> Questions and Answers
>
> QuestionI have 3 stock investments held long-term that I sold during 2004. I
> had tax losses as follows: Stock A, $2,160; Stock B, $2,462; Stock C $9,933.
> When I entered the loss for Stock C in my tax return preparation software,
> the taxable income and federal tax refund didn't change. Why?
>
> AnswerBecause the maximum capital losses that may be deducted in any tax
> year on an individual's federal income tax return is limited to $3,000. Excess
> capital losses are carried over to the next year. See line 21 of Schedule D.
>
> If you are going to be an investor, you need to learn the rules of the game.
> At least read the section on capital gains and losses in a good tax guide.
> Your stock broker might also have some booklets on tax rules relating to
> investments that you can study.
>
> QuestionWhy aren't PBGC retirement checks tax free, since our company, which
> is now bankrupt, paid PBGC insurance premiums and insurance claims aren't
> taxed?
>
> AnswerNot all insurance proceeds are tax-free. Life insurance and most
> medical insurance benefits are usually tax-free, but even life insurance benefits
> are occasionally taxable.
>
> QuestionCan I claim items like gas mileage and books on my tax return? What
> about loans? I haven't begun to pay them and will begin to pay when school is
> completed. I only make the interest payments.
>
> AnswerYou haven't given me many details for your situation. Personal
> mileage, including driving to school to earn your first college degree, isn't
> deductible.
>
> There may be some credits or deductions available relating to your education
> expenses. I recommend that you go to the IRS web site at www.irs.gov and get
> Pub 970, Tax Benefits of Education, and Pub 508, Tax Benefits for
> Work-Related Education.
>
> QuestionI have been contracted by an IT staffing company to a company that
> is a 104-mile commute (round trip) from my house. The staffing company pays me
> and issues my W-2.
>
> Can I take the mileage as a deduction because of the temporary nature of the
> job?
>
> AnswerProbably not. The IRS has recently been "looking through" these
> arrangements and finding the contracting company to actually be the employer.
>
> QuestionSince I started a new job a couple of years ago, I've been having
> too much taken out of my paycheck to cover Federal and state taxes. We're
> ending up with a big refund. I'd rather the money was in our pockets throughout
> the year. Do I change my W-4 to have less income taxes taken out?
>
> AnswerYes. There is a worksheet on the form to help you figure the number of
> exemptions you are entitled to. Watch your withholding after the change to
> be sure you are at least paying in last year's tax. Consider having a tax
> advisor help you with this.
>
> QuestionMy aunt bought a house in December, 1999. She has let my wife and me
> live there from that time to the present without charging us rent. If she
> wants to sell the house and buy another one, will she be charged tax on capital
> gains? What is the rate?
>
> AnswerSince your aunt never charged you rent, it's questionable whether she
> can make a tax-deferred exchange for the residence. Since she never lived
> there, it won't qualify for the exclusion for the sale of a principal residence.
>
> The maximum federal income tax rate that applies to long-term capital gains
> is 15%. State taxes can also apply. In California, net long-term capital
> gains are taxed at the same rate as other income. If she lives in a different
> state from the one where the residence is located, she may be required to file
> income tax returns in both states. Your aunt should consult a tax advisor
> about her situation.
>
> QuestionI was seriously injured on my job and won a settlement. They also
> have to pay my medical bills for the rest of my life. Do I have to pay income
> taxes for the award? It is for a physical injury.
>
> AnswerNonpunitive damages and other amounts received for personal injuries
> are excluded from taxable income. (IRC Section 104(a)(2).) Punitive damages
> are taxable, even when they relate to a physical injury.
>
> QuestionMy wife for 5 years is Russian and our daughter is still in Russia -
> a full time student and ill. We are sending $2,000 per month for her
> support, school and medicines. She has no other income. Can any of this be deducted
> on our joint US income tax return.
>
> AnswerIn order to qualify as a dependent, the child must be a citizen,
> national or resident of the United States, or a resident of Canada or Mexico at
> some time during the calendar year in which the tax year of the taxpayer
> begins, or an alien child adopted by and living with a U.S. citizen or national as
> a member of his or her household for the entire tax year. (IRC Section
> 152(b)(3).) It doesn't appear your daughter will qualify for a dependency exemption
> or medical deductions unless you bring her here to live with you or
> otherwise meet the requirements. (Also, remember full-time students only qualify if
> they are under age 24 at the end of the calendar year.)
>
>
7:34:31 PM
> Ford Escape qualified for tax break.
>
> The IRS has certified the 2005 Ford Escape sport utility vehicle as a hybrid
> gas-electric automobile eligible for the clean-burning fuel deduction. (IR
> 2004-147.) The deduction is up to $2,000 for tax years 2004 and 2005. This is
> the first SUV model and the first vehicle manufactured by a U.S. company to
> qualify for the deduction.
>
>
7:34:29 PM
Illustration by Bob Eckstein
If you're like most people, you don't relish spending money on insurance. Sure, you need it, but it's not bright and shiny, you can't drive it, and no one is going to admire it. So it's all the more galling when you find out you've purchased insurance that you don't need. "Fear sells a lot of insurance," says Robert Hunter, director of insurance for the Consumer Federation of America, a nonprofit consumer-advocacy group of which Consumers Union, publisher of Consumer Reports, is a founding member. "A good rule of thumb is to purchase insurance only from an insurance provider. And buy policies that are comprehensive."
Insurance should cover catastrophic losses that you'd be hard-pressed to cover on your own. So what do you need? A term-life policy to cover your contribution to the family's expenses; a comprehensive health policy (or membership in a managed-care plan); disability coverage to provide income when you can't work; and homeowners and auto insurance to replace lost property. If you've got those, you don't need the following 10 policies.
1
Mortgage life insurance. This policy, generally purchased from a lender, will pay off your mortgage if you die. The cost can be three to five times as much as comparable term-life insurance for a benefit whose value declines as the mortgage is paid down. Instead: Rely on term life.
2
Credit-card-loss protection. It pays off losses if your card is stolen and the thief goes on a spending spree. Plans cost $7 to $15 a month. But federal law limits your loss to $50 per card. Instead: Put credit-card numbers in a safe place, and report lost cards ASAP.
3
Car-rental insurance. For $8 to $11 a day, it covers damages to cars and people if you are in an accident while driving one of the rental agency's vehicles. Check to see if your credit card or your own auto policy has such coverage, says Sandy Praeger, insurance commissioner for Kansas. Instead: Don't bother.
4
Flight insurance. Specialty travel-insurance companies sell life-insurance policies that pay a benefit if you die (or are dismembered) in a plane crash. Depending on the amount of insurance you buy, you pay $15 to $60 per flight. Instead: Skip it. Term life will cover you if you die in a plane crash, and health insurance should cover medical expenses.
5
Cancer insurance. Marketed by specialty-insurance companies, these plans supplement health insurance for cancer-care costs. Annual premiums range from $200 to $3,000. Despite their high cost, the policies may not cover outpatient care. Instead: Chances are that your existing health insurance already covers cancer expenses, so forget about it.
6
Credit-life insurance. Credit-card companies, banks, and other organizations that finance a purchase or lend money offer policies that repay a loan if you die. Average payout is $4,500 for a yearly cost of $23, says William Burfeind, executive vice president of the Consumer Credit Insurance Association. That's a lot of money when a healthy, nonsmoking man of 40 can buy $100,000 of 10-year level term coverage for about $100 a year. Instead: Make sure you have enough term life to cover loan payments.
7
Credit disability insurance. This policy will pay minimum installments on a loan, typically up to 36 months, if you are disabled according to the terms of your policy. A policy may cost $21 per $1,000 of coverage. Instead: Make sure that your disability plan will cover your expenses, including any loan payments.
8
Involuntary unemployment insurance. Credit-card companies and other lenders market this policy which makes minimum payments on a credit card or car loan for 6 to 12 months if you lose your job. The cost: $0.70 per $100 of your credit-card balance. Instead: Create an emergency fund that will cover 3 to 6 months of your expenses.
9
Accidental-death insurance. Your heirs collect a benefit if you die in an accident. Cost runs about $600 a year. Only about 5 percent of those who die each year do so in accidents, however. Instead: Stick with term-life insurance, which pays regardless of cause of death.
10
Identity-theft insurance. Sold by banks, credit-card issuers, and specialty insurers, it covers the cost of repairing your credit and sometimes attorney's fees. Policies cost $20 to $180 a year for up to $25,000 in coverage, which does not include unauthorized charges or funds siphoned from accounts. Instead: Check your credit reports regularly. The FTC anticipates issuing a final rule this summer that would give consumers the right to order one free credit report a year from each of the three main credit bureaus.
If you're
like most people, you don't relish spending money on insurance. Sure, you
need it, but it's not bright and shiny, you can't drive it, and no one is
going to admire it. So it's all the more galling when you find out you've
purchased insurance that you don't need. “Fear sells a lot of insurance,”
says Robert Hunter, director of insurance for the Consumer Federation of
America, a nonprofit consumer-advocacy group of which Consumers Union,
publisher of Consumer Reports, is a founding member. “A good rule
of thumb is to purchase insurance only from an insurance provider. And buy
policies that are comprehensive.”
Insurance should cover
catastrophic losses that you'd be hard-pressed to cover on your own. So
what do you need? A term-life policy to cover your contribution to the
family's expenses; a comprehensive health policy (or membership in a
managed-care plan); disability coverage to provide income when you can't
work; and homeowners and auto insurance to replace lost property. If
you've got those, you don't need the following 10 policies.
1
Mortgage life
insurance. This policy, generally purchased from a lender, will
pay off your mortgage if you die. The cost can be three to five times as
much as comparable term-life insurance for a benefit whose value declines
as the mortgage is paid down. Instead: Rely on term life.
2
Credit-card-loss
protection. It pays off losses if your card is stolen and the
thief goes on a spending spree. Plans cost $7 to $15 a month. But federal
law limits your loss to $50 per card. Instead: Put credit-card
numbers in a safe place, and report lost cards ASAP.
3
Car-rental
insurance. For $8 to $11 a day, it covers damages to cars and
people if you are in an accident while driving one of the rental agency's
vehicles. Check to see if your credit card or your own auto policy has
such coverage, says Sandy Praeger, insurance commissioner for Kansas.
Instead: Don't bother.
4
Flight
insurance. Specialty travel-insurance companies sell
life-insurance policies that pay a benefit if you die (or are dismembered)
in a plane crash. Depending on the amount of insurance you buy, you pay
$15 to $60 per flight. Instead: Skip it. Term life will cover you
if you die in a plane crash, and health insurance should cover medical
expenses.
5
Cancer
insurance. Marketed by specialty-insurance companies, these plans
supplement health insurance for cancer-care costs. Annual premiums range
from $200 to $3,000. Despite their high cost, the policies may not cover
outpatient care. Instead: Chances are that your existing health
insurance already covers cancer expenses, so forget about it.
6
Credit-life
insurance. Credit-card companies, banks, and other organizations
that finance a purchase or lend money offer policies that repay a loan if
you die. Average payout is $4,500 for a yearly cost of $23, says William
Burfeind, executive vice president of the Consumer Credit Insurance
Association. That's a lot of money when a healthy, nonsmoking man of 40
can buy $100,000 of 10-year level term coverage for about $100 a year.
Instead: Make sure you have enough term life to cover loan payments.
7
Credit
disability insurance. This policy will pay minimum installments
on a loan, typically up to 36 months, if you are disabled according to the
terms of your policy. A policy may cost $21 per $1,000 of coverage.
Instead: Make sure that your disability plan will cover your
expenses, including any loan payments.
8
Involuntary
unemployment insurance. Credit-card companies and other lenders
market this policy which makes minimum payments on a credit card or car
loan for 6 to 12 months if you lose your job. The cost: $0.70 per $100 of
your credit-card balance. Instead: Create an emergency fund that
will cover 3 to 6 months of your expenses.
9
Accidental-death
insurance. Your heirs collect a benefit if you die in an
accident. Cost runs about $600 a year. Only about 5 percent of those who
die each year do so in accidents, however. Instead: Stick with
term-life insurance, which pays regardless of cause of death.
10
Identity-theft
insurance. Sold by banks, credit-card issuers, and specialty
insurers, it covers the cost of repairing your credit and sometimes
attorney's fees. Policies cost $20 to $180 a year for up to $25,000 in
coverage, which does not include unauthorized charges or funds siphoned
from accounts. Instead: Check your credit reports regularly. The
FTC anticipates issuing a final rule this summer that would give consumers
the right to order one free credit report a year from each of the three
main credit bureaus.
QuestionAre awards received in a wrongful death case taxable?
AnswerMy condolences for your loss. I will only discuss the federal tax
rules for your issue. You should be working with an attorney and a tax
return preparer in settling your father-in-law's estate. Amounts received
for physical personal injuries (including wrongful death) are excludable
from taxable income. Punitive damages are taxable income. (Internal
Revenue Code Section 104(a)(2).) However, if only punitive damages may be
awarded under a state's wrongful death statutes, which were in effect on
or before September 13, 1995, the damages are excludable (§ 104(c)). The
CCH Federal Tax Service cites the Conference Committee Report to P.L,
104-188 (1996) H,R. Rep. No. 104-737 in concluding that nonpunitive
damages received for wrongful death are excluded from income under
Internal Revenue Code Section 104. The clarifying language under § 104(c)
and Letter Ruling 200029020 also support this conclusion. Damages
received under a wrongful death statute are excludable from the taxable
estate of the deceased person, but amounts that person would have been
entitled to during his or her lifetime for pain and suffering or as
reimbursement for medical expenses, etc. are includable in the taxable
estate. (Revenue Rulings 69-8, 54-19, 75-127, 75-126, 83-44.)
QuestionI want to buy the home next door to mine, fix it up and sell it 2
or 3 months later. What kind of taxes and fees will I have to pay? What
are the negatives in selling so fast?
AnswerI don't know what fees you will have to pay. There will probably
permits for the repair work. There may be commissions to real estate
brokers. If this is an isolated transaction, any gain will be a
short-term capital gain, subject to regular income tax rates (maximum
35%). If you held the house for more than one year, you could qualify for
long-term capital gains rates (maximum 15%). Holding the house for a
longer period of time exposes you to more market risk. If mortgage
interest increase dramatically, the value of the house could go down or
it could be harder to sell. If you do a lot of "rehabs", you
will probably have a trade or business, not qualifying for capital gains
treatment and subject to self-employment taxes in addition to regular
income taxes. Good luck!
QuestionCan I file Chapter 7 for an S corporation that has no assets and
no money, but owes 2004 (California) minimum tax of $800 plus penalties?
AnswerI'm not a bankruptcy attorney. It seems to me it would cost less to
pay the tax and terminate the corporation before the end of this year to
stop the expense.
QuestionWe lost $2 million in the stock market over the last two years. I
need money to pay bills.
I have money in my wife's Roth IRA, my Roth IRA, or my SEP IRA.
Can I take the money from the IRAs tax-free?
Would it be better to get a home equity line of credit?
Would it be better to get a home equity loan? AnswerI don't have enough
details to answer your questions. I am assuming you are under age 59 1/2.
The SEP-IRA is the worst candidate for funds, because withdrawals will be
subject to income taxes plus penalties. There is an exception when the
withdrawals are made as a series of substantially-equal payments over
your life expectancy. (§ 72(t)(2)(A)(iv).)
The amounts contributed to the Roth accounts can be distributed tax-free.
Amounts in excess of the contribution amounts are subject to regular tax
plus the 10% early-distribution penalty. The equity line of credit has
the advantage of being able to take funds as you need them, but will
probably have a higher interest rate and annual fees as compared to the
equity loan.
I know you are short on funds, but you should seek more detailed help to
solve your problem.
Good luck!
QuestionMy husband and I bought a home in Palmdale, CA on June, 2003. We
want to sell the house now and buy a new home. We were told we could
avoid the tax if we bought the replacement residence within a certain
time frame. Is that right?
AnswerYour friend is thinking about an old tax law that has been repealed
and replaced with the new "more than two years holding period"
rule. If you sell your home with the facts you gave me, any gain will be
taxed as a long-term capital gain. Remember California taxes long-term
capital gains at the same rates as other income and will require income
tax withholding for the sale of 3 1/3% of the sales price.
3:01:53 PM
2:51:51 PM
Friday, October 01, 2004
Tax Consequences of Temporary Support
A divorce frequently takes months, and sometimes years, to resolve from the date of separation or filing until the divorce is final. Usually, the lower income spouse needs to receive support until the final decree occurs. Court-ordered spousal support payments that are made between the date of separation and the final decree are known as temporary support payments.
Temporary support payments qualify as taxable alimony (taxable to the recipient and deductible to the payor) only if they are paid because of a decree by a court. These decrees include interlocutory decrees and other decrees except final decrees of divorce or separate maintenance. Voluntary payments that have not been ordered by a court do not qualify as taxable alimony.
If the parties have not completed the divorce or become legally separated by December 31 of a particular year, they do not qualify as single for tax purposes and are still eligible to file a joint return. If they file a joint return for a year in which temporary support has been paid, the temporary support will not qualify as taxable alimony. Thus, for the alimony to be taxable their filing status must be married filing separately. If the divorce is final by December 31 of a year, the temporary support paid under a decree will be taxable to the recipient and deductible to the payor for the tax year. Temporary support payments that qualify as taxable alimony are not subject to the alimony recapture rules.
To qualify as taxable alimony, the temporary support payments must be made in cash or cash equivalents (i.e., checks or money orders payable on demand). Transfers of services or property will not qualify as alimony or separate maintenance payments. Likewise, a debt instrument for the benefit of the spouse receiving support or use by the receiving spouse of property does not qualify as alimony.
Payments to third parties can qualify as alimony. Payments by the provider of support for such expenses as a spouse’s rent, mortgage, taxes, or tuition qualify as alimony. However, payments of the mortgage, real estate taxes, or insurance on property owned by the provider of the support are not payments on behalf of the spouse and do not constitute taxable alimony even if they are made under a judge’s decree. Payments of premiums on whole or term life insurance on the provider’s life will qualify as alimony paid to the spouse only if the spouse is the owner of the policy. Payments by a provider of support to any third party under a written request, consent, or ratification by the receiving spouse also qualify as alimony.
12:43:44 PM
Family CPA Has Conflict Taking Sides In
Divorce. Federal Law Prevents Harassing Calls.
Question: When my husband and I
decided to call it quits, he hired the CPA who had advised us and filed
our personal and corporate tax returns for the past ten years to help him
in our divorce case. This CPA is now valuing our business, tracing the
purchase of assets, and giving tax-related opinions in court – most of
which are very detrimental to me. Throughout the years, I have had many
conversations with this CPA and have delivered personal information to
his office about my inheritance and gifts from my family, but he refuses
to make any information available to my lawyer without a court order or
subpoena – even though I gave him the only copies I had. This does not
seem right to me. How can a professional who worked for both of us choose
sides and what can I do?
Answer: In our view, a certified public accountant who has prepared joint
income tax returns for and given advice to a married couple has a serious
problem choosing sides at divorce and becoming adversarial to one of his
clients. As a client, you are entitled to not only the returns and all
schedules, but also all work papers, notes, and every piece of
information in that CPA's files.
In court, financial experts can be attacked on cross examination in four
areas: qualifications, independence, the assumptions used, and subjective
judgments. Here, it appears that if this CPA testifies or gives
affidavits, his lack of independence will surely taint his opinions in
the eyes of the court. We believe that he should be given one last
opportunity to remove himself from participating in your case. If he
refuses, we suggest that your attorney seek an order from the court
requiring the CPA to turn over all of the records and disqualifying him
from participation in the case. If he persists, we believe he is leaving
himself open to a lawsuit.
Question: My husband's former wife, who moved to another state after
their divorce, calls me constantly, cursing and berating me and
threatening to do harm to me. I receive "hang-up" calls at all
hours of the night. I have been to local law enforcement and although my
state has a law against harassing and threatening telephone calls, since
this woman lives in another state, law enforcement tells me that nothing
can be done. Is this true?
Answer: No. Federal law prohibits obscene or harassing or threatening
telephone calls that are made in interstate or foreign communications.
Under this law, it is illegal for a person to use the telephone (a) to
make obscene, indecent, or lewd comments; (b) to annoy, abuse, threaten,
or harass a person whether there is conversation or not; and (c) to cause
another person's telephone to repeatedly or continuously ring. The
penalties can be a fine of up to $50,000, six months in prison, or both.
We suggest that you contact the Federal Bureau of Investigation or United
States Attorney in your area and seek enforcement of your rights under
this federal law.
Question: My wife and I are completing a settlement which includes
alimony and child support. I am willing to pay her more money during the
first several years when she will need it most in consideration of paying
lesser amounts after she gets on her feet. Try as I might, I can't
understand why we can't do what we want to do and still keep the payments
deductible. Isn't there a simple explanation that can satisfy my basic
need for information?
Answer: Unfortunately, nothing is "simple" when it comes to the
taxation aspects of marital settlements. Assuming they qualify under the
tax law, alimony payments are deductible by the payor in the year paid
and includible in the income of the recipient in the year received. Child
support payments, on the other hand, are neither deductible nor
includible.
To qualify as alimony, each of the following requirements must be met:
(1) Payments must be made according to a divorce decree or separation
agreement signed by the husband and wife; (2) Payments must be in cash;
(3) Payments must terminate at the death of the recipient; (4) Husband
and Wife can't file joint income tax returns with each other; (5)
Generally, Husband and Wife must live separate and apart; (6) Payments
can't be designated as "child support" or as not being alimony;
and (7) Payments may not be made from alimony trusts.
Regardless of the reasoning behind you wanting to make larger payments
during the first few years, there are rules that prevent what is known as
"front end loading" -- that is, where, as you have described,
the payor makes larger payments during the first few years after the
separation or divorce -- which increases the deduction -- and then
decreases or terminates the payments.
In these situations, a part of the large payment in the early years may
later be treated as property settlement which is not deductible by the
payor and is not taxable to the recipient. This means that if you
deducted -- and your wife reported -- the large payments, you might be
required to "recapture" previously deducted amounts into your
income and pay additional taxes. At the same time, your former spouse
would receive a refund. Since this result is certainly not what you
intended, we suggest that you "leave the driving" to an
experienced matrimonial lawyer and certified public accountant who can
make sure your intentions are carried out.
Jan Collins Stucker is an award-winning writer and editor. Jan Warner is
a matrimonial, elder law, and tax attorney. Both are based in Columbia,
South Carolina. Flying Solo is distributed nationally by
Knight-Ridder/Tribune Service.
12:43:44 PM
Alimony Payments and Tax
Deductions
Question: During our three-year
marriage, my wife incurred a lot of debt – more than $15,000 on credit
cards, charge accounts, etc. Thankfully, we do not have any children. We
are in the process of divorce. Although my wife works, she doesn’t make a
lot of money and can’t afford to make the payments and still support
herself. My lawyer tells me that I may be responsible for some of these
debts because we were married. I am willing to pay part of the debts if
the payments are tax deductible to me and if I make the payments directly
to the creditors because I do not trust my wife. My lawyer tells me there
is no way to do this. Can this be accomplished as part of our divorce
settlement?
Answer: We disagree with your lawyer. If all requirements for
alimony are met, your payments to a third person "on behalf of"
your spouse according to a divorce or separation agreement will qualify
as tax deductible alimony. Therefore, if you agree to pay a debt for
which your spouse was obligated according to the terms of your divorce or
separation agreement, these payments would be tax deductible to you and
taxable to your wife – assuming the agreement was worded properly. But to
the extent the debt might be yours, your payments would not be deductible
alimony because they would not be considered to be payments made “on
behalf of a spouse” -- even if made according to the terms of a divorce
agreement.
Therefore, the first order of business is to determine which obligations
are yours and which are hers. You and your wife might consider her
assuming all debts and you making payments of some accounts as alimony.
In this way, the creditors would receive the sums due them, you would
receive a tax deduction, your wife would pay a part, and your wife would
pay the taxes on what you pay on her behalf. But remember, if your
payments to your wife’s creditors do not terminate on your wife’s death,
they will not qualify as alimony. You might want to maintain a policy of
life insurance with your wife as beneficiary to handle this contingency,
but take no action without the advice of qualified attorneys and
certified public accountant.
Question: When my wife and I signed an agreement in 1999, it was
on the condition that the payments I made to her were tax-deductible as
alimony. But my deduction has been disallowed – even though there is a
court order approving our agreement which classified the payments as
"alimony." I called my lawyer and found that there was a
clerical error made in one of the drafts which had deleted the provision
that my obligation would terminate when my now ex-wife died. My former
wife’s lawyer has refused to correct the error. What can I do?
Answer: The removal of the "termination-at-death" clause
-- by accident or otherwise -- has converted what may otherwise have been
taxable - deductible payments into what may are non-taxable and
nondeductible payments.
Your remedy: Ask the family court to correct the error which was made due
to inadvertence, neglect, or mutual mistake and to change the agreement
and court order retroactively to conform with your agreement. If the time
limit has expired based on the law of your state, you might be out of
luck and may have to look to your lawyer for the difference between what
your after-tax cost would have been and what it is now.
<img src="cid:6.1.2.0.2.20040924091409.01c07f00@mail.cpatax.net.0" width4 height4 alt="f85c43d.jpg">In
order to help those who have not yet completed their taxes, the Internal
Revenue Service (official motto: "You make it, we take it") has
create a special set of Frequently Asked Questions to help with last
minute tax chores. While it may not reduce the amount of tax you are
required to pay or the length of your jail sentence, it will definitely
take your mind off a pending audit.
Why are taxes due on April 15?
Don't even start down that path. Your taxes are due on April 15. No
ifs ands or buts. Congress passed this act way before you were born and
our budget depends on it. So get ready to pay up.
What time on April 15 are taxes due?
If you owe taxes, you must submit your completed and signed tax
return by midnight April 15. On the other hand, if you are expecting a
tax refund we don't mind if you wait a couple of years. We'll take good
care of your money during the interim period funding some fancy new
offices we're building in Washington, DC.
So let's say I live in Chicago and I'm running a bit behind schedule
on this whole tax scene. If I fly to, say, Honolulu on business, then I
would have an extra five hours to complete my taxes. Would I be able to
deduct the cost of the flight as a tax preparation expense?
Since the flight time to Honolulu is greater than the time
difference, you would need to prorate the deduction. Also note that
in-flight liquor would not be considered a tax preparation expense unless
you buy a round for everyone on the plane and form an S corporation by
filing "Form WD40 Extreme Lubrication."
Last year, I received stock options from my company which I exercised
and paid taxes on. I held the stock and now it's worthless and I have no
money.
There's a million stories in the naked city and this is just one of
them.
Since I never made any money from the options, can I get a refund for
the taxes I paid last year?
It turns out the IRS did pretty well on the whole dot com boom the
last couple of years by getting our cut up front. So we'll let you
declare a tax loss to offset any further gains this year. Remember the
expression "Buy low, sell high?" Next time, don't forget to
sell.
But I didn't have any gains this year and I had to sell my house in
Fremont just to pay taxes. Not only that, I lost my job and my wife left
me for an investment banker.
On average the economy continues to improve, but statistically
speaking there are always a few outlyers. Get with the program, mac. No
one wants to hang out with a complainer.
My accountant says I should declare bankruptcy. How does that
work?
We don't recommend bankruptcy. Strictly speaking, there's no percentage
in it for the government. Look, whatever you have, just send it in. I'm
sure we can work something out. We'll take a chunk of your paycheck for a
few years and call it even. Think of it as government alimony. We'll
still be friends and you can come visit the capital whenever you're in
town. Just don't call after you've been drinking.
My accountant says there's nothing left. He won't return my calls
anymore. I'm basically living in the streets.
Bankruptcy just doesn't have the social stigma associated with it
that it used to have. So if you want to go that route, we also need to
declare insanity, shave your head and join the Hare Krishna. Be sure to
fill out "Form 9985 Schedule L - Hare Krishna Hare Krisha Krishna
Krishna Hare Hare."
