Tax Guru – Ker$tetter Letter

Q:

Subject: RE: Interesting tax question

 

Thanks Kerry for the valuable information and points well taken.

 

To clarify, I didn’t assume the sale of a personal ring to be a business transaction, I didn’t miss it per se.  I do have a difference of opinion on this being a business transaction but totally understand how the IRS will see it differently.  Regarding the sales tax, if the IRS says it’s a business sale, then can’t I substantiate a lower sales price, less the sales tax?  Creating a legitimate business sale of $9,150 price, plus tax of $850, increasing taxable income (and SE tax) by $150 and a tax payable to the BOE of $850?

 

Another scenario would be as a capital gain of $1,000 at the collectible tax rate of 28%.

 

Also, good advice, I did actually incorporate at the end of 2004.  I keep my books totally separate.  I really like quicken for the portfolio tools, I don’t think QuickBooks offers these tools.  I also have a CPA, but like to do some research so I understand my own taxes.  My CPA gave me the same scenario you did, that it would be a business transaction since I am in the jewelry business.

 

My other argument to this is that the ring I sold is considered “used” and I don’t sell used jewelry, I sell made to order custom jewelry.  A pawn shop on the other hand sells “used” and “estate” jewelry.

 

Anyhow I am just assessing all the angles.  I find it interesting.

 

I appreciate your input and will let you know how it all turns out.

 

Sincerely,

A:

The only way you could possibly make a case that the ring sale was not part of your regular jewelry business might be if it was sold to someone who wasn’t a normal “customer,” such as a family member.  You didn’t mention who you sold the ring to. If it was somebody who patronizes your business and is not related to you, there is no way you will be able to convince IRS not to added it to your Sch. C.  Being used won’t make any difference.

As you know, sales taxes are assessed on the ultimate consumer, but collected by the retailer on behalf of the state.  If you didn’t charge the buyer of this ring, and you end up having to pay the state out of your pocket for the un-collected sales tax, you will be entitled to a deduction for that in the year in which you make the payment if you are on the cash basis of accounting.  If you are using the accrual basis, you could make a case for accruing that expense for the year of the sale.  In that case, the auditor will need to see proof that you subsequently paid it.

If you didn’t prepare a bill of sale or other receipt showing that the $10,000 was to include sales tax, you are going to have a hard time convincing the BOE that it was a sale for $9,150.  BOE auditors are notoriously harder to deal with than are IRS auditors in their relentless thirst for money.

You are correct that QuickBooks doesn’t have the market price adjusting utilities that Quicken has for stocks; but that entire process in Quicken is not proper accounting and end up giving distorted cash basis financial statements.  That was one of the biggest complaints I had from clients who I wanted to switch, but they’ve adjusted just fine to QB, and we have much more accurate accounting reports.

Good luck.

Kerry Kerstetter

 

Q:

Subject: question on gift taxes

 

I found your website very helpful.   I have a question though.
My partner and I will be buying a home within the next 4-6 months.   A life time friend has offered to contribute $150,000 to us both.   Could he give 12k to each of us in Dec and another 12k in Jan (no taxes) and then can he loan us the balance?   Would this be a way around the taxes?  

Thank you for your time and I hope you don’t mind the question.

Best,

A:

A combination of gifting and loans with future principal forgiveness is a common technique to avoid gift tax returns.

Your wealthy friend needs to consult with his professional tax and legal advisors to set up the actual details of how this would work since the gift tax reporting is his responsibility.

You and your partner would receive gifts free of any income tax; but you should still discuss any possible consequences of this plan with your own professional tax advisors.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Medicare Part B – Time to OPT OUT?

 

Back in May, 2006 I wrote you about the new tax law wherein for the first time, the payors of tax exempt interest are required to report said

interest [on 1099s] to the IRS. You mused that maybe the reason for the reporting was to catch Social Security recipients who are not adding tax

exempt interest on the SS worksheet to determine its taxability. I think there may be another reason; starting in 2007,  Medicare Part B premiums

will be income based for higher bracket individuals. The premiums will be based on “adjusted AGI” which includes tax exempt interest. The higher

Medicare Part B premiums will be phased in over the three year period, 2007 – 2009 & will be based on 2005 – 2007 adjusted AGI respectively. [The

Social Security Administration will now have access to our 1040s – ain’t that sweet]. 

