Q:

Thanks Kerry for your detailed response.  One other potential issue:  In addition to the Voluntary Contribution Plan, I also participate in the Government’s Thrift Savings Plan (TSP).  This is the Government equivalent of a 401K.  When I retire, I am eligible to rollover the balance of my TSP to a regular IRA.  I want to do this at some point.  I realize that when I convert my regular IRA (including VCP contributions) to a Roth, I must pay ordinary income taxes on any portion of the contributions and earnings which resulted from pre-tax contributions.  I am OK with this.  So it appears that I should not rollover my TSP until after my planned Roth conversion.  Is there any way I am risking taxation on my TSP as long as I wait until after the Roth conversion to perform the rollover?  Thanks

 

Regards,

P.S. Love your websites

A:

I don’t see a problem whether you do the TSP rollover before or after you do the Roth conversion.  Roth conversions aren’t an all or nothing situation.  You can decide the specific amount from your regular IRA account to convert to a Roth and pay taxes on.    What would make things easier for you in terms of record keeping would be to have different rollover IRA accounts to keep the pre-tax amounts separate from  the after tax money.  If you commingle those two types of money, it will be more of a task keeping straight your tax free cost basis.

As I mentioned before, I do still have the very same serious concern about paying out very real tax dollars now for promised tax savings several years down the road that could be taken away at any time by our rulers in DC, as I mentioned in my 1999 letter that was published in the Wall Street Journal .  If you’re willing to take that chance, that’s your call.

Good luck.

Kerry

Follow-up Q:

Hi Kerry,

I understand that partial conversions can be done.  However since my TSP consists of all pre-tax contributions and earnings (my VCP and IRA  mostly contain monies which have already been taxed)  having any part of it included will increase the taxable amount of any amount which is converted to a Roth.

I appreciate your concerns regarding depending too much on the tax-free status of Roth withdrawals.  While it is true that the amount of tax code tinkering we are all subjected to seems to increase every year, the extent and nature of any changes is unpredictable.  I have enough trouble reacting to what I already know to be true.  I agree that the future holds higher taxes (and probably higher inflation too).  I feel that it is an easier sell to raise general tax rates rather than do a complete about face on the Roths.  Do you feel that Roths are a bigger target?

Regards,

Follow-up A:

The burden is on you to keep good records of your after-tax cost basis in the retirement accounts, so you can recover that much tax free when you make withdrawals.

Across the board tax increases are not as politically feasible as just nailing a group of people that everyone is stirred up to hate, such as evil rich retirees.  Our rulers have already done this very thing to people receiving Social Security, so I find it hard not to imagine the very same thing happening to people with Roth IRAs whose income is over a certain arbitrary level.

I’m not as concerned with people putting new money into Roths and missing out on the current deduction that a conventional IRA has.  I am mostly concerned with people paying out real tax money on converted IRAs with the hope of receiving tax free benefits several years or decades down the road.  I just do no trust the bozos in DC to be fair with this.

I hope I’m wrong; but their past screw-jobs on retirees tell me otherwise. 

It’s your call.

Kerry

Q:

Subject: can i deduct myself?

 

I’ll assume you’ve already seen this link:

http://moneycentral.msn.com/content/Taxes/P108364.asp

I particularly like the concept of depreciating an ostrich during it’s reproductive period.  I have successfully produced two children.  Do you think I could depreciate myself over 82.5 years (or whatever the going rate is nowadays)?

Thanks for your wonderful website (taxguru.net).  It is the first thing I read every morning.

A:

I did see that article.  Depreciating breeding animals is really nothing unusual. I have prepared hundreds of returns doing just that, including horses, cattle, llamas, dogs, and even some kangaroos and wallabies for some clients here in Arkansas.

I realize that you were making a joke about depreciating yourself. However, never missing an opportunity to clarify mystical and arcane tax issues, I do want to comment. 

First is the reason for depreciating an animal or any other asset on tax returns.  This is only allowable for business assets which are being used to earn potentially taxable income. 

When we set up animals for depreciation, we need to establish the appropriate cost basis to use.  For animals that were purchased, we use the amounts paid.  For animals that were born on the client’s premises, there is no new out of pocket cost, so those animals can’t be depreciated. 

So, assuming you were in the business of professionally breeding humans, I’m afraid that your own body has a cost basis of zero.  You didn’t pay anything for it, as it was a gift to you from our creator.

To follow that chain of thought a little further, if a person were to pay for a body part that is to be used in a business enterprise, that cost could be depreciated on the person’s tax return.  I’m sure this is done for show biz celebrities for their cosmetic surgeries and other enhancements that help them earn more money.

Thanks for writing and giving me an interesting topic to discuss.

Kerry Kerstetter

 

Q:

Subject: can i deduct myself?