What is ATM?
ATM, it's like an instant teller machine. You put your bank card in,
you take money out. Where the heck are you from anyways?
Sorry, I mean, AMT.
Oh, that. AMT is the Alternative Minimum Tax. Harry in
Marketing came up with AMT a few years ago, when were trying to figure
out how to raise revenues without hire more collections goons. We never
thought it would fly, but it's turned into one of our biggest money
makers. We're still shocked at how long we've been able to keep this one
going. Harry got a big raise and a promotion out of it.
Who needs to be concerned with AMT?
The AMT was designed to make sure that the rich always had to pay
some taxes and couldn't get out with loop holes tax shelters and all
that. So unless you're in the top 60% of all wage earners, you don't need
to worry about it.
Well if AMT was designed to tax the rich and now it's taxing the
middle class, isn't that a problem?
Not for the IRS. We're very flexible. Of course, now even Harry in
Marketing has to pay AMT, which is kind of funny, when you think about
it.
I used TurboTax to prepare my return, but when I was just about to
save it gave me the error message "Federal Individual 1040 Update
Canceled: Invalid Patch File C:Tax01Updateswfdixxx.rtp." What
does this mean?
You will need to administer emergency first aid procedure. First,
file "Form 8849-PC - Computer Moron." Be sure to send us a copy
of your Autoexec.bat, config.sys and any MP3 files you've downloaded.
Note, please do not send any unsigned metal bands from MP3.com. However,
any bootleg Elvis Costello songs would be greatly appreciated provided
they are itemized on "Schedule EC-0423." If necessary, turn off
your PC, count to three, uninstall TurboTax, reformat your hard disk,
re-install Windows and get out the scotch. It's going to be a long night.
I did all this and then it said "A required .DLL file,
MSVCIRT.DLL, was not found." I've lost all my work and now my
computer won't even start. It just keeps making a beeping noise when I
turn it on. What should I do?
Oh yeah, before you reformat, be sure to make a backup. Just in case
you get an error message about a missing DLL file. Sorry about that. You
can request the DLL by sending in "Form 1225 (Schedule 3) Missing
DLL, Possible Low IQ." Or you can call us directly at 1-900-MORE-TAX
to order a new DLL for only $39.95. If you use Microsoft Passport to log
in to your financial institution, we've already transferred any taxes due
directly to our account along with a preferred customer surcharge. People
should really read those on-line agreements more carefully.
What happens if I don't pay my taxes on time?
Because we've cut back on the number of auditors you might just get
away with it. For a while. And then you'll start wondering if your
neighbors are going to rat you out. You'll see tax men everywhere. You'll
start to sweat whenever anyone even refers to taxes. Next thing you know
you'll be like that guy in the Edgar Allan Poe story.
Alternatively, you can flee to Switzerland or another country that does
not authorize extradition for tax purposes. Be sure to complete the
itemized list in "Form 2044 - Campaign Donations." If your
donations are larger than your phone number you can save time by also
filing a separate "Form 8669 Request for Presidential Pardon"
before leaving the country. Note that while pardons are normally
issued in the last 10 minutes of a presidential term, they last a life
time.
My grandmother is 90 years old. She doesn't even remember where she
lives. What if she "forgets" to file her taxes?
Unfortunately, the IRS has gotten wise to this ruse. Congress has
recently passed the "Unfiled Grandmother Amendment" also known
as "GranTax" closing this loophole. Any unfiled grandmothers
will be held in a newly constructed Grandmother Detention Center for 90
days.
This seems awfully cruel.
No, not at all. The staff love it. The grandmothers are all baking
cookies and knitting macrame wall hangings. It really helps with morale
during the busy season.
A friend of mine claims a home office deduction, but all he ever does
is play video games on his PC. How likely is it he will be
audited?
You can increase those odds by calling 1-800-4SNITCH. Plus you can
win a free set of steak knives.
What if this friend also writes a satirical web site that doesn't make
any money because no one buys the hats and mugs he sells? Can he deduct
the cost of travel to the South Pacific for market research?
You are so busted.
About the author Zack Urlocker is a pseudonym for a Silicon Valley software
executive. His identity is known only by his closest friends and the
IRS.
Bonus-first-year depreciation, which was designed to act as an economic
stimulus in the wake of the 9/11 terrorist attacks, will end on Dec. 31,
2004 for most taxpayers (unless Congress acts to extend it, which appears
to be unlikely). As a result, taxpayers have an additional incentive to
accelerate purchases of new depreciable assets into 2004 if their goal is
to maximize deductions this year. This Practice Alert takes a detailed look
at the closing window of opportunity to claim bonus first year
depreciation, and how to make the most of it in year-end tax planning.
4:27:06 PM
Thursday, September 02, 2004
Guidance issued for Health Savings Accounts.
The IRS has issued comprehensive guidance on the requirements for
high-deductible health insurance plans (HDHPs) and health savings
accounts (HSAs). The guidance should provide more certainty to employers,
insurance companies and other parties, encouraging offerings of more of
these plans by January 1, 2005.
Families covered with HDHPs can make tax deductible contributions to
an HSA, somewhat like an IRA. The earnings in the HSA are tax-deferred,
and may escape tax entirely if used to pay for qualifying medical
expenses. The annual contribution limits are $2,600 for individuals and
$5,150 for families, based on the deductible for the HDHP. (Notice
2004-50.)
4:19:14 PM
The Balanced Scorecard Tells the Story
A good balanced scorecard tells the story of the company’s strategy
through a set of related objectives and measures. For most clients their
strategic goal will probably include “making more money”. The question is
- How can than that be achieved? Here’s a set of related objectives that
might help them achieve that goal:
A goal of improved profit (a financial perspective objective) could
be related to increased revenue by increasing market share.
That might be accomplished by achieving higher customer retention.
Improved customer retention might be accomplished by improving
customer satisfaction (a customer perspective objective).
Increased customer satisfaction could be achieved by better customer
service (an internal perspective objective).
Better customer service could perhaps result from more motivated and
satisfied employees (an organizational and learning perspective
objective).
In this scenario every objective is part of a chain of cause and effect
that relates to the strategy of “making more money”.
Once the set of related strategic objectives has been defined, the next
challenges are:
Choosing metrics: What exactly should we measure? We need to
determine the metrics that best measure whether the objective is being
met. We know how to measure our financial objectives, but we’re not as
familiar at measuring other things. However, defining measures is usually
straightforward. For example, to measure customer satisfaction the
company may want to use customer surveys. To measure employee
satisfaction, the measure might be trends in sickness and absentee
rates.
Keep in mind, there are no penalties for not choosing correctly the
first time! Since the process should be a continuous process of
evaluating results and making adjustments, the system can and will evolve
and refine itself over time.
Setting goals: How will we define success? For each measure,
we need to set goals that can be achieved over time. In general, they
should be stretch goals - difficult but not impossible to achieve.
Avoiding over commitment: How much can be achieved given the
capacity of the organization? This is probably where most
organizations fail. It is better to start too small than to start too
big. If company tries to accomplish too much, it runs the risk of failing
and then abandoning the process completely
In the fully implemented balanced scorecard system, the system would
communicate to each part of the organization and potentially to each
employee through separate scorecards the organizational strategy of the
company.
If that sounds too complicated, remember I said "the fully
implemented balanced scorecard system". It seems to me that any
business can benefit significantly from an executive level scorecard that
could be easily implemented. Since one of the challenges of implementing
any new system is over committing, it will generally be better to keep it
simple in the beginning and let the system evolve over time.
The next and final article of this series will discuss steps you can take
to get started!
Regards,
Ed Wielage
P.S. If you have any questions, comments or experiences with performance
measurement and the balanced scorecard, send me an email, I’d like to
hear from you!
4:09:05 PM
Wednesday, September 01, 2004
New Rules for Overtime Pay effective August 23, 2004!
Under the new FairPay rules, workers earning less than $23,660 per year — or $455 per week — are guaranteed overtime protection.
This will strengthen overtime rights for 6.7 million American workers, including 1.3 million low-wage workers who were denied overtime under the old rules.
Most expensive cars to insure By Prakash Gandhi • Bankrate.com
It doesn't take a rocket scientist to identify which cars would cost the most to insure -- start with the Ferraris, Lamborghinis and Porsches. Duh!
But they're limited-production cars and people who own them certainly are not concerned about the price of insurance.
We've gone a step further, also bypassing other obviously expensive-to-insure lines such as the Mercedes, Jaguar, Corvette, BMW, Cadillac and Lexus.
Model
Annual Premium
Value
Ford Mustang GT convertible
$2,363
$28,640
Honda S2000 convertible
$2,363
$33,250
Chrysler Sebring
$1,788
$24,045
Toyota Celica GTS
$2,114
$22,750
Mitsubishi Eclipse Spyder GTS convertible
$2,114
$27,144
Dodge Neon SRT-4
$2,028
$20,955
VW Passat W8
$1,856
$39,735
Honda Civic Hatchback
$1,788
$19,560
Subaru Impreza WRX AWD Turbo
$1,788
$25,170
Volkswagen GTI VR6
$1,788
$22,070
Instead, here's a rundown on the most expensive cars to insure that the average American might be driving or considering for their next purchase -- those that cost less than $40,000 -- as researched by Runzheimer International, a Rochester, Wis., consulting firm which reviewed insurance costs on vehicles priced under $40,000.
11:16:46 AM
10 least expensive cars to insure By Prakash Gandhi • Bankrate.com
If you really want a car that's inexpensive to insure, go down the middle of the road when it comes to buying your next car. Cars likely to have the lowest claims rate of injury, theft and collision are going to get the best rates. Go for a model that is big enough to provide protection to you and your passengers, but not so big as to cause excessive damage in a wreck. Bigger cars provide better protection, but cost more in liability claims because they do more damage to others. The opposite is true for little cars: They don't do much damage to cars they collide with, but their passengers are not as well protected.
Runzheimer International, a Rochester, Wis., consulting firm, studied insurance costs on vehicles priced under $40,000. Below is its list of the least-expensive cars to insure in 2004.
Model
Annual Premium
Value
Model
Annual Premium
Value
Saturn Ion
$1,127
$11,975
Saturn L300
$1,158
$16,995
Chevrolet Colorado
$1,158
$16,330
Chevrolet Aveo
$1,216
$11,785
Ford Escape XLS
$1,216
$19,300
Mazda 3
$1,216
$14,200
Dodge Caravan
$1,250
$21,795
Honda Accord DX
$1,250
$17,190
Hyundai Santa Fe
$1,250
$19,359
Toyota Corolla
$1,250
$14,885
11:14:52 AM
Monday, August 09, 2004
August 9, 2004 - Enjoy this improved deduction for education expenses
Did you know that there’s an improved deduction for higher education expenses this year? The maximum amount has increased, and more taxpayers are eligible. It’s an above-the-line deduction, meaning that you can claim it whether or not you itemize. This year the maximum amount is $4,000, up from $3,000 last year.
In previous years the income cut-off was $130,000 for joint filers and $65,000 for singles. If your income was above this level, you couldn’t claim the deduction. That limit still applies if you want to claim the full amount. But higher-income taxpayers earning up to $160,000 can now deduct up to $2,000 in qualified expenses. The new upper income limit for single filers is $80,000. You can’t claim any deduction if you’re married filing a separate return.
You can claim the deduction for tuition and certain related expenses. These include student activity fees and other course-related expenses that you’re required to pay to the college. The tuition must be for post-secondary education at an eligible institution. Most private or public universities, colleges, or vocational schools qualify.
To claim the deduction, the expenses must be for you, your spouse, or for a dependent that you claim on your tax return. You’ll have to coordinate the deduction with any education credits or other tax-free education funds you use.
Don’t overlook the improved credit this year. Contact our office to see how it might fit with your overall education financing.
11:32:50 AM
Tuesday, July 27, 2004
July 26, 2004 - Home offices — when can you take a deduction?
If you work at home, you’d probably like to take a tax deduction for your
home office. Here’s an overview of what qualifies.
The first requirement is that you have a part of your home that you use
regularly and exclusively for business purposes. It doesn’t have to be a separate
room, but it must be a clearly defined area. The exclusive use is very
important. The area must be reserved only for business use; if you also use it for
personal activities, it won’t qualify. The only exceptions are if you store
business samples or inventory at home, or if you run a home daycare business.
The other requirement is that your home office be any one of the following:
Your principal place of business. That’s the place where you conduct most of
the management and administrative activities of running your business. You may
travel to meet customers, or perform operations in a hospital, but your
principal place of business is where you do most of the work of actually managing
your business.
A place where you regularly meet customers, clients, or patients. Even if you
run the business from elsewhere, a home office can qualify if you regularly
use it for meeting with customers, clients, or patients.
A separate building, not connected to your home. A freestanding garage or
studio will qualify if it is used in your business. If you have an area of your
home that qualifies, you can generally deduct a percentage of your total costs,
including mortgage interest, insurance, taxes, and utilities. The percentage
is calculated as the area used for business divided by your home’s total area.
The rules on home offices are complex, with many gray areas. Contact our
office if you need more information or assistance.
9:52:32 AM
How to Leverage Your Voicemail Into An Effective Medium of Communication
By Scott Ginsberg
Among all the media through which we communicate, voicemail always gets
treated like the redheaded stepchild:
“Hi this is Randy. Leave your name and number and I’ll get back to you.â€
Gee, thanks Randy. It’s great to know you value my call. Oh, and I appreciate
you sounding so enthusiastic and willing get back to me.
This is an example of a typical outgoing message that makes callers feel like
they really are talking to a machine. Now, we all hear this cookie cutter
message about a dozen times daily. And it doesn’t necessarily make a voicemail
message bad; but it does mean the voicemail is not being fully leveraged.
So just because it’s a 20 second recording on your machine doesn’t mean it
can’t be used to your advantage. And by your advantage I mean your caller’ s
advantage. Here are five techniques that will leverage boring, robotic
voicemail into an engaging, fun and personable medium of communication. These tips
will maximize the effectiveness of your voicemail so people will hang up the
phone feeling glad that they called you.
Noise
Have you ever left a message on someone’s voicemail who obviously recorded
their greeting in a car?
“Hi you’ve reached the voicemail of (HONK!) I’m away from my (HEY WATCH
WHERE YOU'RE GOIN LADY!) but I’ll call you back as soon as I (SCREEEEECH!) Thank
you.â€
Beep.
Click.
Messages like these will make your callers feel unimportant. Messages like
these will show your callers that you don’t care enough about them to spend 10
lousy minutes recording a clear message. Therefore, the first rule of
transforming your voicemail is: get rid of the noise.
When you go into your office or home - shut the doors, turn the music and TV
off, and record your message in absolute silence. Not unlike conversation,
your voicemail is a medium of communication. And like any medium – robotic or
otherwise - noise is a barrier.
Differentiation
Now that you’ve locked yourself in the closet with your phone, it’s time to
figure out what you’re going to say. What’s more, how you’re going to say it.
So think of your business cards, website, letterhead and promotional
materials: what makes you stand out? Is it the slogan? The phrases? The company name?
Great example: I used to sell furniture at a family-owned store called City
Liquidators. Every week, the owner would rerecord a new voicemail with one or
two items that were an amazing deal. She did this so her customers - even
without walking into the store - knew their prices were the lowest in town.
Unfortunately when it comes to voicemail, people just seem to go through the
motions. They throw some generic message together and it stands out like a
needle in a stack of needles. But remember: everyone has voicemail. Everyone. So
what are you going to record that will allow your callers differentiate you
from all those other “I’m away from my desk†people out there?
Fun
Why can’t voicemail messages be fun? In search of an answer I recently
consulted my Sprint PCS handbook. I found the following instructions under the
section called “How to Record Your Outgoing Messageâ€:
“When recording outgoing voicemail message, remember to sound as unfriendly,
boring and bland as possible to guarantee maximum robotic presence in the
minds of your callers.â€
Not bloody likely.
I have a friend whose greeting says, “Hey this is Jeffery. Leave me your 16
digit American Express Card number and I’ll get back to you soon. Thanks!â€
Believe it or not – at least three people a day actually leave their credit card
numbers for him! In fact, the first time I called him I gave him my card
number too! Guess that explains the $2,000 bill on my statement.
But the advantage to a message like this is that it shows your true colors.
And people love that. So, unless you actually are a robot – in which case I’d
love to meet you - don’t sound like one. Sound like you. People like and want
you.
Engagement
If you call either of my phone lines, this is what you’ll hear:
“Hello, my name is Scott – and you have reached Front Porch Productions.
Sorry I missed you; but leave me a message and IF you tell me your favorite
cereal, I promise to call you back! Thanks, and we’ll talk soon.â€
Now, I’m not exactly sure what prompted me to record a voicemail message
about cereal. But to my surprise, my callers’ responses immediately transformed in
regard to their level of engagement.
Some people told me about their favorite cereals, others discussed breakfast
as a whole. Some callers said they didn’t care for cereal, while others
reminisced about childhood memories of delicious treats that are longer available on
the market.
This showed me that voicemail messages aren’t that different from
conversation. People are still more willing to open up when they are asked a question
that is open ended, fun and universally easy to relate to. What ’s more, once
personal preferences are revealed via self disclosure – trust, rapport and common
points of interest will develop in the relationship. Not to mention, it’s
easy to leverage someone’s message as a great ice breaker when you return their
call!
Ok, now…say the following sentence WITH A SMILE: “I’ll get back with you in
24 hours!â€
Did that make you feel silly? Maybe.
Did that sound totally different? Probably.
But will that make your callers actually feel your smile through the phone?
You better believe it.
There are two reasons to record your outgoing message with a smile. First, it
will sound like you actually took the time to record your message instead of
quickly spurting out a few words while merging onto the interstate. What’s
more, people will sense that you do care about their call.
Secondly, you never know who’s going to call for the first time. Imagine
getting a phone call from a new referral that has potential to generate a lot of
business. She leaves a message and awaits your follow up. Now, odds are if you
met them for the first time in person, you’d be smiling so much your ears
would get crowded. Likewise, if your voicemail is the first time they hear your
voice, speaking your smile is a great way to make a first impression. Even if you
’re not there!
Results
Your voicemail is a communication tool that has untapped potential. If you
take the time to rerecord an outgoing message that is different, fun, engaging,
friendly and consistent with you or your business’s personality, here’s what
will happen:
YOUR CALLERS WILL…smile as they leave a message.
YOUR CALLERS WILL...be able to separate your voicemail from the other 1000
they call every week.
YOUR CALLERS WILL…tell their friends about your voicemail.
YOUR CALLERS WILL…hang up feeling glad they called you.
YOUR CALLERS WILL…feel a connection with you because their interaction –
even if it was with your voicemail – made them feel comfortable and engaged.
9:52:30 AM
Wednesday, July 21, 2004
What you make affects what you pay Inflation adjustments instituted on Jan. 1 have already helped many
taxpayers. While the
six
tax brackets remain the same, ranging from 10 percent to 35 percent,
slightly larger amounts of income are now taxed at lower rates. For
example, in 2003 single filers making $70,000 saw part of their money
taxed at 28 percent; this year, the maximum applicable tax rate to their
salaries is 25 percent.
4:39:18 PM
July 2004
10 insurance policies you don't need
Illustration by Bob Eckstein
If you're like most people, you don't relish spending money on insurance. Sure, you need it, but it's not bright and shiny, you can't drive it, and no one is going to admire it. So it's all the more galling when you find out you've purchased insurance that you don't need. “Fear sells a lot of insurance,” says Robert Hunter, director of insurance for the Consumer Federation of America, a nonprofit consumer-advocacy group of which Consumers Union, publisher of Consumer Reports, is a founding member. “A good rule of thumb is to purchase insurance only from an insurance provider. And buy policies that are comprehensive.”
Insurance should cover catastrophic losses that you'd be hard-pressed to cover on your own. So what do you need? A term-life policy to cover your contribution to the family's expenses; a comprehensive health policy (or membership in a managed-care plan); disability coverage to provide income when you can't work; and homeowners and auto insurance to replace lost property. If you've got those, you don't need the following 10 policies.
1
Mortgage life insurance. This policy, generally purchased from a lender, will pay off your mortgage if you die. The cost can be three to five times as much as comparable term-life insurance for a benefit whose value declines as the mortgage is paid down. Instead: Rely on term life.
2
Credit-card-loss protection. It pays off losses if your card is stolen and the thief goes on a spending spree. Plans cost $7 to $15 a month. But federal law limits your loss to $50 per card. Instead: Put credit-card numbers in a safe place, and report lost cards ASAP.
3
Car-rental insurance. For $8 to $11 a day, it covers damages to cars and people if you are in an accident while driving one of the rental agency's vehicles. Check to see if your credit card or your own auto policy has such coverage, says Sandy Praeger, insurance commissioner for Kansas. Instead: Don't bother.
4
Flight insurance. Specialty travel-insurance companies sell life-insurance policies that pay a benefit if you die (or are dismembered) in a plane crash. Depending on the amount of insurance you buy, you pay $15 to $60 per flight. Instead: Skip it. Term life will cover you if you die in a plane crash, and health insurance should cover medical expenses.
5
Cancer insurance. Marketed by specialty-insurance companies, these plans supplement health insurance for cancer-care costs. Annual premiums range from $200 to $3,000. Despite their high cost, the policies may not cover outpatient care. Instead: Chances are that your existing health insurance already covers cancer expenses, so forget about it.
6
Credit-life insurance. Credit-card companies, banks, and other organizations that finance a purchase or lend money offer policies that repay a loan if you die. Average payout is $4,500 for a yearly cost of $23, says William Burfeind, executive vice president of the Consumer Credit Insurance Association. That's a lot of money when a healthy, nonsmoking man of 40 can buy $100,000 of 10-year level term coverage for about $100 a year. Instead: Make sure you have enough term life to cover loan payments.
7
Credit disability insurance. This policy will pay minimum installments on a loan, typically up to 36 months, if you are disabled according to the terms of your policy. A policy may cost $21 per $1,000 of coverage. Instead: Make sure that your disability plan will cover your expenses, including any loan payments.
8
Involuntary unemployment insurance. Credit-card companies and other lenders market this policy which makes minimum payments on a credit card or car loan for 6 to 12 months if you lose your job. The cost: $0.70 per $100 of your credit-card balance. Instead: Create an emergency fund that will cover 3 to 6 months of your expenses.
9
Accidental-death insurance. Your heirs collect a benefit if you die in an accident. Cost runs about $600 a year. Only about 5 percent of those who die each year do so in accidents, however. Instead: Stick with term-life insurance, which pays regardless of cause of death.
10
Identity-theft insurance. Sold by banks, credit-card issuers, and specialty insurers, it covers the cost of repairing your credit and sometimes attorney's fees. Policies cost $20 to $180 a year for up to $25,000 in coverage, which does not include unauthorized charges or funds siphoned from accounts. Instead: Check your credit reports regularly. The FTC anticipates issuing a final rule this summer that would give consumers the right to order one free credit report a year from each of the three main credit bureaus.
4:20:14 PM
Tuesday, July 06, 2004
Last week a Federal District Court in Boston decided
that when someone reads your private e-mail without your permission and
before you receive it, it doesn't violate federal wiretap law. The ruling
perfectly illustrates how we can frustrate the entire purpose of a
statute simply by reading it too carefully. The case began when an online
bookstore named Internloc decided to also become an online ISP... and a
KGB. First it provided its clients with e-mail and Internet access, then
it became interested in its customers' communications with competitor
Amazon.com, presumable to find out which books its customers were buying
from Amazon, and not from them. Internloc modified its inbound mail
server to make special copies of any incoming Amazon e-mail for the
company to read, without the customers' knowledge or consent. The U.S.
Attorney's Office for the District of Massachusetts indicted the company
and its vice president, Brad Councilman, for violation of the federal
wiretap law, Title 18 United States Code Section 2511, which makes it a
crime to: "intentionally intercept, endeavor to intercept, or
procure any other person to intercept or endeavor to intercept, any wire,
oral, or electronic communication."
6:43:59 PM
Thursday, April 08, 2004
The 'Top Ten Most Unusual Sales Tax
Laws For 2004'
AccountingWEB.com - Apr-8-2004 - Taxware, a leading provider of
tax calculation and compliance solutions, today announced the "Top
Ten Most Unusual Sales Tax Laws For 2004." The second annual listing
was compiled by Taxware's team of tax specialists that constantly monitor
more than 27,000 ever-changing tax jurisdictions around the world.
In Ohio, a gift basket of fruit or candy is not subject to sales tax,
as the "true object sought is the food items contained within,"
not the basket. However, a lead crystal candy dish, which is considered a
decorative container, full of candy would be fully taxable.
In Connecticut, the sale of a pumpkin in its "natural grown
state" is exempt from sales tax because it is considered a food
product. However, if the pumpkin is sold after being painted, its
"primary purpose" becomes decoration and is subject to sales
tax.
In Washington, crushed, shaved or cubed ice is not taxable, but
blocks of ice are.
Up until 2003 in Texas, donuts and other individual sized bakery
items sold in quantities of 5 or less were taxable -- they are now
exempt.
Antacids are exempt in Connecticut, but are taxable once one crosses
the border into Massachusetts.
In Minnesota, cough drops are taxable as "candy."
In California, fresh fruit is exempt, but an apple purchased through
a vending machine is taxable on 33 percent of the price.
In Minnesota, massage therapy provided by licensed masseuse is
subject to the state sales tax unless the massage is for the treatment of
an "illness, injury or disease," in which case it is tax
exempt.
In Texas, "intravenous systems, supplies and replacement
parts" are tax-exempt when used in the treatment of humans, but
taxable when used in the treatment of animals.
In Wisconsin, cloth diapers are exempt, but disposable baby diapers
are taxable.
"This list represents a fraction of the research regularly tracked
by our tax research department," said Jon Abolins, vice president of
Tax and Government Affairs at Taxware. "It underscores not only the
complexities of tax compliance, but also the value of working with a
trusted partner to manage these nuances, which allows companies to focus
on the issues critical to their business."
3:24:55 PM
Homeowners Could See New Tax Break on
PMI
AccountingWEB.com - Mar-26-2004 - Congress is considering a new
tax deduction for homebuyers who could not afford a down payment
amounting to 20 percent of the purchase price.
Those homeowners have to pay private mortgage insurance, which banks and
lenders charge when the down payment is below the 20 percent threshold.
The Associated Press reported that under a tax plan before Congress,
millions of lower-income homeowners would be able deduct that cost, which
is significant in some cases.
For example, the owner of a $160,000 house would pay $50 to $80 every
month for private mortgage insurance, also known as PMI. The PMI
deduction would be on top of the deduction that is already allowed for
mortgage interest paid during the year.
The mortgage insurance tax break could help younger homebuyers and
lower-income families afford a home, as gathering that initial down
payment is often the biggest obstacle to homeownership.
The Associated Press reported that the tax benefit would cover 5.5
million people who pay private mortgage insurance and 7 million
homeowners with Federal Housing Administration loans. The benefit starts
to shrink for families earning $100,000 or more.
The tax break is worth about $500 million to homeowners over the next 10
years. The PMI tax break and other minor tax proposals were included in a
bill that would reduce taxes on manufacturers.
Other items include assistance for businesses investing in rural,
depopulating areas; a new tax break for companies that hire welfare
recipients; extension of the $5,000 tax credit for first-time homebuyers
in Washington; renewal of an expired tax deduction that allows teachers
to recoup money spent on classroom supplies; and tax benefits for
employers who continue to pay workers called to active duty in the
National Guard or reserves.
3:24:53 PM
Small businesses benefit from Section 179 deduction Bankrate.com
Typically, if property for business has a useful life of more than one year, the cost must be spread across several tax years as depreciation with a portion of the cost deducted each year.
But there is a way to immediately receive these income tax benefits in one tax year. The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is purchased.
And in 2003, tax-law changes made this option much more appealing by dramatically increasing -- from $25,000 to $100,000 -- the amount that can be written off immediately.
