One of the main arguments used by the defenders of retaining the Marxist estate (aka death) tax is that only the very richest (and thus most evil) among us have to pay it.  They like to cite statistics showing the small percentage of people having to pay estate tax.  This recent article by David Cay Johnston, a person who wrote an entire book decrying the tax breaks for the evil rich, is a perfect example. 

What I have never seen discussed is the number of people who are required to file estate tax returns (Form 706), and the exorbitant cost of having those prepared, even when no estate tax is due.  As I explain on my main website, estate tax is due on the net taxable estate, which is the gross fair market value of everything owned by the decedent, reduced by debts, charitable bequests, final expenses, and the unlimited bequest to the surviving spouse.  However, IRS requires anyone who has passed away (actually the survivors) to file a 706 if the fair market value of the gross estate is over the estate tax exemption amount, which is currently $1.5 million. With the current rise in real estate values, millions more Americans are being pushed into the realm of having to file 706s every day.  

Having prepared pretty much every kind of tax return there is over the past thirty plus years, the 706 is the one I most hate doing because it is definitely the most complicated and the most time consuming, especially when there are assets that are difficult to value with any precision, such as closely held corporations and artwork.  The fact that IRS audits an extremely high percentage of these returns requires much more diligence on the part of us preparers. The biggest fees I have had to charge clients for tax returns have been for these, often well over $10,000. 

While repealing the Marxist estate tax would obviously reduce the income of estate tax return preparers, it would save many millions of people huge sums of fees, to say nothing of the time involved in assembling the information for the 706 and in defending the values against IRS challenges.

Thanks to Ohio CPA Dana Stahl for passing along the Johnston article.  I have the same reaction as Rush has to the NY Times:

 “I must be honest. I can only read so many paragraphs
of a New York Times story before I puke.” –Rush Limbaugh

There used to be a term, “Public Servant,” to describe those who work in the government in order to help the people. Over time, that role has evolved into more of a “Slave Master” as our rulers now force us to work for their benefit.

Q:

Greetings,

First, thank you for the article, it is enlightening.  I understand your position and you may be to busy to answer my query but here it is.  I have quite a few folks telling me that it makes no sense that I open a C corp as I am a starter business that will not be amassing great income initially.  They tell me that S is the way to go and go to C if I start making the big bucks.

 

These folks own their own businesses and are quite successful.  If you can please advise as I am a novice myself,  I don’t want to misstep as the first thing I do.

Thanks

A:

Unless one of those friends of yours who is advising you to be an S corp is a professional tax practitioner who has access to all of your personal tax and financial details, you should not base any real decisions on what they say.  Second hand tax advice from non tax pros is extremely dangerous.  If they are truly successful in their businesses, I’m sure they have tax pros to help guide them.  However, what may be suitable for their situations may be 180 degrees off the mark for yours.  It is really no different than having your friends diagnose your medical conditions and prescribe the appropriate medication based on what worked for them.

As I have explained on countless occasions, there are appropriate times and places for using both C and S corps.  Using an S just to pick up the first year losses, with profits expected in the subsequent years, is a very shortsighted approach to take because of the higher overall taxes on S corp profits.

Deciding which is best for you at this time is not something I can help you with.  You need to hire a tax pro who understands the pros and cons of using corporations to give you that kind of guidance.

Good luck.

Kerry Kerstetter

 

It would be nice if this were possible; but that’s not how life is for those of us who work for ourselves.

Q:

Subject: Employee Fuel Allowances

Hello Kerry,

 

I am working at a client’s office today.  All of his employees drive in from out of town.  He has asked if it would be a good idea for him to provide his staff with fuel allowances.  If so could he cut them a vendor check instead of including it in there payroll and would this be a good write off for his S-Corp by deducting it as employee fuel allowance?       

 

Thanks for your input.

A:

The ability to do what you are proposing – give tax free auto allowances in lieu of taxable wages – became illegal decades ago. 

There are some tax free commuting expenses that employers can provide; such as parking and mass transit passes.  However, paying for driving from home to work is not tax free and has to be included in taxable W-2 wages.

For business related trips, such as misc. errands, the employees can be reimbursed tax free if they turn in the number of business miles driven.  This is what IRS considers an accountable plan.  Those reimbursements, as long as they are no higher than the IRS”s official rate, do not have to be included on the W-2.

The other kind of plan, where a flat amount is provided for an auto allowance without any documentation of actual business miles drive, is called a non-accountable plan.  Those payments must be included in the employees’ W-2s as part of their gross wages.  They can then deduct on their Schedule A their actual business miles.

Kerry

 

Q:

Subject: QB for Personal use

Kerry, I was searching the web and found your site when I did a search on google for “QuickBooks for personal use”.

My wife and I use QB for a couple of business we own, but have refrained from using QB for our personal, be cause we are really not sure how to scale it down rather set it up for just regular home expenses and so forth. Do you have any recommendation other than buying Quicken in addition to QB to set up our personal finances in QB?

Thank you so much for your site, it has GREAT information.

A:

You need to read over the material I have on my website, and you will see that I do not recommend using Quicken.

If you are unincorporated, you should have every single business and personal account you own posted into one QB company file.

You keep straight what is business and what is personal by the use of Classes, as I describe on my site.

Good luck.

Kerry Kerstetter