Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for June, 2008

Can anyone be President?

Posted by taxguru on June 30, 2008

http://www.paltalk.com/marketing/media/vanksen/main.swf

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Posted by taxguru on June 27, 2008

Taxing Issues – More on Obama’s tax hike plans.

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Retroactive home sale?

Posted by taxguru on June 26, 2008

Q:

Subject:  Sale of residence

I am a tax preparer with a small office in MI and am wondering if you would give me your opinion on a transaction.  I have a client who leased a former residence to someone for up to five years, with an option to buy at any time during the lease period.  The buyer/tenant assumed all practical ownership responsibilities for maintenance, paid a higher than market rent during the 5 years so that a portion of the rent was applied to the option sale price and a portion of the “rent” was designated as property tax and insurance reimbursement.  The buyer was trying to work out of some personal tax liens and they took most of the five years to do so. My client did not want to sell on a land contract because it would be harder to evict the buyer if the personal tax issues could not be resolved and third party financing obtained. The sale was completed in 2007.

My client, the seller, received a 1099 for the 2007 closing and they would like to exclude the gain on sale, other than depreciation recapture.  Their contention is they really sold the property in 2001 when the lease/option started.  The lease payment was equal to a reasonable interest rate, plus tax and insurance escrow and the amount applied to the down payment amount.  While the title did not transfer in 2001, the client’s contention is there was basically a land contract sale in 2001, at which time they met the ownership and occupancy requirements. All payments received during the almost five year period have been reported as rent and the property was depreciated- perhaps not the right thing to do (in hind sight).

I have not found anything right on point so I am wondering if you would give me your thoughts on this.  Thanks for taking the time to read this and I look forward to reading your response

 

A:

I am assuming that your client didn’t report the sale of his primary residence, with the Section 121 tax free exclusion, on his 2001 1040, which is where it should have been shown if he wanted to claim it as such.  Trying to recategorize the sale from a normal lease-option (which it seems like to me) to a primary residence sale six years after the fact, when the statute of limitations bars any changes to his 2001 1040, is crazy and not something that would have any chance of standing up to the slightest bit of IRS scrutiny.

In addition, if he has been claiming depreciation since 2001, that also completely undermines his argument that he actually sold the property back then.  Having his cake and eating it too seems to fit that scenario.

I am also assuming that your client hadn’t been reporting any interest income from the buyer’s payments; another contradiction to the argument that there was a 2001 sale.

Based on your description, your client had a standard lease option with a 2007 sale of a rental property.  He could have obviously done a 1031 exchange into new rental property during 2007, but it is too late now to make that kind of change in the type of transaction he had.

If you’ve read much of my postings, you know that I have very little sympathy for people who are too short sighted and/or cheap to consult with a professional tax advisor before the consummation of a potentially taxable transaction and then cry about the consequences when their 1040 is prepared.  The proper time for your client to consult with you would have been before the 2007 closing of the sale.  You may have advised to set it up as a 1031 exchange or even as an installment sale if he could have afforded to carry back some of the sales price.  Now, it is too late to set those things up and he has a fully taxable sale of a rental property.

That’s how I see it.  I hope this helps.

Kerry Kerstetter

 

 

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A believable campaign promise…

Posted by taxguru on June 26, 2008

Posted in comix, Obambi, TaxHikes | Comments Off on A believable campaign promise…

Posted by taxguru on June 24, 2008

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Comparing Business Entities

Posted by taxguru on June 23, 2008

As has been quite obvious from the never-ending emails I receive, there is no shortage of confusion over the proper business entity to use.  As I have to continually point out, the biggest mistake is when people try to make these choices on their own, without the assistance of professional advisors.  That is nothing short of reckless and is no way to start off a business operation.

However, as I have pointed out, it will save time and fees if business owners will acquaint themselves with the basics of the various business structures before meeting with their professional advisors.  In that vein, I pass along this IRS Fact Sheet that briefly describes the basics of the four most commonly used business entities.

The best bit of info in this Fact Sheet is at the very end:

It may be important to seek advice from business experts and professionals when considering the advantages and disadvantages of a business entity.

 

 

 

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IRS Increases Mileage Rates

Posted by taxguru on June 23, 2008

At last, IRS has realized that the 50.5 cents per mile standard rate for business miles is woefully out of kilter with the current fuel prices, so they just announced that as of July 1, 2008, the rate will jump by eight cents to 58.5 cents per business mile.

The standard deduction for medical and moving costs will also increase as of July 1, to a whopping 27.0 cents per mile.

And, as always, the rate for using a vehicle for charitable purposes will remain at the statutory limit of 14.0 cents per mile because our imperial rulers locked that rate into the law.