Eligible property Property that may be written off in the tax year of purchase, rather than depreciated over the asset's useful life, includes:
Machinery and equipment
Furniture and fixtures
Most storage facilities
Single-purpose agricultural or horticultural structures
Also, the definition of eligible section 179 property was expanded by the 2003 legislative changes to include off-the-shelf computer software. Previously, it had to be written off over three years.
The IRS says ineligible property includes:
Buildings and their structural components
Income-producing property (investment or rental property)
Property held by an estate or trust
Property acquired by gift or inheritance
Property used in a passive activity
Property purchased from related parties
Property used outside of the United States
How, when to use deduction The Section 179 election is made on an item-by-item basis for eligible property. You don't have to use it on all eligible property bought in that year. The election must be made in the tax year the property is first placed in service.
The Section 179 deduction isn't automatic. Taxpayers who want to take the deduction must elect to do so. You make the election by taking your deduction on Form 4562. When you file this form, attach it to either of the following:
Your original tax return filed for the tax year the property was placed in service, regardless of whether you file it timely.
An amended return filed by the due date, including extensions, for your return for the tax year the property was placed in service.
Make sure you make the election when you file your original income tax return for that year. You can't later amend your return to elect Section 179. The only exception to this is if you amend your return before the actual due date, including extensions, of your original return.
For example, the maximum extended due date to file your return is Oct. 15. You file your return on Sept. 1 and then realize you didn't utilize the Section 179 deduction. You still have until the Oct. 15 deadline to file an amended tax return to claim the deduction.
Maximum Section 179 deduction increased Congress periodically reviews the amount a taxpayer can claim as the annual Section 179 amount. As part of an economic stimulus and tax-reduction package signed into law in May 2003, the expense limit was hiked to $100,000.
Lawmakers upped the immediate deduction amount in the hopes it would encourage businesses to invest in new equipment sooner. The bigger deduction is available for tax years 2003, 2004 and 2005.
Any amount of property over the maximum deduction must be depreciated.
Limitation on annual amount of property purchased There also is a limit on the annual total of deductible property. If the cost of qualifying Section 179 property you put into service in a single tax year (2003 through 2005) now exceeds $400,000 then you can't take the full deduction.
For every dollar above $400,000 that a business owner spends on eligible property, he loses a dollar in deductions. For example, the manufacturer completely re-equipped his facility at a cost of $407,000. This is $7,000 more than allowed, so he must reduce his eligible deductible limit to $93,000: $100,000 minus $7,000.
The limitation amount will be indexed in 2004 and 2005 to reflect the inflation rate.
Deduction limited to taxable income You have now determined the maximum deduction based on the amount of property purchased during the year. You now must pass the aggregate income hurdle.
Your deduction is limited to your aggregate taxable income from the active conduct of any trade or business. Active trade or business includes employee and spouse's wages, sole proprietorships, partnerships and S corporations. Basically, this means that unless you have other sources of business income, your Section 179 deduction can't create a taxable loss for your business.
More business owners are able to take advantage of the deduction when they combine their company earnings with those of a spouse or money earned in addition to (or before starting) their own company income.
For example, you are someone else's employee for most of the year. Your wages exceed the Section 179 deduction. You start your own business at the end of the year and purchase equipment and furniture. Even if your new business doesn't generate gross income that year, you can still take the Section 179 deduction on the new equipment and furniture. Why? Your wages exceed the Section 179 deduction.
This aspect of inclusion also applies to a spouse. For example, you earn annual wages of $60,000 as an employee. Your spouse doesn't work during the year but begins a new business at the end of the year. Your spouse purchases and places in service $15,000 of Section 179 property at the end of the year. Your spouse's business doesn't generate gross income at the end of the year. Even though your spouse hasn't earned trade or business income for the year, the Section 179 deduction of $15,000 is still allowed in full since your wages count as trade or business income.
Any amounts disallowed by the trade or business taxable income limit are carried over to the next year and added to the cost of any eligible property placed in service in that year. The same rules for maximum deduction, maximum annual investment and taxable income apply to the next tax year as well. .
Conclusion The tax tip explains the process for using Section 179 to fully expense certain business expenses immediately instead of depreciating them across a period of several years. You should also be aware of less obvious advantages of the Section 179 deduction:
Lowers adjusted gross income, which could help you qualify for various deductions which are limited by AGI.
Lowers earned income, which can increase your earned income credit.
Is allowed in full even if the eligible property is placed in service on the last day of the year.
This tip also includes examples that demonstrate the three limits: the maximum dollar limit, the investment limit, and the taxable income limit. By including employment and spousal wages, many taxpayers find they are able to take advantage of this provision.
-- Updated June 26, 2003
2:44:36 PM
Friday, March 26, 2004
Bonus Depreciation on New Property Purchases - Take It or Leave
It?
Businesses are allowed to take an additional 30 percent in
depreciation for new property purchased after September 10, 2001 and
before May 4, 2003 and 50 percent for new property purchased between May
5 until September 11, 2004. However, the poor economy has reduced many
business owners' income in 2003 -- which means they may be better off
claiming these bonus deductions in future years when their income is
expected to be higher. For 2003, many are deciding whether to "opt
out" of this bonus depreciation, thus negating some of the tax
advantages they believed they were getting when they made their
purchases.
Revised 1099 Forms - Return to Sender
The tax act of 2003 significantly changed the tax rates applied to
certain types of dividend income reported to taxpayers from brokerage
firms that generate 1099-DIV forms. These changes, involving certain
exceptions and other complicating factors, are causing so much confusion
among the firms preparing the 1099 forms that many brokerage houses,
mutual fund companies and other firms had to revise and then reissue
these forms to their customers. Taxpayers who have already filed their
returns based on the 1099-DIV form must amend their returns, while
taxpayers who have yet to file must spend additional time making sure
that their forms are correct.
Education Tax Credits - For Mom, Dad or Child?
There has been a fair amount of publicity surrounding tax credits
available for tuition and fees paid to universities and other
institutions of higher education, like the Hope Scholarship Credit and
the Lifetime Learning Credit. There are several restrictions on the
credits, however, and this is causing confusion about who actually
qualifies for the credit. The credits are generally not available for
higher-income taxpayers and can only be claimed by the parent if the
child is claimed as a dependent on the parent's tax return. Children can
claim the credits, but only if they actually pay the tuition or fees,
which can be accomplished, Martin says, through gifts from the parents.
2:54:23 PM
Monday, March 22, 2004
Qualified dividends are taxed
at 15% - or maybe not Source:
Intelligencer Journal
Publication date: 2004-03-15
Arrival time: 2004-03-17
On Feb. 19, the Treasury Department and the Internal Revenue Service
issued a news release in which they agreed to make certain provisions of
the Tax Technical Corrections Act of 2003 related to dividend income
available to taxpayers in advance of its passage. Yep, you got it - the
law hasn't been passed by Congress yet - but taxpayers can pretend it
has.
Every piece of major tax legislation has errors or ambiguities and are
almost always followed by a "Technical Corrections Act." But
the Technical Corrections Act for last year's tax cut package hasn't been
passed yet. What a mess!
Congress wanted to encourage longer-term holding of securities and leave
short-term traders out of the dividend tax break. The tax break is a
lowering of the rate of taxation on qualified dividends from the
taxpayer's top bracket (possibly 35 percent) to just 15 percent (5
percent for the very low income earners).
However, tax experts soon discovered an unintended trap in the
legislation. In the original legislation, in order to be eligible for the
15 percent rate, an investor would have had to hold the stock on which
the dividend is paid for more than 60 days during a 120-day stretch,
starting 60 days before the ex-dividend date.
If you bought stock the day before it goes ex-dividend, you'd be unable
to satisfy the 61-day holding provision before the 120-day period
expires. That would leave investors with dividend income taxed at
ordinary rates as high as 35%, rather than the new 15% maximum.
The ex-dividend date became the anchor point of the lawmakers' long-term
holding period. The ex-dividend date is the date upon which stock is sold
for less than the day before (usually by the amount of the upcoming
dividend) because buyers on that day and for the next two days will not
get the next dividend. The price eventually builds back up.
The period was intended to be just over half of the 120-day period, 61
days or more. The original legislation limited the benefit to those who
held the stock for at least 61 days including the ex-dividend date and
stretching out 60 days in either direction.
A correction was required to make the window 121 days instead of 120 days
so that the prior 61 day period and post 61 day period would both have to
include the ex-dividend date. Before the correction, a person could have
bought one day before the ex- dividend date and just missed the
qualification, which was not the intent of Congress.
Treasury and IRS say that they are allowing the unenacted Tax Technical
Corrections Act to apply to 2003 returns in order to reduce the burden on
taxpayers who might then have to amend their tax returns.
The result: mass confusion. Brokerage firms and mutual-fund companies
have had a miserable time trying to determine how much of their
customers' dividend income qualifies for the 15 percent rate. Errors on
1099 forms are rampant. Corrected 1099's are coming out every day.
Investment houses that offer outside mutual funds are in the worst
position. They have to collect and combine information from lots of other
companies - and these companies are issuing amended 1099's which will
have to be rolled into amended 1099's for the brokerage houses.
But even with corrected 1099's saying what dividends are qualified - that
is not the end of the story. Investors have to sort out on their own
whether they meet the holding period test.
Financial companies aren't required to take into account whether the
individual investor passes the holding-period test when calculating the
"qualified dividends" figures on 1099 forms.
For a mutual-fund investor it's not enough that the fund itself meets the
holding-period requirements for the stock it owns in dividend-paying
companies. The fund shareholder individually must also meet the
holding-period requirement for her mutual-fund stock - and it's up to the
individual shareholder to figure that out.
The news release also provided that partnerships, S corporations, estates
and revocable trusts treated as part of an estate in a fiscal year that
began in 2002 can pass through dividends received in 2003 to their
partners, shareholders and beneficiaries as dividends qualifying for the
lower tax rates, to the extent that the dividends are otherwise
qualified.
Printed IRS instructions do not reflect these new changes. The IRS has
posted revised versions of the instructions for dividend payers and for
investors on its Web site
(www.irs.gov) but will
not mail out or otherwise distribute amended instructions.
In general, the new 15 percent rate is available for "qualified
dividends" which means the payout has to be truly a
"dividend," and it has to be "qualified." Dividends
from common stocks are most likely be eligible for the new low rate.
Most distributions from preferred stocks won't qualify because the
preferred stocks are more like debt. Distributions from REITs generally
aren't true dividends, nor are money-market distributions.
Mutual funds distributions retain their original character as received by
the fund payouts from bond funds, for example, and are still interest
income.
"Qualified" refers to the holding period - which is the cause
of all the confusion described above. If you just hold onto your stock
and never sell - you don't have a problem. Your dividends will meet the
holding period test without a problem.
If you bought and sold during the year, it's up to you to figure out if
you can claim the 15 percent rate. If you bought a stock on July 15 and
the ex-dividend date was Aug. 1, then you'll only qualify for the 15
percent rate if you're still holding that stock in the middle of
September.
Shares bought in a dividend reinvestment program ("DRIP") are
also subject to these rules. You have to separately track each share
purchase to see if the holding period is met.
This tax break is a record-keeping nightmare. Save all of your
documentation, in case you are audited.
Don't be surprised if you get corrected 1099's. This year you might want
to hold off filing your return, even if it's completed. That way you can
avoid filing an amended return.
Does it make enough difference for you to spend time worrying about it?
If you're already in the 15 percent tax bracket, obviously not. But
otherwise, at the highest bracket, on a $1,000 dividend it can be the
difference between paying $350 or $150 in tax.
That's a big difference.
Spencer, a Lancaster attorney, can be reached at 320 Race Ave.,
Lancaster, PA 17603 or by e-mail to Pattispencerlawfirm.com. Her columns,
which have appeared in Business Monday since October 1999, are available
in a book.
Publication date: 2004-03-15
7:53:19 PM
From Business Week
MARCH 22, 2004
SPECIAL REPORT -- WHERE
ARE THE JOBS?
The Price Of Efficiency
Stop blaming outsourcing. The drive for productivity gains is the real
culprit behind anemic job growth
What on earth is going on in the U.S. labor markets?
Demand for goods and services is the strongest in years, and profits are
going through the roof. Companies are spending again on new equipment,
while starting to restock their depleted inventories. Yet they are not
hanging out the "help wanted" signs as they did in earlier
economic recoveries. If past business cycles are any guide, by now robust
GDP growth -- 6% in the second half of 2003, with 5% widely expected in
the current quarter -- should be creating more than 200,000 jobs per
month to help restore the 2.7 million positions lost since the recession
hit in early 2001.
But check out the government's February employment report. Days before
its Mar. 5 release, economists were confidently predicting an increase of
125,000 new payroll jobs -- a modest number, by the way, when compared
with previous recoveries. Yet to the shock of almost everyone concerned,
the U.S. created a measly 21,000 jobs last month. After more than two
years of economic recovery -- and with only 364,000 new positions created
since payrolls turned up last September -- the oft-repeated assertion
that strong job growth is just around the corner is starting to ring
hollow. Says Alan B. Krueger, a labor economist at Princeton University:
"It's surprising that job growth has been so anemic."
So what accounts for the shortfall? To many Americans increasingly
anxious about their prospects, the culprit is clear: the outsourcing, or
offshoring, of manufacturing and, increasingly, white-collar jobs. And
hardly surprising in a Presidential election year, politicians are
throwing fuel on the fire. Even as they ratchet up the rhetorical attacks
on outsourcing, many are racing to propose legislation that would make it
more difficult and costly for companies to move jobs out of the
U.S.
SURVIVAL OF THE LEANEST. But if the outsourcing of jobs to India,
China, and other low-wage centers has caused some of the U.S. job losses
of the past three years, it is hardly the primary explanation for the
weak job market. Instead, the continued ability of U.S. companies to
squeeze out productivity gains on the order of 5% annually, since the
recession ended, is having a far greater impact on the jobs picture.
What's more, thanks to a late-'90s binge on technology, a broader array
of industries is now finding ways to eke out efficiencies from their
workforces than in the past. That means that the dearth of hiring, long a
fact of life in the manufacturing sector, is becoming a reality in the
service businesses -- retail, finance, transportation -- that account for
80% of U.S. jobs. "Don't be surprised that people aren't rushing out
to hire more as this economy expands," says Nickolas Vande Steeg,
the chief operating officer of Parker Hannifin Corp., a Cleveland company
that makes factory equipment for other manufacturers. Since 2000, his
company has cut 7,675 jobs, by streamlining such things as procurement,
even as sales have inched higher, resulting in a 14% rise in sales per
employee in the last two years. "If ever there was a time to gain
productivity," he adds, "it's now."
Other powerful, transformative forces are also at work, reshaping the
economy and suggesting that job growth may not pick up to the degree it
did following the recession of 1990-91. China's emergence as a low-wage
powerhouse, for one, has stiffened global competition and forced U.S.
companies to become even more efficient. At the same time, the demands
for profits by a growing investor class have heightened the pressure on
corporations to keep costs low. The soaring cost of health-care benefits
is also making companies more hesitant to add workers. Finally, the
political and economic shocks of the past three years -- the stock market
bust, the terrorist attacks, the corporate scandals, and war in Iraq --
have generated unprecedented uncertainty and caution in the executive
suite.
What's confounding economists is that high-growth, high-productivity
periods in the past -- the mid-'60s, say, or the late '90s -- have
coincided with robust job creation. Consider that from 1997 to 1999, the
economy expanded an average of 4.5% annually, productivity growth
accelerated sharply, and 264,000 jobs per month were created. So why
isn't the same thing happening this time around?
Fact is, the U.S. economy has changed dramatically in the past decade.
One of the key differences is the intensity and the breadth of the
pressures on business. But even more important, new technologies have
emerged that have given companies the tools to meet the new imperatives
of competition and cost-cutting. As innovation has brought ever-cheaper
computing power and new ways to make use of it, capital has become
increasingly cheap relative to labor. The returns on investment in new
labor-saving, high-tech equipment have soared. Given that labor accounts
for about two-thirds of the cost of making and selling products, greater
labor productivity in today's global economy is tantamount to corporate
survival. As a result, productivity is growing even faster now than in
the late 1990s. And it's a real job killer this time: A
one-percentage-point increase in annual productivity growth costs about
1.3 million jobs.
Up to now, the pressures have been most evident in the manufacturing
sector, at both old-line factories and New Economy giants. Increased
foreign competition has forced the Big Three to design and engineer new
cars on the cheap. General Motors Corp.
(GM
) used to make midsize cars for different global markets using several
platforms. Now, the auto maker builds four different midsize cars on one
platform designed in Germany. So GM doesn't need to hire more designers
and engineers in the U.S.; instead, it has slashed salaried U.S. staff in
each of the past three years by 10%, to 40,000 currently. Meanwhile,
tech-equipment maker Cisco Systems Inc.
(CSCO
) is also boosting its productivity, increasing Internet-related savings
from $650 million in 1999 to $2.1 billion in the latest fiscal year.
Cisco says that only when it hits $700,000 in sales per employee -- it
reached $632,000 per worker in its most recent quarter -- will it
consider widespread hiring.
Now, a broad range of services industries, and even small businesses, are
striving to make similar gains in efficiency. That is especially true in
retailing, which employs nearly 12% of all U.S. workers. Retailers from
department stores to gas stations to restaurants are now able to move a
35% greater volume of goods and services out the door per worker than
they did five years ago, meaning far fewer workers are needed. To take
just one example, Home Depot Inc.
(HD
) has self-checkout counters in almost half of its 1,707 U.S. stores,
allowing it to move as many as 1,000 cashiers to the sales floor. The
shift helped drive sales per labor hour up 4% last year alone. Another
big factor: the explosion in goods moved through e-tail sites, which have
done away with salespeople, restockers, cashiers, and other posts
required in traditional retailing.
CREATIVE DESTRUCTION. It's not only that companies are getting
efficiencies from the equipment they have been laying in over the past
year. More important, they're still squeezing productivity gains from the
technology acquired during the '90s. Many continue to find new ways of
integrating technology into their production and distribution processes,
and of getting customers to tap into the technology to make their
purchases. Southwest Airlines Co.
(LUV
), which made major investments in new technology to upgrade its
reservation system during the 1990s, is now eliminating three of its nine
reservation centers as increasing numbers of fliers book their tickets
online. Plus, those earlier outlays are now facilitating new investments
in self-service kiosks. The result of such moves: Even as the discount
carrier's fleet grew from 375 to 388 planes last year, its payroll fell
from 33,705 to 32,847.
As for companies considering hiring, they increasingly face a situation
that has long plagued their European rivals: The soaring cost of employee
benefits is making companies increasingly hesitant to add workers unless
absolutely needed. Benefits costs, fueled by sky-high health-care
premiums and the need to restore underfunded pension plans, are up 6.5%
from a year ago. After adjusting for inflation, that's the fastest clip
on record. If a company can get three people to do the work of four,
that's one less health-care premium it has to pay. Don Listwin, CEO of
Openwave Systems Inc., a Redwood City (Calif.) wireless software company,
says rising benefits costs are causing it to hold back hiring and to
outsource work. Saving on benefits also helps explain why companies are
leaning heavily on temp workers. In the past six months, temp jobs, which
are less than 2% of all employment, have accounted for about a third of
the increase in overall payrolls, according to the Labor Dept.
Increased use of temps also reflects the new flexibility of the U.S.
workforce. Instead of "just-in-time" inventory management,
companies are now talking about "just-in-time" labor. However,
that increased flexibility, along with rapid technological change, is
what facilitates the process of creative destruction -- destroying jobs
in the short term but making the economy stronger over the long haul.
Unlike in Europe, where greater union power makes labor markets more
rigid, it is easier for U.S. companies to hire and fire. But in this
business cycle, the patterns of gross firing and hiring, which result in
the Labor Dept.'s net monthly job numbers, are dramatically
different.
IDLE YOUTH. The problem isn't in the overall number of jobs
eliminated; they are running no higher than in past cycles. Instead, far
fewer jobs are being created to replace those lost in the job market's
churning than would usually be the case. The implication: More of the
productivity gains seen during and after the 2001 recession are
permanent. Unusually strong productivity also partly explains why other
labor market indicators, especially weekly claims for jobless benefits,
have tended to overproject job growth.
Given a dearth of new jobs, why is the unemployment rate falling, from a
peak of 6.3% last June to 5.6% in February? Chiefly, people are dropping
out of the labor force, which has reduced the amount of job growth needed
to push the jobless rate lower. The labor force participation rate -- the
percentage of the working-age population that is either employed or
seeking work -- has dropped to a level even lower than during the 1990-91
recession. However, almost all of the decline has occurred in the 16- to
24-year-old age group, while participation in the 25-and-older segment
has held up.
Young, inexperienced people, who were sucked into the job market during
the boom, are not what companies are looking for right now. That's
especially true in finance. In this recovery, Wall Street firms are being
more picky about their hiring, looking for experienced, highly productive
bankers, traders, and brokers. "Usually, by this time in a recovery,
the industry would be hiring thousands of young people," says Alan
M. Johnson, founder of Wall Street compensation consultants Johnson
Associates. "This time is dramatically different." Nowhere is
that truer than in the technology area: Lehman Brothers Inc.
(LEH
), like many others, is automating grunt work such as payroll and other
administrative functions while moving software-maintenance and -testing
jobs to India.
Which comes back to the vexing issue of outsourcing. No one doubts that
it is having an impact -- though exactly how strong is hard to say since
good numbers are unavailable. While some put the number higher, Forrester
Research Inc. estimates that of the 2.7 million jobs lost in the last
three years, only 300,000 have been from outsourcing.
However, the same issue came up in the 1990s jobless recovery. "My
gut reaction," says Princeton's Krueger, "is that the amount of
outsourcing hasn't changed dramatically, but what has changed is the
types of occupations that are affected." Now, white-collar jobs are
increasingly being outsourced -- something that didn't happen during
previous business cycles. The fear is that as the trend spreads, many
more jobs will eventually be at risk. Researchers at the University of
California at Berkeley recently estimated that some 11% of the U.S.
workforce is vulnerable.
Small businesses, which generate the lion's share of new jobs in the
economy, are also getting in on the outsourcing act. More and more
entrepreneurs use outside help these days. While exact numbers are hard
to come by, a study by Cutting Edge Information Inc., a Durham (N.C.)
consulting firm, found that 90% of all U.S. businesses now outsource some
work -- though some of that is done locally. Some of that may be
temporary, but most job watchers believe small businesses will continue
to turn to outsiders even as the economy strengthens, because they face
the same relentless pressure to cut prices as big companies do.
"This is more than a temporary phenomenon," predicts Brian S.
Wesbury, chief economist of the Chicago investment bank Griffin, Kubik,
Stephens & Thompson Inc.
But if outsourcing poses potential challenges over the long haul, in the
coming year productivity holds the key to the jobs outlook. The pace of
efficiency gains always slows as a recovery picks up steam, but no one is
really sure how much. The question is how long companies can meet this
big increase in demand without expanding their workforces. "We're
getting up close to the point where firms will of necessity have to hire
additional people to sustain the growth they see in the demand for their
products and services," Treasury Secretary John W. Snow told
BusinessWeek. To judge by history, business cannot lean on the
workforce so heavily for much longer. The problem, however, is that in
this unusual business cycle, history has rarely proved a decent guide.
By James C. Cooper
With Kathleen Madigan and Emily Thornton in New York, Rich Miller in
Washington, Michael Arndt in Chicago, Wendy Zellner in Dallas, Peter
Burrows in San Mateo, Calif., Dean Foust in Atlanta, and bureau
reports
1:48:48 PM
Tuesday, March 16, 2004
Does this April 1
deadline apply to you?
If you reached age 70½ last year, April 1,
2004, could be an important deadline. That's the last day you can take
your required minimum distribution (RMD) for 2003 from your traditional
IRAs. If you miss that deadline, the penalty could be a 50% excise tax on
the amount you should have withdrawn.
Here's how the rules work. Once you reach age 70½, you must start taking
annual distributions from your traditional IRAs. Normally these
distributions must occur by December 31 of each year. But a special rule
lets you defer the first distribution until April 1 of the year after you
reach age 70½. So if you turned 70½ last year, April 1 is the deadline
for your 2003 distribution. Be aware that you'll still need to take your
2004 RMD before the end of this year.
Generally, the amount of the RMD for any year is based on your age. You
take the balance in all your traditional IRAs as of the last day of the
previous year, and divide by a factor representing your life expectancy.
The IRS has published a standard life expectancy table to use in the
calculation. Special rules might apply if your spouse is more than ten
years younger than you are.
Because all or part of your distribution may be taxable income, it is
important to include RMDs in your tax planning. Ideally you should start
planning for RMDs several years before you reach age 70½. But whether
you're planning in advance or looking at a distribution on April 1,
contact our office for more detailed advice.
The RMD rules don't apply to Roth IRAs. Unless you're still working, this
deadline also applies to your other retirement accounts.
9:01:11 AM
Friday, March 12, 2004
More Taxpayers Ensnared by
Alternative Minimum Tax
AccountingWEB.com - Mar-2-2004 - About 2.6 million taxpayers this
filing season will be tangled in a tax web intended for only the richest
Americans.
Congress in 1969 created a backup tax system called the alternative
minimum tax (AMT), which was designed to ensure that the wealthiest
Americans paid taxes. The AMT was invented after Congress learned that
155 millionaires paid no taxes in 1966.
The problem is that the ATM was never indexed for inflation, so people
who do not consider themselves rich are getting hit more and more every
year. The tax is now starting to affect families with incomes between
$100,000 and $500,000. If left unchanged, the Boston Globe reported, the
AMT will begin to hit families with incomes as low as $50,000, affecting
33 million taxpayers by 2010.
Taxpayers are supposed to calculate what they owe under the regular rules
and the AMT and pay whichever amount is higher. The New York Times
reported that the AMT eliminates many popular tax deductions, including
state and local income and property taxes, some medical expenses and
interest expenses on home equity loans, unless used for improvements.
The AMT is negating a big part of the relief provided by the 2003 tax
cuts. Daniel N. Shaviro, a tax law professor at New York University, told
the Times that the Bush administration had engaged in
"gamesmanship" in relying on the AMT to minimize revenue loss
from its tax cuts.
No one seems to like the AMT not taxpayers, tax preparers or even
Internal Revenue Service officials.
Nina Olsen, the current IRS taxpayer advocate, recently called it both
pernicious and horrible, the Globe reported. W. Val Oveson, who held
Olsen’s job from 1998 to 2000, told the New York Times: "What I
think is asininely stupid is that you have a system that gives with one
hand and takes back with the other."
Taxpayers who don’t itemize deductions in general will not owe any AMT.
Those who are subject to the AMT can take steps to minimize the cost, but
it may take a tax professional to do the complicated calculations to
conclude that there is no extra tax liability.
The Times reported that there is little chance of immediate repeal of the
AMT because it would cost about $1 trillion in lost tax revenue over the
next decade. Indexing it for inflation, which would freeze the number of
taxpayers affected, would cost the federal government $480 billion.
Temporary measures are more likely, such as raising the amount of income
not subject to the AMT.
American Companies Failing to Address Retention of E-mail, Electronic
Documents
AccountingWEB.com - Mar-9-2004 - Nearly half of American companies
haven't adopted records retention policies for e-mail and other
electronic documents, despite the serious issues raised about corporate
records keeping over the past two years.
In a new survey of 2,200 records managers, 47 percent said their company
does not include electronic records in its retention and destruction
schedules. Nearly six in 10 companies (59 percent) reported having no
formal policy concerning the retention of e-mail.
Even more disturbing, 46 percent of companies reported having no system
for placing holds on records in the event of pending litigation or a
regulatory investigation -- leaving open the possibly that records
critical to a legal matter could be destroyed. Moreover, 65 percent said
their company's hold order policy, if one existed, did not include
electronic records.
"With most business documents and so much correspondence created and
sent electronically today, it's amazing that companies are not taking
e-records more seriously, especially given what happened to
Andersen," said Peter R. Hermann, executive director and CEO of ARMA
International. "Records, whether they are on paper or electronic,
must be managed in the same fashion to ensure they can be properly
retrieved when needed and are purged on a set schedule according to when
their useful time has passed."