 

I’ll assume you’ve already seen this link:

http://moneycentral.msn.com/content/Taxes/P108364.asp

I particularly like the concept of depreciating an ostrich during it’s reproductive period.  I have successfully produced two children.  Do you think I could depreciate myself over 82.5 years (or whatever the going rate is nowadays)?

Thanks for your wonderful website (taxguru.net).  It is the first thing I read every morning.

A:

I did see that article.  Depreciating breeding animals is really nothing unusual. I have prepared hundreds of returns doing just that, including horses, cattle, llamas, dogs, and even some kangaroos and wallabies for some clients here in Arkansas.

I realize that you were making a joke about depreciating yourself. However, never missing an opportunity to clarify mystical and arcane tax issues, I do want to comment. 

First is the reason for depreciating an animal or any other asset on tax returns.  This is only allowable for business assets which are being used to earn potentially taxable income. 

When we set up animals for depreciation, we need to establish the appropriate cost basis to use.  For animals that were purchased, we use the amounts paid.  For animals that were born on the client’s premises, there is no new out of pocket cost, so those animals can’t be depreciated. 

So, assuming you were in the business of professionally breeding humans, I’m afraid that your own body has a cost basis of zero.  You didn’t pay anything for it, as it was a gift to you from our creator.

To follow that chain of thought a little further, if a person were to pay for a body part that is to be used in a business enterprise, that cost could be depreciated on the person’s tax return.  I’m sure this is done for show biz celebrities for their cosmetic surgeries and other enhancements that help them earn more money.

Thanks for writing and giving me an interesting topic to discuss.

Kerry Kerstetter

 

Tax Panel Seeks Public Comment

1. Headaches, unnecessary complexity, and burdens that taxpayers – both individuals and businesses – face because of the existing system.
2. Aspects of the tax system that are unfair.
3. Specific examples of how the tax code distorts important business or personal decisions.
4. Goals that the Panel should try to achieve as it evaluates the existing tax system and recommends options for reform.

Estate Tax Repeal Advocates Giving It Another Go – Of course there will be same opposition to such a change from the usual suspects, such as Bill Gates, Sr. and Warren Buffett, who along with their Fellow Travelers, still idolize Karl Marx and his philosophy of having the central government confiscate and redistribute wealth. 

I’ve already written several times about how IRS has gone overboard in scrutinizing refund claims by auditing the returns as an over-reaction to their incompetence in actually paying out huge sums for nonexistent slavery tax credits.

Perusing the recent Tax Court cases, I saw that this slavery credit came up in a case that was decided yesterday, Hyler v. Commissioner (T.C. Memo 2005–26).  Kleinrock has a good summary of it in their bulletin.

To summarize, this couple filed a 2000 1040, where they claimed a “Black Investment Credit” of $92,861 by using Form 2439, which is for something completely different, Notice to Shareholder of Undistributed Long-Term Capital Gains.  Any competent tax pro would see that such a claim is ridiculous.  However, when the IRS received the 1040, they actually sent these people a check for $93,071, which included this bogus credit and the excess of their withheld taxes over their actual tax. 

After IRS learned of their own stupidity in paying out these kinds of claims, they had to try to recover them, such as the deficiency notice they sent the Hylers in March 2004.  The Hylers used the standard Willie Nelson defense, that it was all the tax preparer’s fault and the IRS should recover the money from him, even though the Hylers’ 1040 had no paid preparer listed.  

It was no surprise that the Hylers lost this case and will have to repay the bogus credit, plus penalties and interest.  Escaping scot-free with no punishment are the morons at the IRS service center who okayed the payment of the credit back in 2001.  In fact, they’ve probably already been promoted by now. 

Lookout for the sucker-punch tax – Another appropriate name for the insane AMT.

Class-Warfare Death Wish – I wish I could be as optimistic as Larry Kudlow is on this topic, but I still see a very pervasive hatred of success in this country that is exploited by the DemonRats.

Q:

Subject: mileage deductions

Can you tell me if the new rate of 40.5 up from 37.5 a mile can be used in my tax returns filed now feb of 05 for my 2004 income tax. Or do i have to wait till the end of the year to apply the new rate

A:

That is a new, but very wrong, interpretation of the rules for claiming business mileage deductions.  When you file the tax return is irrelevant.  Business miles driven during 2004 can use the 37.5 cents per mile standard rate, or the prorated actual expenses, whichever gives you the best total deduction.

The new rate of 40.5 cents per mile is only available for business miles driven during 2005, which will obviously be calculated on your 2005 1040 some time after the end of 2005.

It sounds as if you could benefit from the services of a tax pro to help make sure you interpret the tax rules properly.

Good luck.

Kerry Kerstetter