 

For a scary preview of the forecasted Part B premiums, see http://www.tscl.org/NewContent/102589.asp

 

I am turning 65 at the end of this year & just received my Medicare card for Part A [Hospital coverage which is free] & Part B [Medical coverage which in 2006 cost $88.50/month]. One is automatically opted in to both parts of Medicare; it is necessary to affirmatively opt out of Part B. Not surprising calls to both the SSA & Medicare received little or no knowledge of the upcoming Part B means test. I urge all SS recipients to take a hard look at the forecasted Part B premiums & seriously consider opting out.

A:

You are correct.  This is one more in a long line of attacks on the “evil rich,” using tax return info as the trigger. 

FYI: SSA has always had access to tax return data directly from IRS.  That is what they use to determine income and SE taxes for those of us who are self employed and don’t receive W-2s.  What has actually long been frustrating is that SSA only seems to want to work with original tax returns.  They don’t adjust for subsequent changes in those returns, either through voluntary amendments or by IRS audit adjustments.

I’m not sure of the higher Medicare premiums will be enough on their own; but along with all of the other penalties for having a high AGI, this should motivate more people to use C corporations and other techniques to reduce the income that shows up on their 1040s.

Thanks for sharing this info.

Kerry Kerstetter

Follow-Up:

Thanks for the response & info. My income consists exclusively of the “unearned” type – mainly dividends & interest [mostly exempt]. I haven’t paid any SE taxes for over 30 years [I worked the minimum 40 quarters & out]. Here’s a few more facts about the upcoming rise in Medicare part B premiums:

 

Below is reproduced the table for estimated increase in Medicare Part B premiums. Note that there is a particularly vicious nature to the break points between income levels not found in the familiar X, Y & Z 1040 Tax Rate Schedules. One dollar of income over an income break point can cost anywhere from $154.80 (12x[113.40-$100.40]) to $930.00 (12x[$413.40-$335.90) in additional yearly premiums. That’s confiscatory taxation parading as an insurance premium. Because premiums are based on Modified AGI, shifting deductions from one year to another is of no help; one must work on the gross income side of the equation with such strategies as realizing capital losses or purchasing bonds with accumulated accrued interest wherein the coupon is not paid until the following year. Even such common practices as dollar rounding on tax returns can have a costly effect if the rounding, on balance, goes the wrong way (i.e. up). The closer one gets to December 31st, the more important it is to run an accurate as possible 1040-ES if you are a Part B participant & near an income break point.

 

Estimated Medicare Part B Premiums
[From http://tscl.org/NewContent/102589.asp]           

 

Assuming the Medicare Part B premium continues to rise at the same average rate that is has for the past five years (about 13.4%), the following chart illustrates 

what estimated premiums may look like for 2007 through 2009.                                   

                                        

          Income [MAGI]*                                               Monthly Premium is                       

Individuals          Married Couples                    2006          2007              2008      2009

Under $80,000       Under $160,000               $88.50       $100.40      $113.90      $129.20
$80,000-$100,000    $160,000-$200,000      $88.50       $113.30      $141.30      $180.90
$100,000-$150,000   $200,000-$300,000      $88.50       $133.30     $190.00      $258.40
$150,000-$200,000   $300,000-$400,000      $88.50       $153.30      $235.50      $335.90
Above $200,000  Above $400,000                  $88.50       $173.30      $281.10        $413.40

    * Modified AGI [includes Tax Exempt Interest, Series EE savings bond interest used for educational expenses & any excluded foreign earned income]

NOTE: The premium for 2007 is based on the Modified AGI for 2005.
      The premium for 2008 is based on the Modified AGI for 2006.
      The premium for 2009 is based on the Modified AGI for 2007.

 

 

Tax Break for Wealthy IRA Owners – Gail Buckner looks at the new tax law.

This is the second recent comic by this cartoonist dissing our profession.

See earlier.

Q:

Subject: Importing data from Money to Quick Books

Dear Sir,

 

Thank you for your very helpful website tips.  It is very generous of you to share your experience.

 

If I am not imposing too much on your good will, may I ask:  am I able to import data from the Money program into Quick Books 6?  The person I am doing this for had kept all his info on Money and now wants to change to Quick Books and I would like to avoid reentering all his information from the first of this year.

 

Thank you.

A:

You should check out the conversion tools available from Big Red Consulting.

Specifically, they claim that the QIF to Excel to IIF Converter can 
   “ Convert part or all of a Quicken or MS Money file to a new or existing QuickBooks company file.”

I hope this helps.  Good luck.

Kerry Kerstetter

Follow-Up:

Thank you very much.