Unlike paper records being overseen by certified records managers, the
information technology department handles oversight for electronic
records in 71 percent of companies, the survey found. Yet two thirds (67
percent) of records managers surveyed said their colleagues might be
computer experts, but they don't understand the concept of "life
cycle management" -- a core principle of records management, which
concludes that documents have a life, and ultimately a death.
"E-mail and electronic documents need to be treated as records, not
data," said John F. Mancini, president and CEO of AIIM
International. "Without a set program for destruction of outdated
e-records, a company faces the possibility that a subpoena will require
the retrieval and legal review of so many e-mails and other electronic
files that the most economical decision is to settle the case."
Child Tax Credit: IRS Tax Tip
AccountingWEB.com - Mar-8-2004 - With the Child Tax Credit, you
may be able to reduce the federal income tax you owe by $1,000 for each
qualifying child under the age of 17.
A qualifying child for this credit is someone who:
Is claimed as your dependent,
Was under age 17 at the end of 2003,
Is your son, daughter, adopted child, grandchild, stepchild or
eligible foster child, your sibling, stepsibling or their descendant,
and
Is a U.S. citizen or resident.
The credit is limited if your modified adjusted gross income is above a
certain amount. The amount at which this phase-out begins varies
depending on your filing status:
Married Filing Jointly $110,000
Married Filing Separately $55,000
All others $75,000
In addition, the Child Tax Credit is limited by the amount of the income
tax you owe, as well as any alternative minimum tax you owe. For example,
if the amount of the credit is $600, but the amount of your income tax is
$500, the credit ordinarily will be limited to $500.
However, there are two exceptions to this general rule. If the amount of
your Child Tax Credit is greater than the amount of income tax you owe,
you may be able to claim some or all of the difference as an
"additional" Child Tax Credit. First, you may claim up to 10
percent of the amount by which your earned income exceeds $10,500.
Second, if you have three or more qualifying children, you may claim up
to the amount of Social Security taxes you paid during the year, minus
any Earned Income Tax Credit you receive. If you qualify under both these
exceptions, you receive the greater of the two amounts, up to the
difference between your tax liability and your regular Child Tax Credit.
Use Form 8812 to figure the additional Child Tax Credit.
For 2003, the total amount of the Child Tax Credit and any additional
Child Tax Credit cannot exceed the maximum of $1,000 for each qualifying
child. If you received part of the credit as an advance payment in 2003,
you must reduce the amount of Child Tax Credit you claim for 2003 by the
amount of the advance payment.
To be sure of using the correct figures, advance payment recipients can
find the amount they received on IRS Notice 1319, which they should have
received just before the payment checks. Those who don’t have this notice
can get the amount by visiting the 1040 Central or Your 2003 Advance
Child Tax Credit pages on this Web site.
Taxpayers claiming the Child Tax Credit who did not receive an advance
payment will get their entire benefit from the credit on their returns.
Individuals entitled to receive the Child Tax Credit and additional Child
Tax Credit may also be eligible to receive the Child and Dependent Care
Credit and the Earned Income Tax Credit.
Child Tax Credit Could Cause Confusion
AccountingWEB.com - Mar-2-2004 - It won’t always be easy to take
advantage of the new tax breaks, exemptions, deductions and higher child
tax credits when filling out returns this year.
Tax preparers say that the higher child tax credit is one of the most
confusing aspects of the $330 billion tax cut passed by Congress last
May.
Lawmakers raised what previously was a $600 per-child tax credit to
$1,000 for 2003 and directed the Internal Revenue Service to mail the
extra $400 immediately instead of waiting for the refund filing season
beginning now. About 24 million parents received checks last summer.
Because taxpayers failed to subtract the amount of the advance payments
on their 2003 tax returns, the IRS said it has received more than a half
million incorrect returns. Gloria Wajciechowski, an IRS spokeswoman, told
the Richmond Times-Dispatch that failing to subtract the amount of child
tax credit received will reduce and could delay the tax refund claimed.
The mailing list for the advance child tax credit payments was created
from what taxpayers reported on their returns for 2002. Now taxpayers
whose circumstances have changed from 2002, who have qualifying children
and got some or all of the $400, or who didn’t receive money but should
have, must square away their credits on returns being prepared now.
However, there are some taxpayers who received the $400 payment, based on
their 2002 returns, who do not have to square away their credits.
According to IRS Publication 17, "If you received an advance payment
but did NOT have a qualifying child for 2003, you do NOT have to pay back
the amount you received. Do not enter the amount of your advance payment
on your return."
Parents who did receive the advance payment will actually get only $600
back April 15. Other parents won't get the full credit, however. Some
won't get one at all. And some will get more than they deserve.
"On the surface, the advance payment appears simple," Kathy
Burlison, a tax expert with H&R Block Tax Services, told the San Jose
Mercury News. "But life does step in and create all sorts of unusual
situations with unexpected consequences. Some of them are good, and some
of them aren't so good."
Taxpayers often forget whether they cashed the advance payment.
"What a pain," said Lawrence K.Y. Pon, a CPA in Redwood City,
Calif. "People swore they never got them." Taxpayers can get
the amount of their advance child tax credit payment by visiting IRS.gov.
Overall, taxpayers face a good chance that refunds will be bigger or the
amount owed will be smaller than past years. The biggest tax changes are
retroactive to Jan. 1 of last year. Some of the tax breaks are automatic,
but others will require extra work, tax preparers say.
Another effect of the early child tax credit payments was a $31 million
price tag for the IRS. The General Accounting Office said Thursday that
the IRS had to move money and staff from other operations to mail the
checks out because no extra money was allocated for the task. The IRS
used $9.3 million that was originally planned for updated information
systems. That project was delayed by about a month. Some mailings also
were delayed because the agency had to spend about $10 million from its
postal budget to send the checks.
Are You Eligible for Any of These Tax Credits?
AccountingWEB.com - Mar-4-2004 - Taxpayers should consider
claiming tax credits for which they might be eligible when completing
their federal income tax returns, advises the IRS. A tax credit is a
dollar-for-dollar reduction of taxes owed. Some credits are refundable –
taxes could be reduced to the point that a taxpayer would receive a
refund rather than owing any taxes. Below are some of the credits
taxpayers could be eligible to claim:
Earned Income Tax Credit
This is a refundable credit for low-income working individuals and
families. Income and family size determine the amount of the EITC. When
the EITC exceeds the amount of taxes owed, it results in a tax refund to
those who claim and qualify for the credit. For more information, see IRS
Publication 596, Earned Income Credit (EIC).
Child Tax Credit
This credit is for people who have a qualifying child. The maximum amount
of the credit is $1,000 for each qualifying child. This credit can be
claimed in addition to the credit for child and dependent care expenses.
However, the credit must be reduced by any advance child tax credit
payments received in 2003. To be sure of using the correct figures,
advance payment recipients can find the amount they received on IRS
Notice 1319, which they should have received just before the payment
check. Those who don’t have this notice find the amount by clicking on
1040 Central or Your 2003 Advance Child Tax Credit, both on this Web
site. For more information on the Child Tax Credit, see Pub. 972, Child
Tax Credit.
Child and Dependent Care Credit
This is for expenses paid for the care of children under age 13, or for a
disabled spouse or dependent, to enable the taxpayer to work. There is a
limit to the amount of qualifying expenses. The credit is a percentage of
those qualifying expenses. For more information, see Pub. 503, Child and
Dependent Care Expenses.
Adoption Credit
Adoptive parents can take a tax credit of up to $10,160 for qualifying
expenses paid to adopt an eligible child (including a child with special
needs). For more information, see Pub. 968, Tax Benefits for Adoption.
Credit for the Elderly and Disabled
This credit is available to individuals who are either age 65 or older or
are under age 65 and retired on permanent and total disability, and who
are U.S. citizens or residents. There are income limitations. For more
information, see Pub.524, Credit for the Elderly and Disabled.
Education Credits
There are two credits available, the Hope Credit and the Lifetime
Learning Credit, for people who pay higher education costs. The Hope
Credit is for the payment of the first two years of tuition and related
expenses for an eligible student for whom the taxpayer claims an
exemption on the tax return. The Lifetime Learning Credit is available
for all post-secondary education for an unlimited number of years. A
taxpayer cannot claim both credits for the same student in one year. For
more information, see Pub. 970, Tax Benefits for Education.
Retirement Savings Contribution Credit
Eligible individuals may be able to claim a credit for a percentage of
their qualified retirement savings contributions, such as contributions
to a traditional or Roth IRA or salary reduction contributions to a SEP
or SIMPLE plan. To be eligible, you must be at least age 18 at the end of
the year and not a student or an individual for whom someone else claims
a personal exemption. Also, your adjusted gross income must be below a
certain amount. For more information, see chapter four in Publication
590, Individual Retirement Arrangements (IRAs).
There are other credits available to eligible taxpayers. Since many
qualifications and limitations apply to the various tax credits,
taxpayers should carefully check the publications and additional
information on this Web site. IRS publications are available on the IRS
web site under Forms and Publications or by calling the toll-free Forms
and Publications telephone line at 1-800-TAX-FORM (1-800-829-3676) to
place an order.
4:48:04 PM
Saturday, March 06, 2004
Back out of an IRA conversion.
If you converted a traditional IRA into a Roth IRA in 2002, you knew you'd have to report the taxable part of the traditional-IRA withdrawal on your 2002 return. But you may not have planned on a year-end surge in your income (for example, from a bonus or stock market gains). That extra income propelled you into a higher tax bracket, or will rob you of tax breaks (such as the education credit) that phase out at higher levels of adjusted gross income (AGI). You can't back out of your bonus or stock market gains (nor would you want to!), but you can back out of that taxable Roth IRA conversion. Through a mechanism known as “recharacterization,” you can undo the conversion and turn the Roth IRA back into a traditional IRA. Net result: Without the taxable income from the conversion, you may avoid being taxed in a higher bracket and/or may keep your AGI below the point where you would lose tax breaks.
Turn a nondeductible Roth IRA contribution into a deductible IRA contribution.
Did you make a Roth IRA contribution in 2002? That may help you years down the road when you take tax-free payouts from the account (if you're eligible), but the contribution isn't deductible. If you realize you need the deduction that a contribution to a regular IRA yields, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution (again, via the “recharacterization” mechanism). The IRA deduction is yours if neither you nor your spouse is covered by an employer-provided retirement plan. If you or your spouse is covered, the deduction starts to phase out when AGI exceeds certain limits depending on filing status (for example, for 2002 the phaseout for joint filers starts at $54,000 of AGI).
Make a deductible IRA contribution, even if you don't work.
As a general rule, you can't make a deductible IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner while you manage the home front. You can make a deductible IRA contribution of up to $3,000 ($3,500 if you are 50 or over) even if you have no earned income. What's more, even if your spouse is covered by an employer-provided retirement plan you can still make a fully deductible IRA contribution as long as your joint AGI as specially computed doesn't exceed $150,000.
Get tax-free gain from a home used as rental property.
Say a couple of years ago you left your condo in the city and moved into the country home you inherited from Mom. You've been renting the condo to others, but now you get an offer you can't pass up and you sell it. Up to $250,000 of gain from the sale is tax-free if you owned and used the condo as your principal residence for at least two of the five years preceding the sale. However, you will have to recognize gain attributable to depreciation allowable with respect to the rental of the residence after May 6, 1997. So most of your gain will be tax-free, even if you held the condo as rental property for the last couple of years. Up to $500,000 of gain is tax-free for joint filers meeting certain conditions.
Claim a moving expense deduction because of your spouse's job.
Job-related moving expenses (the cost of moving household goods and personal effects plus lodging en-route) are above-the-line deductions, which can be claimed even by non-itemizers. This writeoff generally is available only if (1) you start a new job or business at the new location (or are transferred by your employer), and (2) the new job location is at least 50 miles farther from your old home than your old job was from your old home. Even if you don't qualify, however, you can claim the writeoff if your spouse does. The fact that your move was driven by your job-related needs, not your spouse's, doesn't matter.
For example, you're sick of a long, tough commute from distant suburbs to your city office. You sell your home and buy a condo that's a ten-minute walk from work. Your spouse decides to return to the job market after a long absence and lands a job in public relations. You can't qualify for moving expense deductions on the strength of your move, because you didn't change your job or your work location. But you can deduct moving expenses if the distance between your spouse's job and your old home is at least 50 miles (this is a special distance test for those returning to the job market). Your spouse must stay at the new job for certain minimum time periods, however.
A Partial swap of annuity contract is tax-free.
It is well known that it is possible to swap an entire annuity contract for another (for example, to get a better yield) without paying a current tax. However, you might not be aware that it is also possible to make a tax-free direct transfer of part of the funds in an annuity contract to an annuity contract with another company. So if you made a direct transfer of part of your money in an annuity contract in 2002 to an annuity contract with another company, you don't owe tax on the switch.
It may pay for you not to claim a dependency deduction for a child in college.
This can work to your family's benefit if you pay college tuition for your child, your income is too high for you to claim education credits, and your child has enough taxable income to make use of most or all of the credit. If you forego the dependency deduction, your child can claim the education credits on his or her return (even though you paid the education expenses). The tax-cutting value of the education credits that the child can claim may be greater than the value of the dependency exemption for the child. Note, however, that the child can't claim a dependency exemption for himself or herself if you are eligible to, but don't, claim a dependency exemption for the child.
Decide between an education credit and the higher education deduction. If you paid college expenses in 2002, you may be able to choose between taking an education credit (Hope or Lifetime Learning) or the deduction for higher education expenses. In making this choice, note that the value of the deduction is greater if your marginal tax bracket is higher, while the value of the credit is the same regardless of your bracket. Another factor to bear in mind in making the choice is that different income cut-off points apply to the credits and the deduction. For 2002, the credits are phased out ratably for taxpayers with modified adjusted gross income between $41,000 and $51,000 ($82,000 and $102,000 in the case of a joint return), while the deduction is eliminated for taxpayers whose modified adjusted gross income exceeds $65,000 ($130,000 in the case of a joint return).
Write off the cost of a tutor as an education expense. You can deduct the cost of education that maintains or improves the skills required in your business or employment, but not costs to meet the minimum requirements of your trade or profession, or to qualify you for a new job. “Education” doesn't have to be of the classroom variety. For example, suppose you're a sales executive who suddenly had to become an e-commerce expert. You hired a consultant to be your tutor and teach you everything you need to know. That cost is deductible as an education expense. But you can only claim it on Schedule A, Form 1040 as a miscellaneous itemized deduction. Such deductions can be claimed only to the extent their cumulative total exceeds 2% of your AGI.
No current tax or low tax on sales of small business stock-is it possible?
Normally, gains on stock sales are taxed at a maximum rate of 20% (if held for more than one year) or at the same rate as your other income (if held for one year or less). And you can't avoid a tax on your gain by reinvesting in other stock. But special rules apply when you sell shares of qualified small business stock. A number of technical conditions have to be met. Two important ones: (1) The shares must have been originally issued after Aug. 10, 1993, and (2) you must have bought in when the shares were originally issued. There's no current tax on the sale if you held the shares for more than six months, and you reinvest the sales proceeds within sixty days in qualified small business stock issued by another qualifying corporation. And if you held the shares for more than five years, and don't reinvest in other qualified small business stock, then as a general rule half of your gain is tax-free, and the other half is taxed at a maximum rate of 28%. In effect, your maximum tax would be 14% of your total gain on the sale of qualified small business stock.
Home improvements may be medical expense deductions.
Home improvements generally aren't deductible. But a medical expense deduction may be claimed if you make a medically necessary home improvement, such as a lift or elevator for a handicapped person, or a therapy spa for an arthritis sufferer. The cost of such an expense is deductible as a medical expense to the extent it exceeds any resulting increase in value of the property. For example, if a qualifying improvement costing $5,000 increases the value of your home by $2,000, the medical expense is $3,000. Note, however, that medical expenses can be claimed on Schedule A, Form 1040 only to the extent they exceed 7.5% of your AGI.
Employee pay (to owners) can help you write off business equipment.
A tax break for small businesses allows you annually to expensethat is, to currently deductthe cost of machinery and equipment up to a certain amount ($24,000 for 2002, $25,000 in 2003 and afterwards). Assets that aren't expensed can only be written off over a period of years (usually five or seven) via depreciation deductions. However, among other conditions, the maximum annual expensing amount is limited to your taxable income from any active trade or business for the year in which you buy the equipment and place it in service. So if there's no money coming in during your startup year, there's no expensing for that year. Fortunately, your salary as an employee counts as taxable income for expensing purposes. So if you start up a sideline business as a sole proprietorship and buy computers, printers, scanners, etc., you can write off their cost (up to the annual dollar limits) even if there's no business income yet, as long as your salary in that year at least equals what you spent on the equipment. The expensing deduction can offset your other income.
Weighty deductions for heavy sport utility vehicles (SUVs) bought for business use.
A car used for business generally is treated like any other type of business asset, with one notable exception: Annual depreciation and expensing deductions are capped. For example, if you bought a business auto and placed it in service last year, your 2002 combined depreciation and expensing deduction for it can't exceed $7,660 (the $3,060 “regular” first-year limit for cars placed in service in 2002, plus the $4,600 limit for passenger automobiles that qualify for the 30% additional first-year depreciation), regardless of the cost of the car. But you may be in luck if you bought one of those popular SUVs for business use. That's because the annual depreciation and expensing caps don't apply to trucks or vans (and that includes SUVs) that are rated at more than 6,000 pounds gross (loaded) vehicle weight. So, for example, if you bought one of those lumbering giants for $49,000 in 2002, and used it 100% for business, you can, generally, write off $35,000 of its cost on the 2002 return ($24,000 expensing, plus $7,500 30% additional first-year depreciation, plus $3,500 depreciation).
2:09:32 PM
Monday, March 01, 2004
Premium Sample: Excel Tip: Create a
Quick Loan Calculator in Excel
AccountingWEB.com - Jul-15-2002 - You can use Excel to help figure
out what your loan payment would be should you decide to borrow money.
Here's a quick way to set up a loan payment calculator in your Excel
worksheet:
Step 1: Enter the following titles in six consecutive rows:
Cell A1 Price
Cell A2 Downpayment
Cell A3 Principal
Cell A4 Interest
Cell A5 Years
Cell A6 Payment
Step 2: These titles will become the cell names for the cell to the right
of each cell containing a title. Highlight the cells containing titles
and the cell to the right of each of those cells (12 cells altogether).
Choose Insert | Name | Create from the Excel menu. The Create Names
window will appear with "Left column" checked. Click OK. The
names have been assigned.
Step 3: Enter known amounts in the cell to the right of each of the cells
containing titles. For example:
Cell B1 10000
Cell B2 20%
Cell B4 6.5%
Cell B5 4
Step 4: Enter a formula to calculate loan principal in Cell B3:
=Price*(1-Downpayment).
Step 5: Enter a formula to calculate the loan payment in Cell B6:
=PMT(Interest/12,Years*12,Principal).
Once the calculator is in place you can substitute amounts for Price,
Downpayment, Interest, and Years and the calculations will update
automatically.
11:46:29 AM
Tax Tip: Early Distributions From Retirement Plans
AccountingWEB.com - Feb-23-2004 - An early distribution from an
Individual Retirement Arrangement (IRA) or a qualified retirement plan
need not be a “taxing” experience.
Any payment that you receive from your IRA or qualified retirement plan
before you reach age 59½ is normally called an “early” or “premature”
distribution. As such, these funds are subject to an additional 10
percent tax. But there are a number of exceptions to the age 59½ rule
that you should investigate if you make such a withdrawal. Some of these
exceptions apply only to IRAs, some only to qualified retirement plans,
and some to both. IRS Publications 575, Pensions and Annuities, and 590,
Individual Retirement Arrangements (IRAs), have details.
In addition to the 10 percent tax on early distributions, you will add to
your regular taxable income any distributions attributable to “elective
deferrals” that you contributed from your pay, your employer’s
contribution and any income earned on all contributions to the account.
If you made any nondeductible contributions, their portion of the
distribution is not taxed, since you’ve already paid tax on this amount.
There is a way to avoid paying any tax on early distributions, however.
It is called a “rollover.” Generally, a rollover is a tax-free transfer
of cash or other assets from an IRA or qualified retirement plan to an
eligible retirement plan. An eligible retirement plan is a traditional
IRA, a qualified retirement plan, or a qualified annuity plan. You must
complete the rollover within 60 days of when you received the
distribution. The amount you roll over is generally taxed when the new
plan pays you or your beneficiary.
If the early distribution from an employer’s plan is paid directly to
you, your plan administrator will normally withhold income tax at a 20
percent rate. If you roll over the distribution to a new plan, you must
replace that 20 percent of the funds that were withheld and deposit that
amount in the new plan, or you will owe taxes on that amount. To avoid
the inconvenience of this withholding, you can have your old plan’s
administrator transfer the rollover amount directly to the new plan or a
traditional IRA.
All early distributions must be reported to the IRS. You will report
tax-free rollovers on lines 15a and 16a of Form 1040 along with any
taxable distributions, but you will enter on line 15b or 16b only the
taxable amounts you don’t roll over. If applicable, figure the 10 percent
tax or exceptions on Form 5329, Additional Taxes on Qualified Plans
(including IRAs) and Other Tax Favored Accounts, and then carry any
resulting tax to line 57 of Form 1040. You may also report rollovers on
Form 1040A, but you must use Form 1040 for any distributions to which the
10 percent tax applies.
Important tax information should be reported to you by your plan
administrator on Form 1099-R. This will show the distribution amount, the
taxable portion, any tax withheld, and a distribution code related to the
10 percent tax. If your early distribution is subject to the 10 percent
tax and distribution code 1 is correctly shown in box 7 of your Form
1099-R, you do not have to complete Form 5329. Just multiply the taxable
distribution amount you put on line 15b or 16b by 10 percent and enter
the result on line 57 of Form 1040. Also, put “No” to the left of line 57
to indicate that you don’t have to file Form 5329.
You may download Publications 575 and 590, along with any related forms
and instructions, from this Web site. You may also call toll free
1-800-TAX-FORM (1-800-829-3676) to order free copies.
Tax Tip: Remember Your Advance Child
Tax Credit
AccountingWEB.com - Feb-23-2004 - It seems just yesterday when you
got that check in the mail for the Advance Child Tax Credit. How much was
it? $400? $800? $1233? Who can remember?
Now, it’s time to get your stuff together to prepare your 2003 tax return
and you’re going to need to know how much that check was. How much did
you receive? We’ll tell you how much.
You'll need to provide the following information as shown on your 2002
tax return:
Your Social Security Number (or IRS Individual Tax Identification Number)
Your Filing Status, (Single, Married Filing Joint Return, Married Filing
Separate Return, Head of Household, or Qualifying Widow(er)
The total Number of Exemptions as shown on your tax return.
Click here to
find out how much you received and where to report Your 2003 Advance
Child Tax Credit.
Note: If you have trouble while using this application, please check the
Requirements to make sure you have the correct browser software for this
application to function properly.
11:36:22 AM
Company to Offer Free Access to Credit Scores, Advice
AccountingWEB.com - Feb-23-2004 - Credit card issuer Providian
Financial Corp. plans to offer all its customers free online access to
their credit scores, with tips on how to improve them.
The program, called "Real Information," allows cardholders to
see their FICO credit score online. FICO is the most widely used score,
which is computed from monthly credit data. Customers can plug
hypotheticals into a score simulator to see how actions such as a missed
payment or payoff of a balance can affect the score.
Customers can look at their scores anytime they like, as often as they
like, at no charge. Customers will see the top two reasons why the scores
are not higher. In addition, cardholders will be able to sign up for free
e-mail alerts anytime their scores change by more than 10 points an
indicator of a possible identity theft credit crime.
Home mortgage and credit industry experts say that other lenders,
mortgage servicing companies and banks are likely to jump in with
competing programs, says syndicated columnist Kenneth Harney. That would
be good news for potential home buyers, who can check their scores and
improve them. High FICO scores mean low interest rates, and vice versa.
The program is part of an effort by the San Francisco-based company to
revamp its business and reach out to "middle-American
customers." Over the years, Providian marketed their cards to
low-income consumers with imperfect credit histories. The strategy worked
well during the late 1990s, but backfired as the economy sputtered and
consumers defaulted on loans.
"We've been working on turning around the company for the last
couple of years," said Warren Wilcox, Providian's vice chairman of
planning and marketing, in an interview with Reuters. "One of the
keys to turning around a company like Providian ... has to be done on the
basis of solid customer relationships."
The company is also offering a "Real Rewards" program, in which
cardholders can rack up points, not only for making purchases, but for
paying bills on time or keeping a balance. The points can be redeemed for
gift cards at selected retailers or restaurants, or for a lower interest
rate, or to pay an over-limit fee.
"It was created intentionally to really meet the needs of
mainstream, middle-American customers," Wilcox said. He estimated
the size of the "Middle American" market at roughly 40 million
to 50 million people. Providian currently has 10.5 million customers,
Wilcox said.
Robert Hammer, chairman and chief executive of R.K. Hammer Investment
Bankers, which follows the credit card industry, told Reuters that the
programs Providian unveiled last week are not new. They’ve been around
for five or 10 years. What’s new is their inclusive focus.
"The difference is it's always been offered to blue-chip customers,
but not necessarily to subprime customers or middle Americans," he
said.
11:36:22 AM
Outsourcing to India Grows While Legislation Aims to Apply Brakes
AccountingWEB.com - Feb-23-2004 - The trend towards outsourcing
accounting work to India added another brick to its foundation this week,
with the announcement of the launch of a new U.S. based company to assist
with the transactions.
Accountants
in India (AII) is the brainchild of
accounting profession veterans Wayne Harding (formerly with AICPA's
CPA2Biz) and KC Truby (Bridge 21). The outsourcing matchmaker was
launched Thursday to help lower costs for U.S. accounting firms by hiring
full-time accounting professionals in India.
"Through AII, CPA firms can hire a qualified, college graduate
accountant, successfully trained in QuickBooks Pro and other business
management applications, for about $8 an hour," said COO Wayne
Harding in a press release.
According to the New York Times, 100,000 U.S. tax returns, both federal
and state, will be prepared by Indian citizens in Bombay and Bangalore
this year. The number of returns is four times larger than last year, and
many more times greater than the several thousand of just two years ago.
Meanwhile, pending legislation would curtail the trend. A bill introduced
by U.S. Sen. Christopher Dodd of Connecticut would ban the use of federal
funds to buy goods and services produced by foreign workers. It would
also bar the government from buying goods or services from domestic
companies using foreign subcontractors. Federal privatization efforts and
state programs using federal funding would also be limited.
Outsourcing has its strong proponents. India’s knowledge pool is deep,
education is inexpensive and the English-speaking workers accept low
wages an attractive combination for U.S. companies looking to lower
costs.
Staff in India are often used for back-office tasks, such as bookkeeping
services, data entry and simple 1040 tax returns. Security is a top
concern, so AII doesn’t ship any documents. Work is done on a paperless,
secured ASP environment. "Basically, all of the input we have for
our CPA firm is done by the Indian accountant and then one of our
U.S.-based CPAs review their work," said Nigel Clayton, partner of
Colorado-based Clayton & Associates, according to AII. "This
saves us hours of valuable time."
The growth of outsourcing tax returns prompted the
AICPA to warn
members of the ethical and legal ramifications. CPAs must guarantee
privacy, as an accounting firm can be held liable if its Indian partner
fails to protect taxpayer information. The firms are also responsible for
reviewing all work for accuracy and completeness.
In India, executives say the resurgent economy is helping everyone, and
they fear legislation that may dampen the technology boom. Other
industries, such as makers of cars, scooters and motorcycles, are also
blossoming, fueling hope that India can start attacking poverty and other
social issues.
Steven Clemons, executive vice president of the New America Foundation
think tank, speaking to the Chicago Tribune from Bombay, said that
Congress and the Bush administration should focus not on protectionism,
but on encouraging innovation. "There's a culture of inquiry here.