This shows once again why it is important to keep track of actual expenses rather than rely on the out-dated standard rates when calculating vehicle deductions. 

 

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Rolling over retirement funds…

Posted by taxguru on June 20, 2008

Q:

Subject:  Question about IRA’s

Hi Kerry,

 

I have a friend who is a nurse at a hospital in Berkeley.

 

She has two IRA accounts….one is noted as a 403(b)

 

The other one has nothing to indicate what it is, so we are assuming that it is a traditional type IRA, tax defered account.

 

Naturally both of her accounts are losing her money and she wants to roll-over both these accounts into some other tax defered plan.   Both the broker(manager) and her human resources dept. are telling her that she cannot remove funds from either account until she turns 59 1/2 yrs old (this December).  (assuming that she doesn’t quit her job) 

 

They say that taking either account to “cash” and mailing the money direct to the “new fund” would still be a taxable event because she hasn’t turned 59 1/2 yet. 

 

Actually….the manager said that she could take the 403(b) to another fund and she wouldn’t be taxed….and the HR Dept said that was wrong even transfering the 403(b) would be taxable.

 

Since she isn’t quiting her job…..then there isn’t a “distributable event”…..

 

YOU ARE THE GURU……PLEASE ENLIGHTEN US.

 

Many Thanks,

 

A:

I’m not really a fan of second hand tax advice.  Your friend really needs to work with her own personal professional tax advisor in order to work out the best plan for her unique circumstances.  However, there are some good issues here that will make for an interesting blog post, so the following comments are more general than she really needs.

A 403(b) account is basically the non-profit equivalent to the 401(k) deferred compensation retirement savings account that many for-profit companies offer their employees.

What seems to be the confusion is the fact that there are very different rules for IRS in regard to what kinds of things would be taxable and the rules that are established by the administrator of the retirement accounts.  In most cases, the paperwork that employees sign when enrolling in employer sponsored plans is much more restrictive in regard to withdrawals and loans than the IRS rules are.

Thus, I can only discuss the IRS rules with any confidence.  She will have to review her plan documents to see what restrictions she has agreed to, such as not moving the money while she is still employed there.

For IRS, any person is allowed to roll over their retirement assets from any tax deferred account, such as 403(b) and conventional IRA accounts whenever the person feels it to be in her best interest.  With a direct custodian to custodian transfer, the full amount is rolled over to the new account, without anything being withheld for income taxes.

However, if she were to take a check for the withdrawal, she has 60 days to roll it over into a new retirement account, or even multiple accounts if she feels it best to diversify. In this kind of situation, because there is no absolute guarantee that the employee will actually deposit the money into a new retirement account, IRS requires that the first custodian withhold 20% of the withdrawn amount and send it to them just like Federal income taxes withheld from paychecks.  This amount can then be claimed as a credit on the person’s next 1040.  The big problem that arises is that for a completely 100% tax free rollover, the person will have to use other funds to make up for the 20% that was withheld or else it will be considered a taxable withdrawal.

As an observation, I have noticed over the past few years a number of cases where clients doing withdrawals from their retirement accounts did not have any taxes withheld and were thus able to easily deposit the full amounts into their new accounts.  For some reason, their old employers and/or plan custodians were being nice guys and ignoring the IRS withholding requirement, which isn’t always the case.

Rollovers of retirement accounts can be done at any age.  Anyone claiming that only people over 59.5 years old are eligible for tax free rollovers is seriously ill-informed. The 59.5 years of age threshold is only important when taking out taxable withdrawals because if none of the exceptions applies, there will be early withdrawal penalties for both IRS and FTB.

So, in summary, IRS will allow a tax free rollover at any age.  Any restriction on such a move would be in the plan’s governing documents. Her own professional tax advisor should review those documents to see if she did formally agree to such restrictions.

In similar cases I have seen, where someone has been locked into a money losing retirement account, the next best thing to a rollover is to stop any new contributions to it by amending her agreement with the payroll department and diverting that money into another retirement account, such as one of the IRA plans.

I hope this helps.

Kerry

Follow-Up:

Thanks Kerry,

 

So as far as the IRS is concerned, she can “roll-over” her Tax defered IRA’s into new ones with a direct transfer into the new accounts.   She will need to see if her current retirement funds have more restrictions, placed there by her employer, that would keep her from transfering at this time.

 

Thanks so much,

YOU ARE THE GURU !!

 

 

 

Business Plan Pro

 

Posted in Retire | Comments Off on Rolling over retirement funds…

We all know how well that vow worked out for Bush 41…

Posted by taxguru on June 20, 2008

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Posted by taxguru on June 20, 2008

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