated, referring them to his 2006 1040.  So, we’ll see what IRS does next.  Should they come back & demand he pay in as they said, we’ll do the proforma as you suggested.

 

Thanks for getting back on this. 

 

 

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src=”http://affiliate.softcom.biz/aw.aspx?A=172&G=17&Task=Get&Browser=N”&gt;

 

Posted in Uncategorized | Comments Off on Countering IRS ASSumptions…

Revoking S election…

Posted by taxguru on November 21, 2007

Q:

Subject: S to C conversion

Dear Kerry,

 

on your web site you mention that a conversion from S to C Corp. status requires a formal request with the IRS.  Is there a form for that?  Or how else is it done?

 

Thank you for your advice.

 

Best regards

 

A:

There is no official IRS form to revoke the S corporation election of the same kind that is used to elect it in the first place.

The corporation and shareholders holding more than 50% need to submit a properly prepared Statement of Revocation.

This isn’t a do it yourself task and should only be handled by an experienced professional tax advisor, who should also be part of the decision process as to whether revoking the S election is the most appropriate strategy for your particular situation. 

As I’ve mentioned on several occasions, after revoking an S election, there is a five year minimum waiting period before that corp can file for a new S corp election.  I have also frequently mentioned that, depending on your reasons for wanting to terminate the corp’s S status, it is often a more efficient approach to just set up a brand new C corp that isn’t going to be locked into having to use a 12/31 fiscal year end, as a form S corp will be.

Good luck.

Kerry Kerstetter

 

 TaxCoach Software: Are you giving your clients what they really want?

 

Posted in Uncategorized | Comments Off on Revoking S election…

Has IRS expanded definition of reponsible parties for payroll taxes?

Posted by taxguru on November 21, 2007

Q:

Subject: Tax question

 

Mr Guru – I’ve heard from 2 other CPA’s plus my Paychex Representative that, after Jan 1, IRS is going to hold payroll preparers, be they CPAs or whoever, responsible for unpaid 941 taxes.  Have you heard anything along these lines?  How can IRS do that in the first place?  Let me know what you know.  

 

Thanks,

A:

I haven’t heard about that payroll tax change and can’t find any mention of it on the IRS website.  You should ask those other folks for some documentation of this change.

Kerry

 

 

Posted in Uncategorized | Comments Off on Has IRS expanded definition of reponsible parties for payroll taxes?

Posted by taxguru on November 21, 2007

Posted in comix, IRS | Comments Off on

Beware taking tax advice from insurance salesmen…

Posted by taxguru on November 20, 2007

In response to a phone call from a long term client, whose wife’s uncle was being pressured to cash in stocks and replace with annuities, I sent the following:

In regard to your phone call about your wife’s uncle, there are a number of things to consider.  While there are tax free trades possible for some kinds of annuities and insurance policies, he should have a financial pro see if his situation will qualify.

I can’t handle this; so he will need to work with a competent financial advisor.  Some thoughts that did come to mind:

It’s a very serious red flag when a financial advisor puts a rush priority on doing something and doesn’t allow you adequate time to conduct due diligence

There are tons of scammers selling inappropriate annuities to older folks. Google this and you will get a ton of hits.  Annuities generally have huge commissions for the agents; so there is a conflict of interest inherent in any sales pitch.  The push to sell existing investments also smells of account churning to generate commissions.
        
Kerry


His reply to me:

Kerry,

Thanks for your input, especially on my wife’s Uncle.

 

Her brother and I are going to Uncle’s house today…the insurance guy is supposed to meeting him.

 

I plan on getting the insurance guy’s business card ( if he’s legal, his license number will be on it) then telling him that I am reporting him to the Dept. of Insurance on a complaint for “Elder Abuse”.  Hopefully, he will leave Uncle alone because his license will be in the balance.

 

Thanks for your help,

More from the client:

Subject: Re: Uncle and the Insurance Salesman

Hey Kerry,

 

Wife’s brother and I had a meeting with the insurance guy and Uncle today.  The insurance guy is convinced that Uncle can liquidate his stock account under a 1035 exchange and roll the funds into the annuity from the insurance company, without any tax liability……I don’t think so…..here’s the situation…

 

Uncle’s stock account is nothing more than a stock account that is traded by his broker, there is some turn-over for some stocks but for the most part, it’s full of AT&T stock, that Uncle received/bought when he retired from AT&T some 30 years ago.  The stock account is not in a “401-K” or an “IRA”, it is not in anything that resembles a deferred retirement account. It is: A managed stock account that happens to be included in Uncle’s Living Trust. In this case, I don’t think this qualifies as a “custodial account”, but I could be wrong, because the broker does “manage” the account by making trades that benefit Uncle, whenever these trades result in a capital gain, Uncle pays the tax, if any, on those specific trades as they happen.

 

The broker says that there is still a “block of stock” that has not been traded and still has the original “cost basis”. He further says that, when this stock is liquidated, Uncle will have to pay capital gains tax on approx: 54K of “increased value”….

 

   The insurance guy says, Not so…because the stock account is a “custodial account”,  then there won’t be any capital gains, “we’ll handle it as a 1035 exchange and there will be no tax liability”. He further states that,”All we have to do is liquidate the stock and transfer the money directly to the insurance company and Uncle won’t have to pay capital gains tax because the money never was in his hands.” (this can’t be right)

 

   I don’t think it is a “Custodial account” just because he calls it a custodial account….right?  

 

  If Uncle sold a few shares of the original inventory, then he would have to pay some capital gains tax on the difference between the original cost basis and the sales price, right?   Once it is sold, it is sold, period. It doesn’t matter if the check is cut to me or the insurance company, it is sold, there is a gain, because the previous account wasn’t a “tax qualified” account, right?