I've never met so many smart, so incredibly inexpensive people."
1. Change the username & password for your router from the
default.
2. Change the SSID from the default and disable SSID Broadcasting.
3. Enable WEP Security, generate or supply a key and populate the clients
with the key.
4. Configure the MAC Address Filter List and restrict access to those
addresses.
5. Enjoy Safe Surfing.
Michael Givens, IT Consultant
Mobleteks Inc. www.Mobilteks.com
317-780-9799
This is a brief list of a few very basic tips the home user can easily
check. It is NOT intended to be comprehensive.
It is very important to follow the vendor's recommendations for securing
your wireless devices and systems. If you no longer have the
documentation, you can probably obtain it from the vendor's web
site.
If you want to start securing your wireless network, think C, D, E, F
(Change, Disable, Encrypt, Filter/Firewall)
You know your wireless is open IF.
1. You haven't Changed all default passwords, SSIDs, and accounts. Make
the passwords and SSIDs long and very difficult to guess.
2. You haven't Disabled or blocked SSID broadcast messages. Don't forget
to block any non-essential network services and broadcast
messages.
3. Your wireless network is not Encrypted (WEP, WPA, etc.) using the
highest level of encryption possible (128 bits or higher). Don't forget
to choose encryption keys that are long and very difficult to guess.
Change your encryption keys frequently.
4. You aren't Filtering on MAC addresses. The only MAC addresses
you should allow are the ones on your internal network. Don't forget to
enable the Firewall (if your Wireless Router has one).
As always, don't forget to periodically Upgrade the firmware and software
on your wireless devices and PCs. This also includes personal firewalls
and anti-virus software. This will help to enhance the level of
protection for your PCs and networks.
Last, but not least, the recommendations are security "best
practices" that should fit most situations.
Fortified Networks assumes no liability for the implementation of these
recommendations.
Frank Willoughby, CISSP, IAM (NSA)
Chief Information Security Officer, Fortified Networks www.fortified.com
Beginning this year, your young children can
earn more investment income before the "kiddie tax" kicks in.
The kiddie tax rule applies to the investment earnings of a child under
age 14. It says that income above a certain threshold amount will be
taxed at the parents' top marginal tax rate. The intent is to discourage
"income shifting." This happens when parents try to reduce
taxes by transferring investments to their young children or other family
members who are in a lower tax bracket.
For 2004, the kiddie tax threshold increased to $1,600, up from $1,500 in
2003. That means your child under age 14 can now earn up to $800 in
investment income without paying any tax and an additional $800 that will
be taxed at your child's rate. Investment income above that level will be
taxed at your top rate.
The kiddie tax doesn't rule out income shifting as a good tax reduction
strategy. You can save taxes completely on the first $800 of income that
is transferred to each child under age 14, and your child's rate will
apply to the next $800. Children aged 14 or older are not subject to the
kiddie tax. Instead they must file their own tax return and pay taxes at
their own rates. So shifting earning assets to them might still make good
sense from a tax viewpoint, depending on their income level.
Remember, though, that giving assets to your children can have other
implications. You'll lose control over the assets as the children get
older, and there could be gift tax implications. Check with our office
for a careful analysis if you think this strategy might work for
you.
9:03:43 PM
Quoteable
quotes
If you're too open minded, your brains will
fall out.
2. Age is a very high price to pay for maturity.
3. Going to church doesn't make you a Christian any more than going to a
garage makes you a mechanic.
4. Artificial intelligence is no match for natural stupidity.
5. If you must choose between two evils, pick the one you've never tried
before.
6. My idea of housework is to sweep the room with a glance.
7. There is not one shred of evidence to support the notion that life is
serious.
8. It is easier to get forgiveness than permission.
9. For every action, there is an equal and opposite government program.
10. If you look like your passport picture, you probably need the trip.
11. Bills travel through the mail at twice the speed of checks.
12. A conscience is what hurts when all your other parts feel so good.
9:03:41 PM
Ten Tips For Starting a New Business Source: Ampersand Communications Publication date: 2004-02-23
Corporate layoffs remain at the highest levels in years. Entrepreneurship always been a significant stabilizer of economic recessions. The SCORE Association formed in 1964 helps new and small business. More than 10,500 SCORE volunteers provide individual counseling and business workshops for aspiring entrepreneurs and small business owners. SCORE has assisted more than 4.5 million Americans with small business planning and forecasting issues.
SCORE suggest entrepreneurial people considering starting a small business do the following:
1. Identify your talents. Define your passion and think of it in terms of profit. It maybe product-oriented or service-oriented.
2. Consult with colleagues. Mentors, friends, family and a SCORE counselor can provide valuable feedback about your start-up ideas. Their support and suggestions will be valuable as your business venture progresses.
3. Research, research and more research. Learn about the business by attending association meetings, local networking groups and by talking with business owners in similar fields. Research the industry and investigate the competition.
4. Know your money. Analyze your financial resources before pouring your savings into a business venture. Identify both the start-up and ongoing costs. Determine how much you will need to support your family while you build the business.
5. Know yourself. Evaluate your personal strengths and weaknesses. Factors such as motivation, organization, and internal drive will be important to your success.
6. Keep records. Complete, accurate records are needed to file taxes and properly manage your bank accounts. Record new business ideas and business mistakes; these can provide future guidance.
7. Get business counseling from SCORE or other community new and small business advisers. Meet with these sources, either face-to-face, email or phone and discuss on your business ideas and plans.
8. Talk about lifestyle changes. Discuss the possible lifestyle, financial and emotional changes your family will encounter. Air all concerns and make sure your family supports your decision.
9. Find necessary resources. Determine sources of capital, equipment, employees and vendors. Always have back-up sources.
10. Remember your reasons. Before starting a business; write down why you decided become an entrepreneur. Keep this list handy at all times; these reasons will motivate you in good times and in bad.
Personal Income-Tax
Deductions May Be Worth Digging Up Source: Chicago
Tribune
Publication date: 2004-02-22
Feb. 22--Personal income-tax filers looking to reduce their tax
burden can take advantage of several ways to lower adjusted gross income
regardless of whether tax returns are itemized.
"Contrary to popular myth, the IRS does want you to take legal
deductions," said Jackie Perlman, who researches tax law for H&R
Block Inc. in Kansas City, Mo. "It's the illegal ones they don't
want you to take."
These deductions are allowed as adjustments to your total income. But you
must wade through the full 1040 form to get the advantage.
The best known of these deductions is claiming contributions to an IRA.
Here is a rundown of a few of the lesser-known items:
--Educator expenses. If you are a K-12 teacher, counselor, principal or
school aide and worked at least 900 hours during the 2003 school year,
you can deduct up to $250 for out-of-pocket classroom materials bought
last year. Home-schooling expenses do not count.
--Moving expenses. You can deduct the costs of moving for a new job if
you paid for it or if your employer reimbursed you via income -- it would
show up as additional wages on your W-2. The catch: the commute to your
new job must be at least 50 miles farther from your former home than your
old job location was from your former home.
--Line 33. Not detailed in the adjusted gross income section of the 1040
form are lists of other deductions that get lumped in with line 33. This
is where you can take a $2,000 deduction for being the original buyer of
a qualified Toyota Prius, Honda Insight or Honda Civic Hybrid last year.
Also, military reservists can recoup money here, as long as they drove
more than 100 miles from home and had to pay for an overnight stay.
-----
10:35:44 AM
Saving For School Children can earn annual income of up to $4,750 with no tax liability this year. Parents with businesses that employ their dependent children do not have to pay Social Security or Medicare taxes and they get to deduct any wages paid.
These savings can be deposited to Coverdell Education Savings Accounts or qualified tuition programs, otherwise known as Section 529 plans, and reap even greater savings. Roth IRA A Roth IRA may be opened and funded for a child with earned income. The funding for the Roth IRA does not have to come from the child's earnings. For example, if a child earns $5,000, he or she may fund up to $3,000 in a Roth IRA. The contribution can be made by a parent or relative as a gift to the child. A Roth IRA is considered a "tax-free money machine" because it accumulates income tax free and the distributions are made tax-free after age 59 ½. Gifting to the Family This year you can gift $11,000 (in money or property) to any individual free of gift taxes. For a child over age 14, one may give appreciated stock which the child can then sell and pay taxes at the child's lower tax bracket.
Example: A parent gifts stock (held at least 12 months, thereby qualifying for long-term capital gains) worth $11,000 to a child. Parent's basis in the stock is $1,000. If a parent sold the stock, the federal tax, calculated on a $10,000 profit would be $1,500 under the new long-term capital gains rate of 15%. If a child (who receives a "carryover" basis - the donor's basis in the stock) sells the stock, the tax rate is 5% or $500 - a tax savings of $1,000.
Note: the 5% rate applies while the taxpayer is in the 10% or 15% bracket. In our example, if the child has no other income, the 5% long-term capital gains rate applies to as much as $29,150 of gains, per year. New Dividend Tax Rate Corporate dividends are now taxed at 15%. While this provision was enacted to encourage corporations to distribute profits to shareholders rather than retain them, corporate tax planning, especially for small, closely-held companies, has become much more complex. Prior to this change, the tax law was consistent - dividend treatment meant a second tax on earnings. Corporations pay tax on their income, then individuals pay tax when they receive dividends.
Now that dividend treatment is no longer a scourge (in many cases, the 15% tax will approximate payroll taxes for compensation), corporations with retained earnings now may disgorge those earnings with minimal tax consequences. Going forward, the corporate tax rate for the first $50,000 in pre-tax income is 15% and the dividend rate is 15% for a combined tax rate of 30%. The highest individual tax rate is 35% so, in many instances, there is a lower overall tax if corporate earnings are paid out as dividends rather than as compensation to corporate shareholders. Remember, there is an additional payroll tax liability when corporate earnings are distributed to a shareholder/employee as compensation. Classroom Supplies For tax years 2002 and 2003, teachers may deduct a maximum of $250 per year for out of pocket expenses for books, supplies, computer equipment, software and supplementary materials (pencils, paper) used in the classroom. The deduction is available whether the teacher uses the standard or itemized deduction. Make purchases by the end of the year since this benefit is scheduled to expire.
9:44:22 AM
Saturday, February 21, 2004
Tax-free interest
Interest earned on bonds issued by a state, territory, municipality or
any political subdivision is free from federal taxes. These are
generically called municipal bonds, and their tax benefit increases in
value as your marginal tax rate goes higher. (In other words, the bonds
are worth more to you as your overall income rises.)
Your money, fast.
Assume you're in the 35% bracket, the top rate for 2003 and 2004. A 5%
tax-free rate becomes the equivalent of a taxable rate of 7.69%. In the
15% bracket, the taxable equivalent is only 5.88%. If you check out
investinginbonds.com, you can compare taxable and tax-free yields. (See
link at left.) Compare the after-tax rates on alternative investments of
equivalent risk.
Some bonds may not only be tax-free at the federal level, they may also
escape state and local taxes. If you're in the top brackets and live in
New York City, this is one investment you definitely want to consider for
your portfolio.
Carpool receipts
Commuting to work? Bring a friend -- and his wallet. If you form a
carpool to carry passengers to and from work, any dollars received from
these passengers aren't included in your income.
Commuting costs are generally not deductible. But if you establish a
carpool and you're reimbursed in amounts sufficient to cover the cost of
your repairs, gas and similar items used in connection with operating
your car to and from work, then you've converted personal nondeductible
expenses into excludable income.
Assume you're in the 25% bracket (down from 27% in 2002). You have to
earn $133 per month to cover a $100 monthly commuting expense. If you
have a carpool arrangement with expenses being reimbursed, you've got no
additional income. But you do have an additional $133 per month in
wealth!
Sell your house
Under a tax law enacted in 1997, if your house was your principal
residence for two of the last five years, you can exclude as much as
$250,000 in gain ($500,000 on a joint return) when you sell it.
You don't have to reinvest the money, and you can claim the exclusion
every two years. (If you've got $500,000 in gain every two years, I want
to meet your real estate agent and go shopping!)
If you don't meet the two-year rule, you can get a partial exclusion
based on the time of use and ownership. Assume you sold after only one
year and had a $50,000 profit. Your exclusion is half the $250,000, not
half the $50,000 profit. In this case, you'd pay zero tax on the
sale.
But this partial exclusion is only if the sale is required because of
either a change in place of employment, health reasons or unforeseen
circumstances. I haven't yet seen final regulations defining
"unforeseen circumstances." My understanding is that the IRS is
going to be flexible here.
Tax-free compensation
When you're due for a raise, ask your company to get creative in your
compensation. There are numerous ways to receive non-taxable
compensation. Let's look at some of the best alternatives to taxable
earned income.
Use your health coverage. Health and hospitalization insurance
premiums paid by your current or former employer are tax-free -- a huge
benefit. Let's say your health insurance premiums come to $280 a month or
$3,360 a year (for an HMO policy for a family of four with a $1,500
deductible). If you're in the 25% tax bracket and have to pick up the
bill, the real cost to you would be $4,480. That's $3,360 for the
premiums and $1,120 for additional income taxes because you'll be paying
for the coverage in after-tax dollars. Having your company pick up the
cost helps both of you. It doesn't have to pay the salary necessary to
get you even. It gets to write off the full cost of the coverage. Plus,
neither of you has to pay the 7.65% payroll taxes on the premiums. And
you, of course, boost your disposable income substantially.
Cover your life. Group term life insurance coverage of $50,000
or less paid for by your company isn't taxed to you. You pick the
beneficiary; your company pays the premiums. Your company deducts the
expense; you walk away with additional tax-free income.
Send yourself to school. Get educated. The courses don't even
have to be job-related. But they can't be for any education involving
sports, games, or hobbies. Your company can pay, and deduct, as much as
$5,250 per year in educational assistance paid for either undergraduate
or graduate courses. Again, that assistance comes to you tax-free.
Get you there…and parked. Your company can give you discount
fare cards, passes or tokens to take public transportation to work. As
long as it's not worth more than $100 per month, your company can deduct
it, but you, as an employee, receive it tax-free as a de minimus tax
benefit. You're taxed only on any excess over the $100. If you drive and
have to pay for parking, your company can provide free parking, up to a
maximum value of $180 per month, to you tax-free.
Cafeteria plans. These are sometimes called Flexible Spending
Accounts. Your company makes deductible contributions under a written
plan, which allows you to select between taxable and non-taxable
benefits. To the extent you chose non-taxable benefits, you have no
additional income. Available non-taxable benefits may include group life
insurance, disability benefits, dependent care and/or accident and health
benefits. Your individual plan details the options. You make your choices
among the items on the cafeteria menu.
Any time you can convert taxable income into non-taxable income,
you've given yourself a raise. You and your company save money.
5:54:24 PM
Monday, February 16, 2004
Top Ten Biggest deduction myths
From SUVs and diets to police lunches and work clothes: What you're sure is deductible may not be. January 30, 2004: 2:42 PM EST By Jeanne Sahadi, CNN/Money senior staff writer
NEW YORK (CNN/Money) – In case you had any doubts, let's be clear: The U.S. tax code isn't a myth. Byzantine maybe, but not mythic.
Nevertheless, there are certain myths about tax breaks held dear by some taxpayers that are worth debunking before anyone tackles their 1040 this year.
Have a gander at these untrue notions:
Uncle Sam will help you buy that SUV. That may be what a dealer told you, but since when is a car dealer your go-to source for tax information?
Some consumers, apparently, have come to believe they can get a tax credit just for buying an SUV, according to the National Association of Tax Professionals. Not so.
There was legislation being kicked around in Washington at one point that would have offered a tax credit to buyers of hybrid SUVs, but it didn't become law. (There is, however, a clean fuel tax deduction up to $2,000 offered to owners of some hybrid vehicles, including some Honda models and the Toyota Prius.)
There is a tax break for SUV buyers who are small business owners. In a controversial move, the U.S. government decided to allow taxpayers to write off up to $100,000 for the purchase of a new SUV in the year it is purchased so long as the vehicle is used for business purposes and weighs more than 6,000 pounds.
There is not, however, any tax break if you buy an SUV to tote around your brood.
Hey, honey, guess what? We can write off the house. For some who run home-based businesses, "the myth is you can write off 100 percent of your home," said enrolled agent David Mellem of Ashwaubenon Tax Professionals. The truth is you can only write off the portion of your home that is dedicated to your business.
Among some part-time telecommuters, there is also an assumption that you'll automatically qualify for a home office deduction of some sort. But as with so much in the tax code, the answer "it depends" usually applies.
"The home office deduction is more nuanced than people think," said Jackie Perlman, a senior tax analyst for H&R Block.
For instance, she said, if you work at home occasionally because you prefer it to your cubicle, you may not be able to deduct any home-office expenses since your employer has already provided a space for you at work and has not required that you work at home.
Have medical receipts; will deduct away. Medical expenses may be deductible if -- and it's a huge "if" -- they exceed 7.5 percent of your adjusted gross income (AGI).
That's a higher threshold than you may think and the payoff once you reach it may not be huge. That's because if you do manage to spend 7.5 percent of your AGI in out-of-pocket medical expenses, you'll only be able to deduct the amount above that 7.5 percent.
Remember, "out-of-pocket" means expenses that are not eligible for reimbursement from your health insurer or from your flexible spending plan. "You can't double dip on that," Perlman said.
Say, for example, your AGI is $80,000. To qualify for a medical expense deduction, you'd need to spend more than $6,000 out of pocket. So if you spent $6,010, you'd only get to deduct $10. And that $10 deduction would only reduce your tax liability by $2.50 if you're in the 25 percent tax bracket ($10 X 0.25).
What if you were lazy and didn't submit expenses from reimbursement to your insurer? It's not like you got money for them, so you figure you can include that in your 7.5 percent floor, right? Nice try. If expenses are reimbursable, they are not deductible, Perlman said.
I've dieted, now I'm ready to deduct. That weight-reduction program has done wonders for your waistline, but it probably won't shrink your tax bill.
A weight-loss program may qualify as a deductible medical expense, but only if it meets certain requirements. You can't deduct it unless it your physician prescribed it and it was intended to treat a particular disease.
Obesity is considered a disease, so if you are legitimately obese, that would count. Or if you're not obese but are told to lose weight to, say, lower your blood pressure, that also might make the program a deductible expense.
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But even if you meet those criteria, the cost of a weight-loss program is still subject to the same AGI threshold restrictions as other medical expenses (see above).
So, too, are programs designed to help you quit smoking. Unlike a weight-loss program, however, you don't need a physician's prescription to join a smoking-cessation program.
For more on what are considered deductible medical expenses, click here.
Cops on the beat gotta eat, right? Every year, enrolled agent Cindy Hockenberry of the National Association of Tax Professionals gets asked the same question: Policemen (and firemen) may deduct a per diem for meals eaten while they're on duty, right?
Every year she gives the same answer: No. "It's just a bad rumor that keeps going around. And it won't go away," she said.
I got the nicest dress for work. I can't wait to write it off. In most professions, you might be fired if you came to work in the buff (to say nothing of getting arrested on your way to the office). But just because you have to get dressed for work doesn't mean you get to deduct the cost of your clothes as a work expense.
There is one exception, Hockenberry said. You may deduct the cost of your work clothes if your employer requires you to buy clothing that is specifically not made for everyday wear, such as a uniform or clothing with a company logo.
Most overlooked deductions
To minimize the hard-earned dollars you pay on April 15, don't forget about these breaks. January 28, 2004: 4:46 PM EST By Jeanne Sahadi, CNN/Money senior staff writer
NEW YORK (CNN/Money) – Even if you don't itemize deductions on your federal tax return, make sure you don't cheat yourself out of tax breaks to which you're legally entitled.
CNN/Money asked two tax experts -- enrolled agent David Mellem of Ashwaubenon Tax Professionals in Green Bay, Wis., and Jackie Perlman, senior tax research analyst of H&R Block – to identify those deductions and credits that taxpayers most often overlook or are most likely to overlook this year because they're not aware of changes to the tax law. Here's their list:
Tuition credits and deductions
If you've been shelling out big bucks to a college or university, you might be able to get some of them back. There are two education credits or a tuition deduction for which you may be eligible.
(Remember, a credit reduces the taxes you owe dollar for dollar. A deduction reduces the taxes you owe by a percent of every dollar you're allowed to deduct. A $100 credit reduces your taxes by $100. A $100 deduction reduces your taxes by $100 times your tax bracket. So if you're in the 25 percent bracket, your $100 deduction will reduce what you owe by $25 ($100 X 0.25)).
The Hope Scholarship Credit is for taxpayers whose dependents (or who themselves) are in their freshman or sophomore years in college.
For the 2003 tax year, if you're married filing jointly and your modified AGI is less than $103,000 ($50,000 if you're unmarried), you may take a credit for up to $1,000 of the first $1,000 you pay in qualified tuition expenses and up to $500 of the second $1,000 you pay, for a maximum of $1,500 per eligible student. So if you spent $1,200 on tuition costs, you can take a credit of $1,100 (100 percent of the first $1,000 back, plus 50 percent of the remaining $200).
The amount you may claim, however, begins to be reduced if your AGI is over $83,000 ($40,000 if unmarried).
With the Lifetime Learning Credit, you may get a credit for up to 20 percent of the first $10,000 in tuition you pay, for a maximum credit of $2,000. That's an increase over the $5,000 cap on educational expenses in 2002.
There are a few limitations, however. First, only one Lifetime credit is allowed per tax return, so you may only apply it for one of your dependents (or you or your spouse if one of you is the student). Second, you can't take the Lifetime credit in the same year as the Hope credit for the same student. And third, to qualify, your modified AGI must be below $100,000 if you're married filing jointly ($50,000 if single).
The amount you may claim, however, begins to be reduced if your AGI is over $80,000 ($40,000 if unmarried). For more information, click here.
If your income is too high to qualify for either the Hope or Lifetime credits, you may be eligible to take a Tuition Deduction. If you're married filing jointly and your AGI is below $130,000 ($65,000 if you're single), you may be able to deduct up to $3,000 in qualified tuition expenses. The credit may only be taken for one person per return. For more information, click here.
Student loan interest
Assuming you met certain income requirements, it used to be that you could deduct the interest you pay on student loans up to a certain amount for the first 60 months (5 years) of your repayment period. Now that five-year limit has been lifted.
So, if your AGI is below $130,000 and you're married filing jointly ($65,000 if you're single), you may be able to deduct up to $2,500 in interest for as many years as it takes to repay the loan. But the amount you may deduct is reduced somewhat if your AGI is greater than $100,000 ($50,000 if you're single).
If you moved in 2003 to take a new job or to follow your employer to a new locale, and you weren't reimbursed for your troubles, you may be able to deduct your moving expenses on your federal return.
There are, however, two tests you must meet: a distance test and a time test.
Your new office must be 50 miles farther from your old home than was your old office. In other words, if your commute used to be 20 miles, you need to show that your commute from the new office to your old home would have been at least 70 miles to justify the deduction of moving expenses.
You also need to work full-time for your employer for at least 39 weeks during the 12 months right after you move. Now, if you moved in December 2003, you can still deduct the move, but if you end up working less than the required time, you eventually must amend your 2003 return or report the amount deducted as income on your 2004 return.
The time test is slightly different for those who are self-employed. For more information, click here.
Dependent and child care costs
Say you're paying someone to take care of your elderly parent while you're at work or you've enrolled your kids in a daycare center. If you've signed up for a dependent care benefit at work, your employer may reimburse you with tax-free dollars for those expenses up to $5,000.
But if your expenses exceed the amount for which you're reimbursed, you may be able to take a credit for a percentage of the unreimbursed expenses on your federal tax return.
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Depending on your AGI, it used to be that you could take a credit of between 20 percent and 35 percent of unreimbursed expenses up to $2,400 for one dependent, and $4,800 for two or more. But those limits went up in 2003 to $3,000 and $6,000 respectively.
So say you have two kids, and you got $5,000 reimbursed in childcare expenses from your employer, but you spent $6,000 on daycare in 2003. If your AGI is over $43,000, you are now eligible to take a credit of $200, which is 20 percent of that extra $1,000 you spent. If your AGI is less than $43,000, you may be able to take up to 35 percent, or $350.
Last year's tax legislation sharply cut the tax rate you'll pay on most
dividends. But not all dividends qualify for the new low rate. Whether you're
restructuring your investment portfolio or just gathering information for your 2003
tax return, it pays to know your dividend types.
Qualified dividends include most common stock dividends paid by U.S.
companies. You'll pay a maximum tax rate of 15% on qualified dividends, or just 5% if
you're in the lowest two tax brackets. Dividends paid by foreign companies may
also qualify if the company is traded on a US stock exchange or meets certain
other requirements.
Other dividends are taxed at higher ordinary income rates. This category
includes dividends paid by credit unions, mutual insurance companies,
cooperatives, and certain other nonprofit organizations. Some preferred stock dividends
may not qualify for the lower tax rates. Even regular dividends may not qualify
if you hold the stock for only a short time around the dividend payment date.
What about mutual fund dividends? Some dividends paid by mutual funds qualify
for the low rates; some don't. It all depends on the underlying investments
that generate income for the mutual fund. "Dividends" paid by a money market
mutual fund, for example, probably won't qualify. That's because the underlying
investments are usually not equity securities.
Although the rules are clear in most cases, there are numerous exceptions and
fine details. If in doubt, contact our office for advice before you invest.
It could save you from getting a nasty surprise when you receive your Form
1099-DIV at the end of the year.
5:01:55 PM
Saturday, February 07, 2004
2004 data -IRS
It’s that time of the year again when the Service announces the numbers you need to know for 2004. At this time only a few numbers have not been announced, including the depreciation limits for automobiles placed in service in 2004. Presumably, the Service will wait until the second-half of the year as it did in 2003.
Tax rates -- The 15 percent/25 percent/28 percent/33 percent/35 percent brackets begin at the following taxable incomes (according to filing status):
$14,300/$58,100/$117,250/$178,650/$319,100 (Married, filing jointly); $7,150/$29,050/$58,625/$79,325/$159,550 (Married, filing separately); $7,150/$29,050/$70,350/$146,750/$159,550 (Single individual); $10,200/$38,900/$100,500/$162,700/$319,100 (Head of Household); and $0/$1,950/$4,600/$7,000/$9,550 (Trust or Estate).
Standard deduction -- The 2004 standard deduction amounts are $4,850(single individual), $9,700 (married, filing jointly and surviving spouse), $7,150 (head of household), and $4,850 (married, filing separately). For a taxpayer (and spouse) who is elderly (age 65 or over) or blind, the additional standard deduction is $1,200 ($2,400 for a taxpayer who is both elderly and blind); in the case of a married taxpayer, the additional standard deduction is $950 ($1,900 for a taxpayer who is both elderly and blind). If an individual may be claimed as a dependent on another taxpayer's return, the basic standard deduction is limited. For dependents with earned income (but total income less than the basic standard deduction), a slightly increased standard deduction (of up to $250) is available. In 2004, a dependent's basic standard deduction is limited to the lesser of: (i) the basic standard deduction for single taxpayers ($4,850); or (ii) the greater of (a) $800 or (b) the dependent's earned income plus $250.
Personal exemption -- The 2004 exemption amount will be $3,100. Exemption amounts claimed on a tax return are subject to a phaseout as the taxpayer's AGI exceeds a threshold amount (§151(d)(3)). Specifically, all exemption amounts claimed on a return are reduced by two percent for each $2,500 (or fraction thereof) of AGI in excess of the appropriate threshold amount ($1,250 for a married individual filing separately). As a result, exemption deductions are completely eliminated when AGI exceeds the AGI threshold amount. After adjustment for inflation, the AGI threshold amounts for 2004 are $142,700 (single individual), $214,050 (married, filing jointly and surviving spouse), $178,350 (head of household), and $107,025 (married, filing separately); this means that the exemption is fully phased out at AGI of $265,200 (single individual), $336,550 (married, filing jointly and surviving spouse), $300,850 (head of household), and $165,275 (married, filing separately).
Itemized deductions -- Total itemized deductions otherwise allowable are reduced by three percent of a taxpayer's AGI in excess of specified threshold amounts. This overall limitation applies to itemized deductions after all other floors have been applied. After application of the three-percent floor, the "net itemized deductions" remain. For 2004, the threshold amount is $142,700 for all taxpayers except a married individual filing separately, where the threshold is $71,350.
Kiddie tax -- The "net unearned income" of a minor child is taxed at the parents' marginal tax rate. For 2004, net unearned income is computed as unearned income less $800 less the greater of: (i) $800 of the standard deduction (or $800 of itemized deductions); or (ii) the amount of allowable deductions that are directly connected with the production of the unearned income. Alternatively, parents may include the unearned income of a minor child on his or her return if the child has gross income (exclusively from interest and dividends) between $800 and $8,000, and the tax on a child's first $1,600 of unearned income will be the lesser of $80 ($800 X 10 percent) or 10 percent of unearned income exceeding $800. If the child has unearned income in excess of $1,600, it will be taxed at the parent's highest marginal tax rate. Minor children with unearned income have a reduced alternative minimum tax (AMT) exemption amount equal to the child's earned income plus $5,750 (but no more than the $40,250 AMT exemption for single taxpayers in 2004).
Tax credits -- The child tax credit provisions allow taxpayers to take a tax credit based on the number of eligible dependent children. The child tax credit is $1,000 per child in 2004. The available credit begins to phase out for higher-income taxpayers when AGI reaches $110,000 for married couples filing a joint return, $55,000 for married couples filing separately, and $75,000 for all other taxpayers. For lower-income taxpayers, the child tax credit is refundable to the extent of 10 percent of the taxpayer's earned income in excess of $10,750 in 2004.
The earned income tax credit (EITC) is determined by multiplying a maximum amount of earned income by a specified credit percentage (based on the number of qualifying children). The credit is reduced by a specified percentage of income over an inflation-adjusted phaseout amount. For married taxpayers filing a joint return, the phaseout base amount is increased by $1,000. The income used for this phaseout is the greater of a taxpayer's AGI or earned income. Finally, "investment" income in excess of a specified inflation-adjusted target disqualifies an individual from the EITC. In 2004, the disqualified income amount will be $2,650. The earned income base amounts and phaseout information for 2004 are represented in the table below
Married, filing jointly
# Qualifying Children
Income Base Amount
Credit Percentage
Maximum credit
Phase out base
Phase out percentage
Ends at Income of
No children
$5,100
7.65
$390
$7,390
7.65
$12,490
One child
$7,660
34.00
$2,604
$15,040
15.98
$31,338
Two or more
$10,750
40.00
$4,300
$15,040
21.06
$35,458
Other taxpayers
# Qualifying Children
Income Base Amount
Credit Percentage
Maximum credit
Phase out base
Phase out percentage
Ends at Income of
No children
$5,100
7.65
$390
$6,390
7.65
$11,490
One child
$7,660
34.00
$2,604
$14,040
15.98
$30,338
Two or more
$10,750
40.00
$4,300
$14,040
21.06
$34,458
If a taxpayer incurs expenses related to the adoption of a qualified child (for example, adoption fees, attorney and court costs, social service review costs, and transportation costs), an adoption expenses credit is available. The tax credit covers the first $10,390 of adoption expenses paid by a taxpayer. The available credit is phased out ratably over a range of $40,000 for taxpayers whose modified AGI exceeds $155,860 in 2004.
Educational savings bonds -- Interest income earned on a qualified U.S. Series EE savings bond used to finance the higher education of the taxpayer, spouse, or dependents is excluded from gross income. No exclusion is allowed to married individuals filing separate returns.
If the principal and interest amounts received do not exceed the qualified higher-education expenses, all interest is excludable subject to an inflation-adjusted modified AGI phaseout. If the principal and interest amounts received exceed the qualified higher-education expenses, only a pro rata portion of the interest will qualify for the exclusion (the ratio of qualified higher-education expenses to total principal and interest received). When modified AGI exceeds the AGI base, the exclusion is completely phased out. The AGI base amounts for 2004 are $89,750 (married, filing jointly), phased out over $30,000 of MAGI, and $59,850 (other eligible taxpayers), phased out over $15,000 of MAGI.
Education credits -- The maximum HOPE Scholarship credit in 2004 is $1,500 (100 percent of the first $1,000 of qualifying expenses and 50 percent of the next $1,000). In 2004, the lifetime learning credit is 20 percent of the first $10,000 of qualifying expenses. The qualifying expense limit is not subject to an annual inflation adjustment. Both education credits are subject to a phaseout for modified AGI in excess of the AGI base; in 2004 the AGI base is $85,000 (married, filing jointly) or $42,000 (all other taxpayers).
Qualified transportation fringe benefits -- To encourage the use of mass transit for commuting to and from work, certain employee benefits, called “qualified transportation fringe benefits,” are excluded from income. These benefits consist of expenses related to transportation from the employee's residence to work in a commuter highway vehicle; a transit pass; and qualified parking. In 2004, the first two categories are limited to $100 a month; the third category has a separate monthly limit of $195.
Medical -- Medical savings accounts (MSAs) are available to a limited number of eligible individuals. Currently, an individual is eligible for an MSA if he or she is self-employed or elects to be covered under a "high-deductible" plan of a small employer (an employer who, on average, employs 50 or fewer workers). For 2004, a "high-deductible" plan is a health plan with the following deductibles and limitations on out-of-pocket expenses: (i) an annual deductible not less than $1,700 and $2,600 and maximum out-of-pocket expenses for covered benefits not exceeding $3,450 (individual coverage); and (ii) an annual deductible not less than $3,450 and $5,150 for family coverage and maximum out-of-pocket expenses for covered benefits not exceeding $6,300. The amount that can be contributed to an MSA is a function of the "deductible" of the "high-deductible" health plan. For individual coverage, the annual contribution limit is 65 percent of the deductible; for family coverage, contributions are limited to 75 percent of the deductible. As a result, the contribution range for 2004 is $1,105-$1,690 (individual coverage) and $2,588-$3,863 (family coverage). Long-term-care insurance premiums that do not exceed specified dollar limits based on the insured's age qualify as a medical expense. In 2004 the limits are $260 (40 or less); $490 (41 through 50); $980 (51 through 60); $2,600 (61 through 70); and $3,250 (over 70).
Section 179 -- JGTRRA increased the maximum amount that can be expensed to $100,000 in 2003 and increased the acquisition-cost ceiling (above which the expense amount is phased out) to $400,000. In 2004, the maximum §179 expense election will be $102,000 and this amount will be subject to a phaseout once property placed in service exceeds $410,000.
Social Security -- The taxable wage base in 2004 is $87,900.
4:26:44 PM
Tuesday, February 03, 2004
How do you correct depreciation errors for back years?
The IRS has issued temporary regulations and revenue procedures
giving guidance for how to make corrections for depreciation errors for
back years. Here is an oversimplified summary. See the source documents
for details.
Under Revenue Procedure 2003-50, the time for making the election has
been extended for taxpayers that missed the expense election for the tax
year that included September 11, 2001. Since December 31, 2003 has
passed, a taxpayer may make the election by filing a Form 3115 (Change of
Accounting Method) with the taxpayer's timely filed federal income tax
return for the second taxable year after the taxable year that included
September 11, 2001. The fiscal year must end on or before July 31, 2004,
and the taxpayer must have owned the property as of the first day of that
taxable year.
Under final and temporary regulations issued with Treasury Decision
9105, "catch up" depreciation adjustments can generally be made
as automatic accounting changes by filing Form 3115 (Change of Accounting
Method) with the income tax return for the year of correction. A change
in useful life is not a change of accounting method, so no Form 3115 is
required for this change. Adjustments relating to a change in useful life
are made in the current and future years, not as a Section 481(a)
(catch-up) adjustment.
Under Revenue Procedure 2004-11, prior-year depreciation errors may
be adjusted for the year an asset is sold, even when the asset hasn't
been depreciated for two years by including Form 3115 with the income tax
return for the year of sale.
2004 last chance for bonus depreciation?
Remember that some of the recent tax law changes have short effective
dates because they are economic stimulus provisions. For example, 50%
bonus depreciation is scheduled to expire on December 31, 2004. There are
some advantages of bonus depreciation compared to the expense election.
For example, trusts qualify to claim bonus depreciation but not the
expense election. Also, there are no limits for the total amount of bonus
depreciation that can be claimed. Remember, only new assets qualify for
bonus depreciation.
Also remember California and most other states do not allow a
deduction for the federal bonus depreciation amount.
6:16:29 PM
A number of readers have asked about this. Just a different name for the
same thing? Far from it. If you and another party--your spouse, child,
relative, friend, business partner, etc. want to co-own property, both
forms can be used. But the legal consequences are very different. If you
and a friend own property as joint tenants, the property
automatically passes to the survivor on the death of the other party.
Good news? You don't need a will. Bad news? A will won't change the
outcome. And, no matter how many co-owners are involved, it's assumed
that each has an equal share. Thus, if Fred, Sue and Dick purchase a
rental as joint tenants, each will have a 1/3 share. Finally, in the case
of jointly owned property, no owner can sell his or her share without the
other parties' consent.
On the other hand, if the property is owned as tenants in common,
the ownership shares can be different and each party is considered to own
his or her share and can dispose of it as they wish. For example, if Fred
puts up 20% of the purchase price, Sue puts up 50% and Dick puts up 30%,
that's what their ownership interests will be--20%, 50%, and 30%. Each
party can leave his or her shares to any beneficiary on death or sell
their interest to any other party without the consent of the other
owners. Each party can also encumber (borrow on) his or her interest in
the property (the rule here varies by state). All parties should keep a
record of the expenditures they pay, paying attention to the type of
expenditure. That is, whether the funds were used for general upkeep
(maintenance, property taxes, etc.) or to pay the mortgage or for capital
improvements. Keep in mind that each owner is jointly and severally
liable for the mortgage. That means, should the other parties not pay,
you can be responsible for the entire amount. What happens if you haven't
chosen a form of ownership after purchasing property with another party?
In some states, ownership as tenants in common is assumed.
There are several other ways to jointly own property.
The first is called tenancy by the entirety with right of
survivorship. It's similar to joint tenancy (the surviving spouse
automatically inherits the property on the death of the other spouse),
but is only available to married couples, and only about half the states
allow it. Some married couples automatically choose this option. But
that's not always the best approach.
The second is by setting up a partnership. This is more expensive.
You'll have to draft a partnership agreement, file papers with your
state, file federal and state tax returns for the partnership, set up a
bank account, etc. But there are a number of advantages here. First, your
partnership interests can be very different. For example, Fred puts up
30% of the funds to buy the property and Dick puts up 70%. But Fred
agrees to manage the property and cover 50% of the maintenance expenses.
Fred could have a 30% capital interest (e.g., he gets 30% of the proceeds
on the sale), but is entitled to 50% of the profits and losses. In
situations like this, a partnership makes particular sense. Second,
should Fred decide to leave, he can simply sell his partnership interest
without selling the underlying property. That's important if more than
one property is involved. (Selling a partnership interest isn't all that
simple, but it's easier than dealing with joint ownership.) Because of
the cost of dealing with a partnership, it probably doesn't make sense
for a vacation home that's not rented for profit, particularly if the
parties are relatives. The big disadvantage of a partnership is that the
partners are jointly and severally liable for the debts of the
partnership. (A limited partnership avoids that problem, but is more
complicated. You can also avoid the problem by organizing as an LLC.)
An LLC (limited liability company) is similar to a partnership in
that it exists as a separate entity, files tax returns, and is generally
taxed as a partnership. The big difference is that LLC owners are
generally not responsible for the liabilities of the entity.
You might consider setting up a trust. This approach is very
popular way to hold real estate in some states, but it's often not as
flexible. It can be a good way of holding real estate for appreciation,
or a vacation home or simple rental property.
A S corporation is sometimes used as an alternative to a
partnership, but it's not the most attractive choice. There is no such
thing as separate capital and profits interests. The big advantage is the
limited liability for shareholders and ease of transferring ownership
(you can simply sell your stock).
A C corporation can be used for holding and renting property, but
there are a number of disadvantages including the double taxation of
profits and gains, the inability to currently use losses, etc. That
generally makes it a poor choice.
What's the best method? There's no one answer here. Certainly if you're
looking at multiple properties, particularly if this is a business
venture, a partnership or LLC is an attractive option. The set-up and
annual costs are spread over several properties. That's especially true
if there's no easy division of profits and losses and sales proceeds, or
if one party is providing more or less labor and more or less capital. A
trust can be a way of relatives holding a family vacation home or rental
property. Joint ownership generally only makes sense between close
relatives. For example, a mother and daughter holding family property.
No matter what form you select, you may not be able to avoid problems
without a side agreement if there's a disgruntled co-owner. Even in an S
corporation, a shareholder who owns 20% of the stock may be able to
stonewall actions, or transfer shares to someone you don't want as a
shareholder. The only solution is a side agreement restricting the sale
of shares, a partnership interest, etc. Consider a buy-sell agreement
where any co-owner wanting to get out has to sell to the other co-owners
at the appraised, book, or other prior agreed-on approach. In the case of
joint ownership, consider a legal agreement on how and when to dissolve
the co-ownership.
Get good legal advice before committing. It's a small price to pay to
avoid a costly legal battle in the future.
4:31:39 PM
Monday, February 02, 2004
How to choose mutual funds
It seems like everyone is catching mutual fund fever these days. All those funds claim to offer low risks and good returns on your investment. But they can't all be telling the truth, can they? Of course not. Choosing the wrong fund can leave you feeling more anxious than a prisoner the day before a conjugal visit.
Funds can be loaded with fees
The good news is that learning how to choose the right funds doesn't have to be complicated. You don't even need to have big bucks in order to get started investing. Gene Walden, author of The Top 100 Mutual Funds, states that you'll need about $500 to $2,500, depending on which funds you buy. Once you've made your initial investment, you can then add as little as $50 per contribution, according to Walden.
As a beginning investor, your first step should be to understand the basics of mutual funds. There are two kinds of mutual funds for you to consider -- load funds and no-load funds. Load funds are those that charge a sales commission. However, that doesn't mean those funds will necessarily bring you a higher return than no-load funds.
If load funds don't guarantee a higher return, then why do people buy them? The reason is because some investors think a stockbroker's advice is sometimes worth the added expense. Also, no-load funds aren't always the bargain they seem. Those funds can still carry management fees (12b-1 fees) or advertising expenses even if they don't charge a commission. Still, experts don't always agree over the value of paying commissions.
"I advise people never to buy a load fund because there's always an equivalent no-load fund out there," says Paul Farrell, mutual funds editor for CBSmarketwatch.com. "Why put up five percent of your money up front? There are some load funds that do better than the competition. However, if you look at their earnings after taxes then they're not performing as well as they originally seemed. Stockbrokers will tell you that those expenses will even out after a five-year period. The problem with that logic is that many people are getting out of a fund after two to three years."
"If your broker gives you the recommendation, pay the fee happily," argues Walden. "But if you do your own research, then you should probably be biased toward no-loads."
Five keys to picking a fund
If you're an enthusiastic investor, you'll be glad to hear that some professionals have written entire books about how to choose a fund. I'm not that ambitious, so I'll just provide some simple guidelines to get you on the right path.
Set investments goals. Ideally, mutual funds are geared toward long-term investors. However, market returns have been so good in the past few years that investors have been pulling their money out much sooner than normal. Keep in mind that your financial goals are going to vary widely depending on your age. Having time on your side means that you can afford to be more aggressive with your investments -- since you have more time to recover from an unexpected loss.
Learn the signs of a well-managed fund. You're not going to have trouble finding out details about any fund, so you need to know what to concentrate on rather than risk information overload. Walden recommends that investors focus on a fund's performance, management and consistency.
"I want funds that rank near the top of the list in terms of five-year returns; then I want to be sure the fund manager has been there several years, and I want a fund that is consistent year to year relative to the overall market," says Walden.
Understand the risks. In general, mutual funds are not considered to be too risky because they invest in dozens or even hundreds of stocks. Still, be careful to read the part of the fund's prospectus that talks about risk. Farrell, author of "The Winning Portfolio," warns that you shouldn't be fooled into thinking you can't lose any money on these investments.
"There are a lot of funds that haven't done well even with the strong market," he says. "Small cap funds have lost 10 to 20 percent of their portfolio value recently. Funds involved in emerging countries have also done poorly. ... The American Heritage fund was the No. 1 performing fund two years ago, before it became heavily invested in a failed drug. ... The fund went from $100 million in holdings to about $3 million."
Study your resources. All funds have toll-free telephone numbers, so you can call them to get information and ask questions. Companies will also send you a free prospectus that explains the principal strategies, objectives, risks, performance and fees associated with a fund. In the past, these documents have been as easy to read as a set of encyclopedias. However, funds now offer a simplified "fund profile" that covers the highlights in three to six pages. The financial news media and companies like Morningstar, a popular mutual fund rating and data firm, are also great resources.
Dump what doesn't work. Farrell suggests that investors carry no more than eight to 10 funds in their investment portfolio at any time. You don't need to panic if some of your funds aren't kicking tail, but it's still a wise idea to reevaluate your portfolio every three to six months.
"There will usually be one to three funds in that group that are subpar performers," says Farrell. "If they are below the middle of their peer group for four consecutive quarters, then investigate the reasons why, and make the necessary changes."
Following these steps won't guarantee you a spectacular return on your investment, but you'll be much less likely to end up losing your investment. Here's one final piece of advice: Don't underestimate the value of diversification by putting all your money into one single fund. People who put all their eggs in one basket may come home to find someone's been making scrambled eggs in their kitchen.
10:09:52 AM
Thursday, January 29, 2004
- I’m sorry, I’ve been trying to break the record for "the most calls
missed" if it’s a emergency, please hold on till the record is broken. And I will
call you back. - Hi. This is John:
If you are the phone company, I already sent the money.
If you are my parents, please send money.
If you are my financial aid institution, you didn't lend me enough money.
If you are my friends, you owe me money.
If you are a female, don't worry, I have plenty of money. - Hi, this is
Stephanie's answering machine. If you're the phone company asking for money, stop
bugging her, she'll send it sooner or later. If you're a TV company advertising
TVs, she already has a TV with every channel known to man, and several known
to monkeys. If you called for any other reasons, please hang up the phone,
start screaming, and run to the nearest shoe store. When you get there, ask them
for a cheeseburger. (This probably won't help you, but we'll always have
something to laugh about when we're bored.) - (With loud music playing in the
background) "Hello... HELLO?? I can't hear you! What? Oh.. we're not home, leave a
message. - "(In funny old lady voice) Hello, you have reached the ----family
and we can not come to the phone right now. Please leave your name, phone
number, short message, social security number, and credit card number and we will
call you when we're done shopping." - We're sorry. You have reached an
imaginary number. Please rotate your phone 90 degrees and try again. - Hi. I'm home
right now, I'm just screening my calls. So start talking and if you're someone I
want to speak with I'll pick up the phone. Otherwise, well, what can I say?
Pic of the Day
9:41:37 AM
Tuesday, January 27, 2004
The Top 10 Scams, Schemes & Scandals for 2004
AccountingWEB.com - Jan-23-2004 - State securities regulators forecast that investors will be challenged with increasingly complex and confusing investment frauds and identified the Top 10 schemes investors are likely to see in 2004. New to the NASAA annual survey of state securities enforcement officials are mutual fund practices, senior investment fraud, and variable annuities.
“Investors face a complex maze of scams, schemes and scandals," said Ralph A. Lambiase, NASAA's president and director of the Connecticut Division of Securities. "Our fight against fraud never stops because each year con artists discover new ways to fleece the public. Sadly, many of the age-old scams still work to cheat victims of their hard-earned savings as well. It pays to remember that if an investment opportunity sounds too good to be true, it usually is."
The following ranking of NASAA's Top 10 scams, schemes and scandals for 2004 is based on the order of prevalence and seriousness as identified by state securities regulators:
PONZI SCHEMES.
Named for swindler Charles Ponzi, who in the early 1900s took investors for $10 million by promising 40 percent returns, these schemes are a perennial favorite among con artists. The premise is simple: promise high returns to investors and use money from previous investors to pay new investors. Inevitably, the schemes collapse and the only people who consistently make money are the promoters who set the Ponzi in motion. When regulators shut down these schemes promoters even go so far as to blame investors' losses on government intervention -- rather than admit their own deceptions.
In Mississippi last year, a Tennessee attorney and a Mississippi securities dealer pleaded guilty to 58 counts of investment fraud for their role in a Ponzi scheme that bilked 41 investors from four states out of $10.2 million.
SENIOR INVESTMENT FRAUD.
Volatile stock markets, record low interest rates, rising health care costs, and increasing life expectancy, have combined to create a perfect storm for investment fraud against senior investors. State securities regulators said older investors are being targeted with increasingly complex investment scams involving unregistered securities, promissory notes, charitable gift annuities, viatical settlements, and Ponzi schemes all promising inflated returns.
Pennsylvania and Delaware securities regulators last year shut down a “Ponzi” scheme that targeted seniors, but not before 13 Philadelphia-area investors had lost nearly $2 million from their pensions and IRAs. In Arizona, the Arizona Corporation Commission ordered a Scottsdale company and four individuals to return more than $15 million to mostly senior investors and pay penalties of $45,000 to the state in a case involving “CD alternatives” earning up to 8.5 percent. “Behind these schemes are opportunists with products and pitches that may sound tempting to many seniors who’ve seen their retirement accounts and income dwindle in recent years,” Lambiase said.
A long-time member of the Top 10 list, these short-term debt instruments often are sold by independent insurance agents and issued by little known or non-existent companies promising high returns – upwards of 15 percent monthly – with little or no risk. When interest rates are low, investors often are lured by the higher, fixed returns that promissory notes offer. These notes, however, can become vehicles for fraud when the issuer of the note has no intention, or capability, of ever delivering promised returns.
In November 2003, Grammy-nominated polka star Jan Lewan pled guilty to charges that he defrauded investors in 21 states through the sale of promissory notes. State authorities said Lewan, who defected from Poland in 1979 and launched a successful career that included performances before President Reagan and Pope John Paul II, illegally persuaded investors to invest in a series of failing business ventures. Lewan offered promissory notes that were supposed to pay an interest rate of 12 to 20 percent.
Authorities said investors lost between $2 million and $2.5 million. Lewan sold the promissory notes during a period of time when he was under a five-year ban by the Pennsylvania Securities Commission barring him from selling securities in the state. New Jersey authorities acted against Lewan in 2003, fining him $950,000 and prohibiting him from selling securities in the state. Connecticut securities regulators are also investigating Lewan.
UNSCRUPULOUS BROKERS.
Despite the stock market’s rebound in 2003, state securities regulators say they are still receiving a high level of complaints from investors of brokers cutting corners or resorting to outright fraud to fatten their wallets. “I give credit to the increasing numbers of investors who are giving their brokerage statements a closer look and asking the right questions about unexplained fees, unauthorized trades or other irregularities,” Lambiase said.
In October 2003, US Bancorp Piper Jaffray agreed to pay $2.6 million to settle a complaint by the state of Montana alleging unethical business practices and fraudulent securities dealing by the investment firm and one of its brokers. State regulators accused Thomas J. O'Neill, who was a broker in the firm’s Butte office, of making more than 6,000 unauthorized trades for mostly elderly customers between 1997 and early 2001. They said some trades were made for a customer who was in a coma and again after he died. Authorities said O'Neill generated commissions for himself and the firm through the illegal trades that transformed mostly conservative retirement investments into risky portfolios.
AFFINITY FRAUD.
Con artists know that its only human nature to trust people who are like yourself. That’s why scammers often use their victim’s religious or ethnic identity to gain their trust and then steal their life savings. No group seems to be immune from fraud.
In November 2003, authorities arrested five people accused of defrauding evangelical Christians of $160 million in three years and using the money to live extravagantly with a yacht and a helicopter. Federal and state investigators charged that an Alta Loma, California, family promoted an affinity fraud scheme through evangelical leaders and organizations, targeting people who shared religious beliefs and common ethnicities. In a joint effort involving the FBI, the Securities and Exchange Commission, the Internal Revenue Service and the Texas State Securities Board, criminal and civil charges were filed to halt the scheme, which promised returns of 25 percent within three months.
INSURANCE AGENT SECURITIES FRAUD.
While most independent insurance agents are honest professionals, too many are lured by high commissions into selling fraudulent or high-risk investments, such as promissory notes, ATM and payphone investment contracts and viatical settlements. “Scam artists continue to entice independent insurance agents into selling investments they may know little about,” Lambiase said. The person running the scam instructs the independent sales force – usually insurance agents but sometimes investment advisers and accountants – to promise high returns with little or no risk. For example:
Arizona securities regulators in 2003 obtained a $4.3 million final judgment against a Scottsdale company and two insurance agents who fraudulently sold charitable gift annuities to mostly senior investors who were told their money would be invested in secure accounts. Instead it was placed in high-risk, speculative investments while the insurance agents helped themselves to $1.3 million in commissions.
California authorities in 2003 ordered several insurance agents to stop selling viatical investments – interests in the death benefits of terminally ill patients that are always high risk and sometimes fraudulent. The agents promised returns as high as 150 percent in three years, and guaranteed the investment through a “fidelity” bond, but failed to tell investors that the bond was issued by a company incorporated in Vanuatu, South Pacific that is not licensed by to issue bonds in California.
PRIME BANK SCHEMES.
A perennial favorite of con artists who promise investors triple-digit returns through access to the investment portfolios of the world’s elite banks. The negative publicity attached to these schemes has caused promoters in recent cases to avoid explicitly referring to prime banks. Now it is common to avoid the term altogether and underplay the role of banks by referring to these schemes as “risk free guaranteed high yield instruments” or something equally deceptive.
In 2003, five Oklahoma men were convicted on fraud charges stemming from a prime bank scheme in which 5,000 investors lost $14.6 million. In another case, two California men were sentenced to prison for the role in a prime bank scheme that cost more than 30 victims approximately $3.45 million. In March, the FBI announced it had targeted 100 people involved in prime bank scams that had cheated investors out of $500 million.
INTERNET FRAUD.
With the Internet becoming a common part of daily life for increasing numbers of people, it should be no surprise that con artists have made cyberspace a prime hunting ground for victims. Internet fraud has become a booming business. The most recent figures show cyberfraudsters took in $122 million in 2002, according to the Federal Trade Commission. “The Internet has turned from an information superhighway to a road of ruin for victims of cyber fraud,” Lambiase said. The Internet has made it simple for a con artist to reach millions of potential victims at minimal cost. Many of the online scams regulators see today are merely new versions of schemes that have been fleecing offline investors for years.”
In November 2003 various federal, state, local, and foreign law-enforcement agencies targeted cyberfraudsters and netted 125 arrests and more than 70 indictments. Operation Cyber Sweep identified more than 125,000 victims with losses estimated to exceed $100 million. Lambiase also warned investors to ignore e-mail offers from individuals representing themselves as Nigerian or West African government or business officials in need of help to deposit large sums of money in overseas bank accounts. “Don’t be dot.conned. If you get an e-mail pitching a deal that can’t be beat, hit delete,” Lambiase cautioned.
MUTUAL FUND BUSINESS PRACTICES.
Although mutual funds play a tremendous role in the wealth and savings of our nation, ongoing scandals throughout the industry clearly demonstrate that some in the mutual fund industry are putting their own interests ahead of America’s 95 million mutual fund shareholders. State securities regulators, the SEC, NASD, and mutual-fund firms themselves have launched a series of inquiries into mutual fund trading practices. To date, more than a dozen mutual funds are under investigation and several mutual fund employees have either pleaded guilty, been charged or settled with state regulators. “These investigations demonstrate a fundamental unfairness and a betrayal of trust that hurts Main Street investors while creating special opportunities for certain privileged mutual fund shareholders and insiders,” Lambiase said. “We will continue to actively pursue inquiries into mutual fund improprieties and are committed to aggressively addressing mutual fund complaints raised by investors in our jurisdictions.”