 

Frankly, both my brother in law and I believe this insurance guy is blowing smoke, but since he and the broker have their own interests to protect we decided to ask a qualified CPA about the situation.  If the CPA comes back and says that it sounds like Uncle will have to pay capital gains taxes on the liquidated stocks appreciated value, then we’ll tell the insurance guy that our tax professional told us that tax will be due, so Uncle is not doing the deal. Done, Goodbye.

 

So tell me Mr. Tax Guru…..do you know of any circumstance where a “managed stock account, not a custodial account, listed in a living trust can be transfered into a life insurance annuity using a 1035 exchange, such that, no capital gains tax will be paid on the liquidated stock” ?

  

Awaiting your answer,

 

P.S. I’m not mentioning that the annuity will only let him remove a limited amount of money per year, and that the annuity only pays 3.5% interest while the brokerage has been making Uncle 6% per year, and anytime Uncle needs money the brokerage will not limit how much he removes.

 

My reply:

I first have to repeat that I am still too overloaded with existing client work to be able to take on any new work; so your uncle really should have his own tax pro to consult with. 

However, this situation is too juicy to resist commenting on.  It sounds exactly like the classic case of a commission hungry insurance salesman preying on trusting elderly folks.  Out of curiosity, how did this sales person come into contact with your uncle?  I don’t see why he would even be considering such a drastic change in his investment portfolio at this time in his life.  It sounds like the salesman bought a list of likely victims (aka gullible seasoned citizens) and did some cold calling.  Am I right?

In terms of Section 1035 exchanges, you are correct and that salesman is blowing smoke up your rear ends.  As a quick web search will confirm, this is a mechanism by which one annuity plan can be swapped for another annuity plan tax free or one insurance policy can be swapped tax free for another insurance policy.  It does not allow for different kinds of investments to be swapped for other different kinds of investments. 

He is also misinterpreting the term “custodial account.”  As you very well know, many investors keep their stock and bond investments inside an account with their stockbrokers for easier transfers.  In regard to how this type of ownership is treated for tax purposes, it is no different than owning the shares directly in your own name.  The stockbroker is considered to be your agent acting on your behalf.  Anything that happens in that account is treated exactly the same for tax purposes as it would be if the assets were owned directly in your own name. 

Likewise, assets held inside living trusts are considered to be the exact same as assets owned directly by an individual.  They are completely transparent for tax purposes while the trust’s owner is alive.

Claiming that this kind of custodial account allows special Section 1035 tax free treatment is either the ranting of an idiot or a con artist.  I’m guessing the latter.

After your mention yesterday of your plans to possibly file a complaint against this guy for elder abuse, Sherry and I were concerned that you might be opening yourself up to a lawsuit.  However, after this additional info, it appears that you do have a responsibility to see that this scammer can’t do his evil work on other folks.

Again, it would be wise to have someone independent of all of your uncle’s investments review his holdings to see if he even needs to make any changes.  It sounds as if he would be much better off sticking with what he has rather than moving to a very restrictive and lower yielding annuity vehicle that just happens to pay a huge sales commission.

Good luck.  I hope this helps.

Kerry


From the wife:

Kerry;

 

Thank you so much for taking the time to address this question for us. We needed your outside, independent explanation of whether the 1035 fits this situation because Uncle’s financial advisor is the stock broker (a V.P. at Smith Barney) who was telling him he would have unavoidable tax consequences if he sold his shares & bought the annuity even if the money was transferred directly to the insurance co.

Since the broker is on one side & the ins salesman on the other side of this tug-of-war, we needed your outside expertise to confirm that the broker is right.

I’m truly grateful for your willingness to help us understand this situation better.

 

Hugs to you & Sherry.

 

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

 

Posted in scams | Comments Off on Beware taking tax advice from insurance salesmen…

Sec. 179 Limits

Posted by taxguru on November 20, 2007

Q:

For 2007 the 179 deduction threshold is $125,000 correct??  What happens after the threshold can it be carried forward next year??

 

Thanks

 

A:

I do have a chart of the Section 179 limits for every year from 2002 to 2011 on my website

If I understand your question properly, you are asking if a business buys more than $125,000 of new equipment during 2007, can the excess be carried over to 2008 and applied against the $128,000 limit for that year?

The answer to that is a very big NO.  The 2008 Section 179 deduction may only be claimed for equipment purchased and placed into service during 2008.  Any excess of 2007 asset purchases over the $125,000 limit will have to be depreciated normally.

An additional twist to this situation depends on how much more than $125,000 of new equipment was purchased during 2007.  If the total of new equipment acquired during the year is over $500,000, the $125,000 limit for the 2007 Sec. 179 deduction starts to be phased out.

I hope I understood your question properly.  If I missed your point, please clarify it for me.

Kerry Kerstetter

 

Business Plan Pro

 

Posted in 179 | Comments Off on Sec. 179 Limits

Florida as tax home…

Posted by taxguru on November 19, 2007

People of all income levels have moved from high tax states to tax free states, such as Florida and Nevada. Often, they’re shocked to see that their overall tax burden is still more than they would like due to much higher sales and property tax rates in those states with no income tax.

As I constantly warn people when planning such a strategy, income from services rendered and property owned inside states with income taxes will still require paying those states their share. This applies to everyone, but is more dramatic with the big money earners, such as professional entertainers and athletes. Rush Limbaugh always mentions how much he has to pay in New York taxes when he broadcasts from his studio there instead of from his main home base in Florida.

There is currently a high profile case with baseball player Derek Jeter that is getting some press.


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Posted in comix, StateTaxes | Comments Off on Florida as tax home…