State and federal investigations have uncovered sales contests where investors have been steered to funds paying higher commissions to brokers; abusive trading practices, such as “market timing,” that may cost tradition buy-and-hold investors more than $5 billion each year; and illegal trading practices, such as “late trading,” that may cost investors $400 million each year.
VARIABLE ANNUITIES.
Sales of variable annuities have increased dramatically over the past decade. As sales have risen, so too have complaints from investors. Regulators are concerned that investors aren’t being told about high surrender charges and the steep sales commissions agents often earn when they move investors into variable annuities. Some investors also are misled with claims of guaranteed returns when variable annuity returns actually are vulnerable to the volatility of the stock market. The benefits of variable annuities – tax-deferral, death benefits among others – come with strings attached and additional costs. High commissions often are the driving force for sales of variable annuities. Often pitched to seniors through investment seminars, regulators say these products are unsuitable for many retirees. “Variable annuities make sense only for consumers willing to invest for 10 years or longer, but they are not suitable for many retirees who cannot afford to lock up their money for a long time,” Lambiase said. Variable annuities are considered to be securities under federal law and the laws of 17 jurisdictions. Most states consider variable annuities to be insurance products. NASAA is encouraging changes in state laws that would allow state insurance regulators to continue to oversee the insurance companies that sell variable annuities while authorizing state securities regulators to investigate complaints about variable annuities and to take action against the companies and individuals who sell them. “Those who buy variable annuities should not be denied the protections enjoyed by every other class of investor,” Lambiase said.
Mississippi securities regulators moved last year against a licensed securities broker in the state who rang up commissions of approximately $1 million within a 15-month period largely through sales of variable annuities.
Lambiase also announced that NASAA has created an interactive Fraud Center on its website (www.nasaa.org). The center features details of NASAA's Top 10 scams, schemes and scandals; tips on how to detect con artists and avoid becoming a victim; an Investor "Bill of Rights;" instructions on how to file an investment-related complaint; and contact information for each state securities regulator. "Education and awareness are an investor's best defense against fraud," Lambiase said.
Top Ten Most Often Missed Business Tax Deductions
AccountingWEB.com - Jan-14-2004 - Calling the millions of dollars that is overpaid to the Internal Revenue Service (IRS) each year, "a widespread epidemic", the Tax Recovery Group (TRG) is releasing their list of the top ten most often missed business tax deductions.
Failing to utilize these deductions accounts for the majority of businesses overpaying their taxes, which, according to statistics, businesses throughout the country overpay their taxes to the sum of millions of dollars each year. This list is the result of TRG's work with thousands of businesses over the years for which they have recovered millions of dollars from the IRS.
Listed in no particular order:
Home Office Deductions - If a taxpayer runs a home office they are entitled to deduct expenses for the percentage of square footage the home office is occupying. Expenses include the combined total of mortgage interest, property taxes, utilities, repairs, etc. For example, if 250 square feet of a 1,000 square foot house is being used for a home office, the taxpayer is entitled to deduct a quarter of their total expenses.
General Business Expenses - Often, business owners will use their personal money or property for business expenses and will fail to deduct it. For example, one makes a trip to Staples to purchase some office supplies and pays for their purchase using their personal cash but fails to account for or deduct the expenditure.
Imputed Interest on Corporate Shareholder Loans - If a shareholder loans money to his corporation he is required to charge interest on it. The shareholder would be required to report the interest as income on his personal return, but the deduction on the corporate return can be used to reduce wages resulting in a refund of Social Security and Medicare taxes. This deduction is very often missed.
Meals/Entertainment Expenses - Similar to the general business expenses deduction, many times business owners will use their personal money to pay for meals or entertainment expenses. This would include items such as entertaining clients.
Personal Assets Converted to Business Use - In many cases when a person starts a business, he uses personal assets to get the business going.
The best example of this would be using a computer bought with personal funds for business use. The fair market value of these converted assets can be a business deduction starting with the date of conversion.
Self-Employed Health Insurance - As of the 2002 tax year, those who are self-employed are entitled to deduct 70% of their health insurance premiums.
Company Entertainment - Company holiday parties, barbecue's or other forms of entertainment are often paid for with personal funds and are not accounted for or reimbursed.
Communications Expenses - Anytime a personal cell, telephone or Internet connection is used for business use, that is an additional deductible expense, which is often missed.
Fuel Tax Credit - Fuel that a business uses for off-highway equipment or machinery is entitled to a fuel tax credit. For example, if a landscaping company purchases fuel to power it's lawnmowers or other equipment; they are entitled to a credit.
Automobile Expenses - Often, personal vehicles are used for business use but the individual will fail to deduct for mileage and other related automobile expenses.
"Although some of these deductible expenses may seem minor at the time, over an entire year, they can add up to thousands of dollars that an individual business is unnecessarily paying the IRS," said Brace Barber, President & CEO of TRG.
Why review a game in a tax and business newsletter? Because this game is designed to help develop business and investment skills. The American educational system is designed to develop good employees, not entrepreneurs or investors. Many people view a college education as a type of trade school. They believe getting a college education should result in getting a good job. When we enter the workforce, the tendency is to fall into "the rat race", spending about what we make and never becoming financially independent.
In Rich Dad, Poor Dad, Robert Kiyosaki explained how this became clear to him at a young age. His actual "Poor Dad" father was a highly-ranked school administrator, who constantly argued with his wife over money matters. A friend's "Rich Dad" father took Robert under his wing and showed him how he acquired wealth.
How can you show how investment principles work in a way that makes them clear in a fun way? A game! That is how Robert Kiyosaki came to develop the CashFlow game. I received a CashFlow game from my wife, Janet, for Christmas and played a round with my adult children, Dawn and James, on New Years day. Although the instructions say to plan on spending about three hours to play the game, it took us six hours this first time.
The game is played in two parts. In the first part, "the rat race", your objective is to "get out of the rat race" by building your passive income to be greater than your monthly expenses. You draw a career card that gives you your beginning salary and monthly expenses. Those with a higher salary also have higher monthly expenses. Movement is determined by rolling dice. You get opportunities to make investments that can eventually generate the cash flow required to get out of the rat race. You can also have the "misfortune" of buying expensive "toys" or having children, requiring monthly payments that make it harder to exit the rat race. Monthly expenses can be reduced by paying off debts. The consequences of chance and choices are highlighted in the game. Progress is tracked on personal balance sheets and income statements.
In the second part, "the fast track", the objective is to win the game by being the first person to buy your "dream" or to accumulate $50,000 in monthly cash flow from businesses purchased on the Fast Track. (You have to finish the game somehow!)
This is an expensive game, but I believe the investment can be justified if it helps provide the mindset required for helping your family and yourself truly get out of the rat race. According to Kiyosaki, playing the game monthly should help you do just that. To get one, visit www.richdadpoordad.com.
2:04:22 PM
HSAs enacted in Medicare Act
Congress has passed and President Bush signed on December 8 the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (H.R. 1). A feature of the Act, effective January 1, 2004, is Health Savings Accounts (HSAs). HSAs are replacing a previous medical insurance program, Medical Savings Accounts. HSAs provide a way to get "above the line" deductions for medical expenses. They will be available for taxpayers who have qualifying high-deductible medical insurance coverage. The minimum allowable deductible is $2,000 for family coverage and $1,000 for self-only coverage. Copayments can't exceed $10,000 annually for married and family coverage and $5,000 for individual coverage.
Individuals can deduct HSA contributions up to the deductible amount on the medical insurance policy, to a maximum of $5,150 for family coverage and $2,600 for self-only coverage. Individuals born before 1950 can contribute and deduct an additional $500 for 2004.
Income earned by the HSA is not currently taxed to the HAS owner. Withdrawals to pay medical bills of individuals covered by the plan are not taxable. (Unused amounts are carried over.) Other payments are taxable and subject to a 10% penalty. Payments made on or after reaching age 65 or due to death or disability are taxable but not subject to the penalty, so there is a retirement planning feature. HSAs may not be paid out over an extended period after death, like some other retirement accounts.
Employers can make tax-deductible payments to HSAs for employees, and the payments are not currently taxable for the employees. Employers who offer HSAs must do so for all of their eligible workers.
The IRS has also issued guidance for HSAs in a question and answer format. (Notice 2004-2.)
This is not a complete explanation of HSAs. You will be hearing publicity about them, and should discuss their advantages and disadvantages with tax and medical benefits advisors. The ideal candidate for a HAS is young and healthy.
2:02:02 PM
IRS attacks certain Roth abuses.
The IRS announced that it believes certain tax-avoidance transactions using Roth accounts are abusive and they intend to disallow them. The IRS gave the example of a corporation owned by a Roth account buying accounts receivable at a discount from another corporation owned by the Roth participant to shift income to the Roth-owned corporation. The IRS proposes to use its authority under Internal Revenue Code Section 482 to disallow the discount, treat it as a dividend to the Roth participant and a contribution to the Roth, subject to an excess contribution penalty. The IRS could also find the arrangement to be a prohibited transaction, which would disqualify the Roth.
This type of an arrangement is now a "listed" trnsaction, subject to an "audit me" special disclosure on the participant's income tax return.
With the tax-exempt characteristic of Roth accounts, the IRS will be watching carefully what tax avoidance schemes taxpayers and their advisors create for them. If you have an unusual approach for shifting income to a Roth account, be sure you have good advice and are not too greedy. (Notice 2004-8.)
2:00:30 PM
Resist the lure
of rapid refund tax offers
We’re in an era when mortgage rates are in the
4 to 5 percent range, and car loans are 4.75 to 6 percent. So, why would
anyone pay 200 to 700 percent on a loan? Usually, it’s because people are
money hungry. Over the next three months, people will give up huge
amounts of money in “fees” because they want their tax return back as
quickly as possible. Typically, these companies claim you’ll get your
return back in three days, which sounds very appealing. But they charge
you an exorbitant interest rate to do so. You’d be much better off to
file the normal way and wait 10 or 12 days and get the full amount back.
Besides, you shouldn’t be getting a very big tax refund anyway. If you’re
expecting one, it means you’re giving an interest-free loan to the
government. You need to reduce your withholding through your employer so
you’re getting a very small refund or breaking even on your taxes. The
people who will spend money on these loans have a hard time saving money.
Why not use a payroll savings plan and invest automatically in a savings
bond or CD. You are not allowed to touch the money for at least a year,
and you don’t have to borrow money to get your own money back.
10:54:44 AM
Thursday, December 04, 2003
Analysis of the Year-to-Year Change in Net Profit After Tax
It is useful to analyze the changes in net profit from one year to the next. This gives you insights as to what has happened in the business. Net Profit is what’s left over after deducting Direct Expenses and Overheads from Gross Profit.
Gross Profit from one year to the next arises because of three things:
1. A change in the volume as reflected by the number of transactions.
2. A change in Average Transaction Value due to pricing or transaction size.
3. A change in the cost of sales.
The relationship between these is shown below:
x Average Transaction Value minus Average Cost of Sales
minus
=
Gross Profit
minus
Direct Expenses + Enterprise Overheads = Net Profit
The Change in Gross Profit
The analysis of the change in Gross profit from one year to the next frequently reveals that additional revenue has had a positive impact but this is more than lost by a reduction in the Gross profit margin. This should be looked at very carefully.
6:20:49 PM
The Six Drivers of Business Profitability There are 6 drivers of net profit. They are:
1. Average prices
2. Average transaction size (that is, the number of units per
transaction) Together 1 and 2 make Average Transaction Value. 3.
Number of transactions Total revenue is equal to Average Transaction Value x Number of
Transactions. Drivers 1, 2 and 3 determine revenue. Most times you will not be able
to easily isolate the Average Price and Transaction Size unless you have
access to the detailed transactions. However, if you know the total
Number of Transactions (or a close approximation is always good enough
for a high level analysis) you can work with Average Transaction Value
(drivers 1 and 2 combined).
4. Average cost of goods sold Cost of Goods Sold is a variable cost in the sense that it varies
directly with the volume of revenue. Gross Profit is the difference
between Total Revenue and Total Cost of Goods Sold. It is the amount left
after variable costs have been covered. The Gross Profit % is equal to
Gross Profit / Total revenue.
5. Direct expenses These are enterprise overheads that are directly associated with, and
can be easily traced to, the revenue generating activities of a business.
They may be variable but are usually fixed in the sense that they are not
driven by revenue. For example, if a
retail business had 5 stores, the costs directly associated with each
store (as opposed to those that are associated with the business as a
whole) would be classified as direct costs. In a business that has only
one store, you might want to classify non-variable sales and marketing
expenses as direct.
6. Enterprise overheads Enterprise overheads are all other expenses not classified as part of
COS or Direct Expenses. These are expenses necessarily incurred in
running the business.
6:19:15 PM
Friday, November 21, 2003
Credit scores explained
What is a credit score and what is it designed to do?
"The FICO score is the single best summary score of one's credit worthiness," says E-Loan President and Chief Operating Officer Joe Kennedy.
A credit score number is often called a FICO score, for Fair, Isaac and Co., the California company that developed the system upon which it is based.
The score is supposed to distill all the information in your credit report, using a formula to calculate a single number that indicates your credit worthiness.
It's designed to give lenders a fast, accurate prediction of the risk involved in giving you a loan. Lenders have attested to the score's value in streamlining the underwriting process and creating more opportunities for consumers to get mortgages.
Scores range from the 300s to about 900, with the vast majority of folks falling in the 600s and 700s. The higher the score, the better.
What factors determine my credit score? When determining how high a score will be, five characteristics separate the cream of the crop from everyone else. In order of score significance:
Past delinquency: People who have failed to make payments in the past tend to do the same in the future.
The way credit has been used: Someone who is maxed out or close to the limit on a credit card is considered a greater risk than someone who doesn't look at the high credit line as a license to print money.
The age of the credit file: Fair, Isaac's model assumes people who have had credit for a long time are less risky.
The number of times a person asks for credit: The system frowns upon those who have initiated several requests for credit cards, loans or other debt instruments over a short period.
A customer's mix of credit: Someone with only a secured credit card is generally riskier than someone who has a combination of installment and revolving loans. (On installment loans, a person borrows money once and makes fixed payments until the balance is gone, while revolving borrowers make regular payments, each of which frees up more money to access.)
How is credit worthiness gauged using the credit score? It depends on the type of loan a consumer is seeking. For example, a mortgage broker will give more weight to different credit factors than a credit card issuer.
Mortgages: By Freddie Mac standards, borrowers with FICO scores above 660 are likely to have an "acceptable" credit reputation and their loan files need only a basic review. The credit risk is "uncertain" for those with scores between 620 and 660, with a thorough review of the borrower's entire credit history. A score below 620 indicates "high risk" with an unacceptable credit reputation that could make traditional financing difficult to obtain.
"Most very good FICO scores come in the mid-700s," explains Michael Feldman, a co-founder of MortgageIT.com. "You'll see standard pricing, assuming a FICO score above 680. A score above 720, the pricing gets better. If you get above 750 -- with some lenders in some cases -- you'd see another improvement in the points. On the average $200,000 (home purchase), it can mean up to $1,000 to a consumer. It's real money."
Credit cards: Credit card lenders place additional weight on credit card-related information, such as how many times a person missed revolving credit payments. And the systems evaluate a college student targeted for a starter card differently than a platinum-toting stockbroker with a summer home in the Hamptons.
Auto lenders: Auto scores, on the other hand, focus on "deal characteristics" in much the same way the mortgage scores do, David Shellenberger, product manager at Fair, Isaac and Co., says. They take into account things such as the amount a customer puts down, for example, as well as a borrower's debt-to-income ratio, length of time at one job and the like. As with credit card lending, information about past performance on similar types of loans is weighted, so a missed Nissan payment might be more important than an overdue Visa bill.
Why would knowing your credit score help? Mortgage experts say you can use it to improve your creditworthiness and negotiate for the best possible terms.
"These are very intimidating transactions," says Eric Cunliffe, former president and CEO of HomeSpace Inc., now a division of Lendingtree.com. "A mortgage is probably the single biggest transaction most people make in their lives. The traditional approach -- 'no one will tell me where I stand' -- only exacerbates the process. If you have very good or excellent credit, you know you should be qualifying for the best rate available."
That won't happen, though, if the first time you look at your score is when you have the contract for your dream house in your hands and the clock to closing is already ticking.
"The problem is that lenders grade mortgages on a FICO score," Michael Feldman, a co-founder of MortgageIT.com, says. "At the point a lender is doing that, you can't change it. If you do it three to six months ahead of time, then you have ample time."
Given the competition in the field, just about any mortgage broker will be happy to run a credit report for you -- even if you're not planning to buy a house for a year -- to get you prequalified.
What will it cost to order your credit score? If you want to purchase your credit report and credit score, shop around first. The prices vary between the three credit bureaus. Here are the costs and contact information for ordering your own.
Credit report and credit score -- a price comparison
Company
Credit report
Credit report with credit score
Reports from all three credit bureaus with score
Equifax P.O. Box 740241 Atlanta, GA 30374 1-800-685-1111
$9 (Maximum. Price varies by state and by credit circumstances.)
$12.95
$39.95
TransUnion P.O. Box 1000 Chester, PA 19022 1-800-888-4213
$9 (Maximum. Price varies by state and by credit circumstances.)
$12.95
$34.95
Experian PO Box 2104 Allen, TX 75013 1-888-397-3742
$9 (Maximum. Price varies by state and by credit circumstances.)
$14.95
$39.95
If you've recently been turned down for credit, you may be entitled to a free report. Contact the credit bureaus to find out more. The prices, culled from the Web sites, can change at any time. Visit the Web sites for a more complete description and pricing.
8:16:23 AM
Thursday, November 20, 2003
Get the Biggest Bang for Your Buck Instead
So many mistakes can be made in the advertising arena. How does the
average small firm stand a chance of making the right choices? Enter
Julie Wright, President of Wright-On Communications in Escondido,
California. Julie has some hot tips on what to avoid. Julie's
comprehensive top ten run the gamut from frequency and design to
placement and evaluation. Here they are:
One-time or infrequent exposure. Sorry, but a one-time
exposure, or running an ad infrequently, is not an adequate investment to
get the return you seek. These are the most classic of all advertising
errors. Readers need to see an ad multiple times.
Unrealistic expectations. The first time someone sees an ad,
they normally don't go running for the phone. The first ad creates
awareness. Exposure increases interest and, over time, the possibility of
action.
Too much information. The message is more effective if it is
focused. Instill one to three key thoughts. Studies show people can
remember this amountmuch more and they do not retain well.
Selling to yourself. This isn't about you. Draft your your
message around your clients want to hear, not what you want to hear.
Understand your clients' hot buttons and then craft your message. If you
are not sure of what they want to hear, ask thembefore the ad goes to
print.
Dull and boring design. Make the ad more memorable by
considering the use of color, fonts, are sharp design.
Poor quality photos and graphics. While pictures get more
attention, poor photos and graphics can convey negative information about
you.
No contact information. Don't forget to identify all the ways
the client can contact you in the ad. Web sites and e-mail addresses are
often forgotten as valid communication channels.
Inconsistent placement. Don't run the ad all over the paper.
Readers get used to seeing the same things in the same places. Try for
consistent placement.
Doing it yourself. Call the advertising department of the
newspaper you seek to publish in. The rep assigned to your industry or
geography can explain their services. Some will design the ad for you;
others will recommend that you out-source to a graphic designer.
Advertising reps can also explain the circulation, market area, and
options available (like banner and wrapper ads).
Not measuring results. Don't forget to collect data and
analyze it to understand if your ad is effective. By adding a distinct
phone line for incoming calls, or asking how the client discovered you
when the call comes in, you will be able to make intelligent decisions
about the ad's effectiveness. Run return on investment calculations over
a significant period. Why run the ad to generate leads if it does not do
so?
Designing, placing, running and evaluating advertising can be tricky.
Small firms often do not have money to burn with this communication
channel. To make the most of precious advertising dollars, take help
where you can and avoid the most common mistakes of your
colleagues.
The Right and Wrong of Business Cards
By Sherri Petro There's a right and wrong way to put together an effective business
card so that your message doesn't get lost in the shuffle. How do you
insure your business card provides value and has a life longer than
24-hours? Marketing expert Sherri Petro shares best practices in making
the most of the little pasteboards. It's Not Just Contact Information
An astounding percentage of all business cards are thrown away within
24 hours. Thrown away. You read that right. Just when you think you've
got a "no-brainer" to deal with, you realize there can be a
strategy behind every business activityeven developing business cards!
It's important to think this through. How do you insure your business
card provides value and has a life longer than 24-hours? Your Strategy: Three Objectives
Start with the basics. What do you hope to accomplish with your
business card? Spend a few minutes defining up to three objectives
Of course, the first objective is the card's primary purpose of
providing contact information. Would you like it to be multifunctionalan
appointment reminder, a place to help manage client expectations by
expressing your mission or your code of ethics?
Remember that the business card is on the front-line in expressing your
image. What else do you want to achieve? You may want to take the clean
lines of Frank Lloyd Wright to express your ability to see things
clearly, to use graphics to add whimsy to differentiate yourself, or to
integrate color to catch the eye. Are you designing with your clients in
mind? Though cards are an expression of the firm, they should not use
fonts or colors that are difficult to readeither with the eye or by card
scanners, now used increasingly to pick up information for capture into a
database.
As always, you should think from the customer's point of view. What do
they need to see on a business card versus what's just nice to see? Think
in terms of the content and the format. The Six "Right" Ways to Design a Card
While you shouldn't feel obligated to implement every one of these
options, if you consider them all you will be well on your way to
designing a memorable business card.
Use color in your print or logo if you can afford the extra
expense. Otherwise black and white is fine if it fits with your
image.
Consider using something other than paper. No need to be too
kitschy by inscribing your name on barkbut in some settings, CD-ROM
business cards and phone cards are gaining popularity.
Consider using a photo of yourself, especially if you are
relationship-selling.
Orient your card as a portrait (tall and thin) versus a
landscape (wide and short) if you really want to stand out. The
downsidesome folks still punch holes in business cards and add them to
the Rolodex and yours will go in sideways.
Use bold, italics and different font sizes for emphasis if
appropriate. Don't go crazy with this though. While differences are
interesting to the eye, they can be overwhelming if used too much.
Keep it legible. Assume some of your clients will want to read
your card without bifocals or taking off their glasses.
The Six "Wrong" Ways to Design a Card
Deciding you will go for a plain card.
It's too easy for
practitioners to spend about 15 minutes trying to design a card and then
deciding that a plain card is the best after all.(Wrong to Right:
Take a running start to the task. Save cards you especially like in a
folder. Jot ideas down ahead of time. Then when it's time to reorder
cards, you'll be ready to take it up a notch.)
Too much information for a 2" x 3-1/2" card. While
you are defining your card's objectives, keep in mind that you have
limited space in which to get your point across. (Wrong to Right:
you can plan a fold-over business card or want to use the back of the
card. Communicating the right information, making use of space
efficiently and being multi-functional are reasons to use the back of the
card.)
The contact information is jumbled. It's a problem if the
client eye skitters trying to find what is needed. (Wrong to
Right: Make it an easy read. If your client is not apt to look for
both phone number and the address at the same time, separate them on the
card with white space.)
The organization's name is not descriptive of the service
provided and the title or tagline does not ensure people understand
what you do or have to offer. (Wrong to Right: Try adding four
words or less such as "Financial Services Consulting" to
clarify.)
The logo overpowers the text or the text buries the logo.
(Wrong to Right: Balance. Add the logo but don't allow it to
overpower the card. Add your title but keep it simple. Unless you are in
a large organization where 12-word titles are necessary to differentiate
yourself from others having similar titles, you look more important with
a clear, simple title.)
Dumping all your objectives into one card. As a practitioner
you wear multiple hats and serve different functions for different
clients. Why not get specialized cards to help you deal with the
situation? (Wrong to Right: Establish one cardlike the basic
black dressthat you can use everywhere. But then design cards for
specialized environments. For example, one card might play up your
technology skills, another your bookkeeping talent.)
11:34:25 AM
Monday, November 17, 2003
President Bush Signs the Military Family Tax Relief Act of 2003
On November 11, 2003, President Bush signed H.R. 3365, the Military Family Tax Relief Act of 2003 (the Act). The following paragraphs summarize the more important provisions of the Act and are based on the Joint Committee on Taxation Technical Explanation (JCX-99-03) of the Act. (Complete coverage of the Act can be found in the Joint Committee's Technical Explanation.) To pay for these changes, the Act authorized an extension of various customs user fees through March 1, 2005.
Exclusion of Gain on Sale of a Principal Residence
Under present law, individuals can exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for the exclusion, the person must have owned and used the residence as a principal residence for at least two of the five years ending on the sale or exchange. Someone who fails to meet these requirements because of a change of place of employment, health, or, to the extent provided by regulations, unforeseen circumstances, can claim a partial exclusion based on a fraction multiplied by the maximum allowable exclusion (i.e., $250,000 or $500,000 for married filing jointly).
Under the Act, a taxpayer can elect to suspend for up to 10 years the five-year test period for ownership and use during certain absences due to service in the uniformed services or Foreign Service of the U.S. The uniformed services include the (1) Army, Navy, Air Force, Marine Corps, and Coast Guard; (2) commissioned corps of the National Oceanic and Atmospheric Administration; and (3) commissioned corps of the Public Health Service.
Specifically, if the election is made, the five-year period ending on the date of the sale or exchange of a principal residence does not include any period up to 10 years during which the taxpayer or the taxpayer's spouse is on qualified official extended duty as a member of the uniformed services or in the Foreign Service.
For these purposes, qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles away from the taxpayer's principal residence or under orders compelling residence in government-furnished quarters. Extended duty is defined as any period of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.
The election can be made for only one property for a suspension period.
This provision is effective for sales or exchanges after May 6, 1997. The Act includes a one-year period (beginning on the date of enactment) for taxpayers to claim refunds as a result of this provision that are otherwise barred by the statute of limitations.
Income Exclusion for Certain Death Gratuity Payments
Under current law, qualified military benefits are not included in gross income. Generally, a qualified military benefit is any allowance or in-kind benefit (other than personal use of a vehicle) that (1) is received by a member or former member of the uniformed services of the U.S. or his or her dependent because of the member's status or service as a member of the uniformed services; and (2) was excludable from gross income on September 9, 1986. Generally speaking, other than certain cost-of-living adjustments, no modification or adjustment of a qualified military benefit after September 9, 1986, is taken into account for purposes of this exclusion from gross income.
Qualified military benefits include certain death gratuities, with the level of the death gratuity exclusion set at $3,000 since September 9, 1986. The amount of the military death gratuity benefit was increased to $6,000 in 1991.
The Act increases the death gratuity benefit from to $6,000 to $12,000. It also increases the amount of the exclusion from $3,000 to $12,000.
This provision is effective for deaths occurring after September 10, 2001.
Excludable Dependent Care Assistance Benefits
Under current law, qualified military benefits (as defined above) are not included in gross income.
The Act clarifies that assistance received under a dependent care assistance program (as in effect on the date of enactment) for a member of the uniformed services by reason of such person's status or service as a member of the uniformed services is excludable from gross income as a qualified military benefit, subject to the present-law rules.
Also, amounts received by uniformed services personnel under a dependent care assistance program are not considered wages for employment tax purposes.
This provision is effective for tax years beginning after December 31, 2002. No inference is intended as to the tax treatment of such amounts for prior years.
Amounts Received under Homeowners Assistance Program
The Defense Department's Homeowners Assistance Program (HAP) provides payments to certain employees and members of the Armed Forces to offset the adverse effects on housing values from a military base realignment or closure. Under HAP, eligible individuals receive (1) a cash payment as compensation for losses that may be or have been sustained in a private sale; or (2) an amount not to exceed 90% of the prior FMV as determined by the Secretary of Defense, or the amount of the outstanding mortgages.
Amounts received under HAP are includible in gross income as compensation for services to the extent they exceed the FMV of the property relinquished in exchange for such payments. And such payments are considered to be wages for FICA tax purposes.
The Act generally exempts from gross income amounts received under HAP (as in effect on the date of enactment). Amounts received under the program also are not considered wages for FICA tax purposes. The excludable amount is limited to the reduction in the FMV of property.
This provision is effective for payments made after the date of enactment.
Expansion of Combat Zone Rules to Contingency Operations
In general, the period of time for performing various acts under the Code, such as filing tax returns, paying taxes, or filing a claim for credit or refund of tax, is suspended for persons serving in the U.S. Armed Forces in an area designated as a combat zone during the period of combatant activities. A prisoner of war is considered to be in active service and so is eligible for these suspension-of-time provisions. The suspension of time also applies to persons supporting the Armed Forces in the combat zone, such as Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the Armed Forces in support of those Forces.
The Act applies the special suspension-of-time rules to persons deployed outside the U.S. and away from their permanent duty station while participating in an operation designated by the Secretary of Defense as a contingency operation or that becomes a contingency operation. A contingency operation is a military operation designated by the Secretary of Defense as an operation in which members of the Armed Forces are or may become involved in military actions, operations, or hostilities against an enemy of the U.S. or against an opposing military force, or results in the call or order to (or retention of) active duty of members of the uniformed services during a war or a national emergency declared by the president or Congress.
This provision applies to any period for performing an act that has not expired before the date of enactment.
Suspension of Tax-exempt Status of Terrorist Organizations
To combat terrorism, the federal government has designated a number of organizations as terrorist organizations or supporters of terrorism under the Immigration and Nationality Act, the International Emergency Economic Powers Act, and the United Nations Participation Act of 1945.
Under the Act, the tax-exempt status of an organization exempt from tax under IRC Sec. 501(a) is suspended for any period the organization is designated or identified by U.S. federal authorities as a terrorist organization or supporter of terrorism. The Act also makes such organization ineligible to apply for exempt status under IRC Sec. 501(a).
During the period of suspension, no deduction for any contribution to the organization is allowed under IRC Sec. 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522.
The Act directs the IRS to update listings of suspended organizations and to publish notice to taxpayers of the suspension of an organization's tax exemption and the fact that contributions to the organization are not deductible during the period of suspension.
This provision is effective for designations made before, on, or after the date of enactment.
Deduction for Travel Expenses of National Guard and Reserve Members
Under current law, National Guard and Reserve members can claim itemized deductions for their nonreimbursable expenses for transportation, meals, and lodging when they travel away from home (and stay overnight) to attend National Guard and Reserve meetings. These overnight travel expenses, along with other miscellaneous itemized deductions, are deductible on Schedule A to the extent they in total exceed 2% of the taxpayer's adjusted gross income (AGI).
The Act authorizes an above-the-line deduction for the overnight transportation, meals, and lodging expenses of National Guard and Reserve members who must travel away from home more than 100 miles (and stay overnight) to attend National Guard and Reserve meetings. The deduction may not exceed the general federal government per diem rate applicable to that locale. Also, the deduction is only available for the period the individual is more than 100 miles from home in connection with such services.
This provision applies to amounts paid or incurred in tax years beginning after December 31, 2002.
1:33:00 PM
Tax Savings from Making Charitable Gifts
As the end of the year approaches, charitable giving typically increases. Taxpayers can use cash or property to make a charitable gift. The type of gift can affect the tax consequences resulting from the gift. For example, the taxpayer may derive greater tax benefits from giving property to charity rather than selling the property and giving the proceeds. In addition, consideration should be given to giving property with unrealized appreciation to maximize the taxpayer's economic benefit.
Timing Cash Contributions
Cash contributions are deductible in the year paid. A contribution generally is considered made at the time of delivery. Thus, contributions paid by check are considered made on the date of delivery or mailing .
Contributions charged to a credit card are deductible in the year the charge is incurred, even though paid in a later year . However, interest paid on the credit card balance is not a charitable contribution. Charitable contributions made by credit card may be useful for a taxpayer who anticipates a greater benefit from the contribution in the current year, but needs to defer payment until the next year.
Promissory notes given to charity generally do not constitute a charitable contribution until paid .
Comparing Cash and Property Contributions
Transferring cash is simple--the cash need not be valued, and costs associated with transferring title to property are avoided. Also, property donations by individuals may be more limited under the percentage of AGI limitations than cash donations. Finally, cash is suitable for any recipient. Conversely, a given property donation may not be what the charity needs. In fact, the charity may incur significant costs trying to sell the property or adapt the property to a more beneficial use.
The price for simplicity is giving up cash. A donor may prefer to donate property that is not producing current income since she suffers no loss of income. A property donation may also be attractive to an owner of illiquid property or property with a low tax basis.
Ordinary Income and Short-term Capital Gain Property Contributions
The charitable contribution deduction for appreciated ordinary income property is limited to its FMV less the amount that would be ordinary income. This generates a charitable contribution deduction equal to the taxpayer's cost basis . Ordinary income property is property that, if sold, would result in ordinary income or short-term capital gain. Ordinary income property includes capital assets held for 12 months or less, property created by the donor (such as works of art, letters, etc.), inventory, and stock-in-trade.
Taxpayers who want to donate appreciated short-term capital gain property should, if possible, delay the contribution until the long-term holding period is met. This will generate a deduction equal to FMV, thereby increasing the amount of the contribution. The contribution of ordinary income property should be reserved for property with a FMV that approximates cost.
Long-term Capital Gain Property Contributions
The contribution deduction allowed for gifts of appreciated long-term capital gain property (property held for more than one year) to a charity depends on (1) the type of property contributed and (2) the charity's use of it, as shown in the following table:
Type of Property
Use by Donee
Contribution Deduction
Tangible personal property
Related use
FMV; if Section 1231 property, FMV less ordinary income that would have been recaptured if it had been sold for FMV
Unrelated use
Basis
Other long-term capital gain property (stocks, mutual fund shares, land, etc.)
N/A
FMV; if Section 1231 property, FMV less ordinary income that would have been recaptured if it had been sold for FMV
A common strategy that maximizes the economic benefit from a charitable contribution is to donate appreciated long-term capital gain property to a qualified charity rather than selling the property, incurring the tax, and donating the net after-tax proceeds.
When planning the charitable contribution of appreciated stock or mutual fund shares, the following rules should be kept in mind:
The donated assets must be held more than a year prior to the donation in order to deduct the FMV rather than the basis.
Tax benefits can be maximized by donating mutual fund shares before the fund distributes any ordinary income or realized capital gains for the year. Thus, the donor escapes tax on the distributed income but still receives a deduction for most or all of this income because it is typically reflected in the shares' value.
For donations made close to year-end, the donor should allow enough time to complete the appropriate paperwork
Donating Tangible Personal Property
As noted in the preceding table, the FMV of a gift of appreciated tangible personal property is deductible only if the charity uses the property in its exempt function. For example, furniture donated to a charity would be considered a related use when used in the administrative offices of the charity. Property is put to an unrelated use when it is not used by the organization in the charitable activities for which it was granted tax-exempt status .
The contribution of tangible personal property and later sale by the organization is an unrelated use even if the donated property was related to the charity's exempt function, or the sales proceeds are used for the charity's exempt function. For example, when a taxpayer contributes items that are auctioned by the charity, the deduction generally is limited to the taxpayer's original cost. However, tangible personal property given to a museum that is normally retained by a museum will not be considered used in unrelated activities if the item is later sold by the museum [Reg. 1.170A-4(b)(3)(ii)(B)].
Donating Property That's Decreased in Value
The contribution deduction for a charitable gift of property that has decreased in value is limited to the property's FMV at the time of contribution (Rev. Rul. 79-419, 1979-2 CB 107). Furthermore, the loss is not deductible. Thus, it generally is better to sell the property, recognize the loss (if allowable), and then donate the sale proceeds to the charity.
Donating Services
A charitable deduction is not allowed for services performed by a taxpayer for a charity [Reg. 1.170A-1(g)]. Thus, a volunteer's charity work is nondeductible [Samuel Taylor, TC Memo 1992-174 (1992)]. However, a charitable deduction is available for unreimbursed expenses, including automobile expenses the taxpayer incurs while rendering services to a charitable organization (Rev. Rul. 84-61, 1984-1 CB 39).
Furthermore, a taxpayer who directs that compensation for services be paid directly to a charity is allowed a charitable deduction for the gift. However, the amount must be included in the taxpayer's gross income (i.e., a taxpayer can't assign her compensation to another). Although the income and deduction amounts are the same, the income increases AGI, which could affect other deductions or credits claimed by the taxpayer.
Whether a contribution is characterized as services or property is often subject to IRS interpretation. For example, the charitable contribution of newspaper advertising space and radio broadcast time were not deductible because they involved a contribution of services performed by the donor (Rev. Ruls. 57-462, 1957-2 CB 157; and 67-236, 1967-2 CB 103). Conversely, the charitable contribution by a radio station of third-party lodging and airfare it received in exchange for radio advertising time (and included in income) was deductible as a property contribution. The contribution was in the form of a contract right to receive purchased services (Rev. Rul. 84-1, 1984-1 CB 39).
Deducting Out-of-pocket Expenses
Although a charitable deduction isn't allowed for a contribution of services, unreimbursed out-of-pocket expenditures made while rendering gratuitous services to a charity may be deductible [Reg. 1.170A-1(g)]. The expenses are treated as direct payments to the charity, rather than for the use of the organization (Rev. Rul. 84-61, 1984-1 CB 39), so they are subject to the 50% of AGI limitation (30% if made to other than a 50% charity). The expenses must be nonpersonal, directly connected with, and solely attributable to the rendition of such services (Rev. Rul. 69-473, 1969-2 CB 37, as modified by Rev. Rul. 84-61, 1984-1 CB 39). Thus, expenditures that primarily benefit the taxpayer are not deductible [Arthur Saltzman, 54 TC 722 (1970)].
Examples of potentially deductible expenses include uniforms unsuitable for everyday use, equipment, copying charges, office supplies, long distance phone charges, postage, transportation, or other travel incurred while rendering services for a qualified organization. Travel expenses incurred while away from home, including meals and lodging, are deductible if (1) there is no significant personal pleasure, recreation, or vacation involved [IRC Sec. 170(j)]; and (2) the performance of services is substantial.
The cost of child care while performing services for a charitable organization is not deductible even if the volunteer work otherwise cannot be performed (Rev. Rul. 73-597, 1973-2 CB 69). Conversely, the use of an auto for charitable purposes is deductible as a charitable contribution at the rate of 14 cents per mile for 2003 and for 2004 (Rev. Procs. 2002-61, 2002-39 IRB 616; and 2003-76, 2003-43 IRB 1).
Concluding Thought
A taxpayer is allowed to deduct charitable gifts for income tax purposes made only to qualified nonprofit organizations. The IRS publishes a master list (updated quarterly) of qualified organizations [IRS Pub. 78, "Cumulative List of Organizations Described in IRC Sec. 170(c)"]. Publication 78 can be accessed via the IRS website.
1:29:49 PM
Thursday, November 13, 2003
Generally, taxpayers who itemize may deduct the “points” paid to obtain a
home mortgage as interest. They may deduct the points on the mortgage
related to a home purchase or a home improvement in the year paid, but for
other loans – such as a refinanced mortgage – they must deduct the points
over the life of the loan.
To figure the annual deduction amount, divide the total points paid by the
number of payments to be made over the life of the loan. Usually, this
information is available from the lender. For example, a homeowner who paid
$2,000 in points on a 30-year mortgage (360 monthly payments) could deduct
$5.56 per payment, or a total of $66.72 for 12 payments. Taxpayers may
deduct points only for those payments actually made in the tax year.
A taxpayer who uses part of the refinanced mortgage money to pay for
improvements to the home, and meets certain other requirements, may
generally deduct the points associated with the home improvements in the
year paid, spreading out the rest of the points over the life of the loan.
When refinancing for a second time, or paying off a loan early, a taxpayer
may deduct all the not-yet-deducted points from the first refinancing when
that loan is paid off.
Other closing costs, such as appraisal fees and processing fees, generally
are not deductible. Taxpayers with adjusted gross income above $139,500 –
$69,750 if married filing separately – also face limits on the amount of
deductions they can take.
IRS Publication 936, Home Mortgage Interest Deduction, has details on
deductions related to refinancing.
7:46:41 PM
Tuesday, November 11, 2003
How To use Split-Run Testing to
Raise Your Conversion Rates By Merle
Have
you ever heard the phrase "split-run testing?" No? If you have
a website and you're trying to sell something online, you need to know
about this valuable testing process that can increase your bottom line.
Split-run testing is where you create different versions of a sales page
(for example) to test its effectiveness. When users enters your site,
they're shown one version or the other. Once you do this enough times you
can easily see which version converted visitors into buying customers.
Are you following me here?
The benefits of split-run testing are many. You can see at a glance
what's working and what isn't. By testing different versions of your copy
and tracking what converts, you can make permanent changes and see an
increase in your sales with the same amount of traffic. When you improve
your conversion rates, the money you spend on marketing will work harder
for you as more of your site's visitors make the leap from browsers into
buyers.
If your sales copy is ineffective, all the traffic in the world will not
increase your sales activity. By testing and tracking and finding out
what does and doesn't work, you can incorporate changes that are proven
winners and make more money. Sound good? Of course it does.
So what kinds of things might you want to test? Some people might start
with two different versions of their sales letter (for example, your home
page). Then once they finish testing the copy itself, run tests on more
specific elements like including more or less testimonials, the headline,
adding a Post Script or not, etc.
There are many different factors that you can test, but for the most
accurate measuring results, the trick is to test only one component at a
time. You'll also want to allow each test to run to between 500 to 1000
unique visitors before coming to any conclusions.
4:21:19 PM
Friday, November 07, 2003
IRS to taxpayers: Use site to check on checks Source: Newsbytes Publication date: 2003-10-27
The IRS today urged taxpayers to use its online refund-tracking feature to determine why they have not received their advance child tax credit check.
The “Where’s My Refund?” feature at www.irs.gov can help taxpayers solve problems, such as incorrect addresses, IRS officials said.
The IRS said 115,744 child tax credit checks worth more than $50 million were undeliverable after the service issued them July and August. Taxpayers have until Dec. 5 to claim their undelivered child tax credit checks. After that, taxpayers cannot claim the checks until they file their tax returns next year, IRS commissioner Mark Everson said.
The IRS issued nearly 24 million checks worth more than $14 billion in an advance of the increased child tax credit.
"Our Web site makes it easy for taxpayers to track undelivered checks," Everson said. “Our goal is to get this money back in the hands of the people it belongs to, and we want to get the checks out as soon as possible.”
Taxpayers enter information including their Social Security numbers and their filing status, such as single or married filing jointly, the refund amount shown on their 2002 tax returns and the number of exemptions shown on their 2002 tax returns.
When the information is submitted online, taxpayers can view Web pages that show the status of their refunds or child tax credit. In many cases, they also get instructions about solving problems. If the IRS has the wrong address, taxpayers must update the address information before the IRS can reissue the checks.
2:10:27 PM
20 Tips for year end
planning
Increase the amount you set aside for next year in your
employer's health flexible spending account so that you can get tax-free
reimbursements for over-the-counter drugs, such as aspirin and antacids.
If you have any capital gains or losses from sales of stock or
other capital assets or you have stock or other capital assets that are
ripe for sale, you need to engage in some special year-end planning this
year because the capital gain rates were changed in the middle of the
year. For both 2003 and 2004, short-term capital gains and ordinary
income are taxed a top rate of 35%. On the other hand, post-May 5, 2003
long-term capital gains generally are taxed at a maximum rate of 15% (for
pre-May 6, 2003 long-term gains, the maximum rate is generally 20%).
However, the post-May 5, 2003 maximum rate is only 5% (10% for pre-May 6,
2003 gain (8% for property held over 5 years)) to the extent the gain
would otherwise be taxed at a rate below 25% if it were ordinary income.
The particular strategy that will work best for you in light of these
changes will depend on your capital gain picture to date and other
factors.
You may be able to take steps to convert investment income
taxable at regular rates (e.g., interest income) into qualifying dividend
income taxed at a top rate of 15%.
It may be advantageous to try to arrange with your employer to
defer your bonus until 2004.
Clients who own an interest in a partnership or S corporation
may need to increase their basis in the entity so that they can deduct a
loss from it for this year.
If you own matured E bonds, consider exchanging them for HH
bonds to avoid realizing accrued interest, which would be taxed this
year.
Consider using a credit card to prepay expenses that can
generate deductions for this year.
You may want to pay contested taxes to be able to deduct them
this year while continuing to contest them next year.
Business clients should consider putting new equipment in
service before year-end to get a 50% bonus first-year depreciation
allowance, plus regular depreciation deductions on the remaining adjusted
basis.
Business clients also should consider making expenditures that
qualify for the $100,000 business property expensing option. This is much
more generous than it was in past years and applies to many more
businesses.
A special opportunity exists for business clients to take
action by year-end to fix expensing or depreciation problems for the 2001
tax year.
You may want to settle an insurance or damage claim in order
to maximize your casualty loss deduction this year.
You may be able to save taxes this year and next year by
applying a bunching strategy to “miscellaneous” itemized deductions,
medical expenses and other itemized deductions.
Those facing a penalty for underpayment of estimated tax may
be able to eliminate or reduce it by increasing their withholding.
Self-employed individuals should consider setting up a
self-employed retirement plan.
You can save gift and estate taxes by making gifts sheltered
by the annual gift tax exclusion before the end of the year. You can give
$11,000 each year to an unlimited number of individuals but you can't
carry over unused exclusions from one year to the next.
Those who are contemplating marriage or divorce need to watch
out for how the marriage penalty could affect them.
Those receiving Social Security benefits should consider
taking a number of steps to reduce or eliminate tax on their benefits.
Workers may want to ask their employers to increase
withholding of state and local taxes to pull the deduction of those taxes
into this year (but only if doing so won't cause an AMT problem).
Consider extending your subscriptions to professional
journals, paying union or professional dues, enrolling in (and paying
tuition for) job-related courses, etc., to bunch into 2003 miscellaneous
itemized deductions subject to the 2%-of-AGI floor.
8:49:25 AM
Get larger first-year deductions for equipment purchases.
Included in Title II of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), “Growth Incentives for Business,” are several changes to the current cost recovery rules that substantially increase first-year deductions for depreciable assets. The increase in the percentage write-off from 30% to 50% for the first-year additional or bonus depreciation under Section 168(k), the increase in the Section 179 immediate expensing election from $25,000 to $100,000 with the accompanying increase in the phase-out limit from $200,000 to $400,000, and the increases in expensing for first-year depreciation for passenger automobiles are part of a package of incentives intended to stimulate a sluggish U.S. economy. Small business owners are specifically targeted for relief. The Treasury Department estimates that JGTRRA provisions will immediately reduce the tax liability of 23 million small business owners. Because these generous, new “taxpayer-friendly” provisions have varying effective dates, differing definitions of qualifying property, interrelationships, and election deadlines, tax planning becomes even more essential. (E.D. Cook, 71 Practical Tax Strategies 260 (November 2003).
8:45:59 AM
Higher 2004 standard mileage rate for business auto use will apply to more businesses:
IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) will be 37.5? for business travel after 2003. That's a 1.5 cent increase from the 36? allowance for 2003 business travel. Also after 2003, businesses will be able to use the mileage allowance if they use 4 or fewer autos for business simultaneously (currently, it's restricted to one business auto).
IRS issues simplified per-diem rates for post-Oct. 31 employee travel:
IRS has issued a new revenue procedure carrying the ?high-low? simplified per-diem rates for post-Oct. 31, 2003 travel. The rates are slightly higher than the previous simplified per-diems. IRS also issued new M&IE per diems for the transportation industry and increased the incidental expenses per-diem to $3 from $2.
8:08:19 AM
Monday, November 03, 2003
Some of the most common questions
Questions and Answers
Question
I want to purchase real estate with my IRA. Is that possible? If so, will I have to pay all those nasty penalties?
Answer
An IRA is allowed to own real estate. Typical IRA trustees, such as stock brokerage companies and most banks, will refuse to accept real estate. You have to find a trustee that will accept the property, and they typically charge high maintenance fees.
Remember that income distributed from an IRA is typically taxed as ordinary income, so there is a high tax cost involved in using an IRA to hold real estate. A Roth account is a better alternative.
There are many potential issues from holding rental real estate in a retirement account, including subjecting the account to an income tax on unrelated business income. You should definitely get some detailed professional guidance before you go ahead with this.
Question
With the new 15% maximum federal income tax rate on dividends, what is the effect on the AMT? Will the tax on dividends remain at 15%, or will they be taxed at the AMT rate of 26%/28%?
Answer
The 15% maximum income tax rate also applies when computing the alternative minimum tax. Since the income is subject to tax at the same rate, but certain deductions, including state income taxes, are not deductible for AMT, more taxpayers will be subject to AMT thanks to this tax change.
Question
I have a question regarding gift tax. If my parents make a gift to my husband and me of $100,000, do they have to pay tax on it? Since they have never given any money to anyone before, wouldn't the Unified Credit apply so they wouldn't have to pay any tax?
Answer
Yes.
Question
I am planning to give my father and mother some stock with a value of $22,000 to meet the annual exclusion exception.
When my parents sell the stock, are they liable for paying any taxes to the IRS? Does the online broker withhold any taxes from the sale?
My parents are citizens of India who came to the United States on a visitor visa. Last year, we claimed them as dependents on our tax return and plan to do so again this year, because they meet the substantial presence test.
Answer
The first question is whether your parents are actually residents of the United States. Based on what you have told me, it doesn't appear so unless they have made an election to be taxed as U.S. residents.
If your parents are not taxed as U.S. residents, you may not claim a dependent deduction for them.
If they are non-residents, the sale of stock results in income from intangible assets, taxable in the country of residence (India).
If they are taxable as U.S. residents, the gain will be taxable in the United States. The income could disqualify them for the dependent deduction on your income tax return for the year of sale.
It appears to me that no federal income tax withholding is required for the sale of securities by a nonresident alien. You can confirm this with your stock broker.
Note that different rules apply for estate tax. If your parents own the stock of a U.S. company at their death and they are not U.S. residents, the stock will still be subject to U.S. estate tax.
There could also be tax issues for India and foreign tax credits involved if any income is double-taxed.
These rules are very complex and I'm not an expert in this area, so I recommend that you hire and consult with a tax consultant who is familiar with these rules before going ahead.
Question
I am looking into buying a family car. Some of the SUVs look good. Is there some law about more tax I have to pay for owning an SUV?
Answer
Mostly more taxes included in the cost of the additional gasoline you will use. You might also check with your insurance agent about the cost of insuring an SUV compared to a more conventional car or truck.
10:13:30 AM
Vehicles qualifying for Clean Fuel Deduction.
The IRS recently announced the 2004 Toyota Prius is eligible for the clean-burning fuel deduction. A taxpayer who purchases a new Toyota Prius may claim a tax deduction of up to $2,000 on Form 1040. Other cars that have qualified include the 2001, 2002 and 2003 Toyota Prius, the 2000, 2001 and 2002 Honda Insight and the 2003 Honda Civic Hybrid.
The clean-burning fuel deduction is being phased out. The $2,000 deduction may be claimed for 2003. The future scheduled limits are $1,500 for 2004, $1,000 for 2005, and $500 for 2006. (IR-2003-114.)
10:11:52 AM
New depreciation tables issued for vehicles.
The IRS has issued tables showing the 2003 depreciation limits for automobiles and trucks to which the "luxury" limits apply. For the first time, the limits are being adjusted for inflation. Since the index referred to for automobiles is different from the index for trucks and vans, the limitations are different for different groups of vehicles. The application of different first-year limitations when the 30% and 50% first-year depreciation deductions are elected create more alternative table limitations. I don't have the time or the space to list all of the details here. If you need to have the amounts for tax planning, consult with your tax advisor or refer to Revenue Procedure 2003-75 at the IRS web site.
Remember that Georgia and some other states have not adopted 30% or 50% bonus depreciation or the new expensing limits, so different depreciation limitations may apply on the federal and state income tax returns.
10:11:17 AM
Wednesday, October 22, 2003
Making an Allocation
Section 1060 requires that the purchase price be allocated among the various assets using the residual method. Under the residual method, the purchase price is first reduced by any cash and general deposit accounts (including checking and saving accounts) received by the buyer. The remaining amount is allocated to other assets in proportion to (but not in excess of) their fair market values in the following order:
Certificates of deposit, U.S. Government securities, foreign currency, and actively traded personal property, including stock and securities.
Accounts receivable, other debt instruments, and assets that are marked-to-market at least annually for federal tax purposes (e.g., commodities held by a dealer).
Property of a kind that would be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers.
All other assets except goodwill, going concern value of the business, and other Section 197 intangibles(e.g., patents, copyrights, trademarks; see below).
Section 197 intangibles other than goodwill and going concern value.
Goodwill and going concern value [Reg. 1.1060-1(c)(2)].
Example: Paul Smith buys the assets of XYZ Company for $210,000. No cash or deposit accounts or similar accounts were purchased. XYZ owned Government securities that had a fair market value of $32,000. The only other asset purchased (other than goodwill and going concern value) was inventory with a fair market value of $150,000. Of the $210,000 paid for the assets of XYZ, $32,000 is allocated to Government securities, $150,000 to inventory assets, and the remaining $28,000 to goodwill and going concern value.
Valuing inventory: In a recently released revenue procedure, the IRS said that three basic methods can be used to determine the fair market value of inventory when a business is purchased:
The replacement cost method.
The comparative sales method.
The income method [Rev. Proc. 2003-51].
Replacement Cost Method: This method generally provides a good indication of fair market value if inventory is readily replaceable in a wholesale or retail business, but generally should not be used in establishing the fair market value of the work in process or finished goods of a manufacturing concern. In valuing a bulk inventory of raw materials or goods purchased for resale under this method, the determination of the replacement cost of the individual items should be only the starting point and may need an adjustment. For example, a buyer might be expected to pay (and a seller might be expected to demand) a price for inventory that would compensate the seller not only for the current replacement cost, but also for a fair return on expenditures in accumulating and preparing the inventory for distribution.
Comparative Sales Method: The comparative sales method utilizes the actual or expected selling prices of finished goods to customers in the ordinary course of business as the starting point. The inventory to be valued may represent a larger quantity than the normal trading volume. The IRS says that expected selling price is a valid starting point only if the inventory is expected to be used to fill customers' orders in the ordinary course of business. The base amount must be adjusted for such factors as: (a) the time that would be required to dispose of this inventory; (b) the expenses that would be expected to be incurred in the disposition (e.g., all costs of disposition, applicable discounts, sales commissions, and freight and shipping charges); and (c) a profit commensurate with the amount of investment in the assets and the degree of risk.
Income Method: According to the IRS, the income method recognizes that finished goods must generally be valued in a profit-motivated business. As the amount of inventory may be large in relation to normal trading volume, the highest and best use of the inventory will be to provide for a continuity of the marketing operation of the going business. Additionally, the finished goods inventory will usually provide the only source of revenue of an acquired business during the period it is being used to fill customers' orders. The historical financial data of an acquired company can be used to determine the amount that could be attributed to finished goods in order to pay all costs of disposition and provide a return on the investment during the period of disposition.
<img src="cid:5.2.1.1.2.20031022150849.00b74988@mail.cpatax.net.0" width=1 height alt="4b7dd92.jpg"> Formalizing the Allocation
The buyer and seller can enter into a written agreement specifying the allocation of the purchase price among the assets. The agreement will be binding on both parties, unless the IRS determines the amounts are not appropriate.
Both the buyer and seller must report to the IRS on the allocation of the sales price among the business assets. The buyer and seller should each attach Form 8594, Asset Acquisition Statement to their returns for the year of the sale.
When there is an increase or decrease in the purchase price after the close of the year of the sale, the buyer and seller each must file a supplemental asset acquisition statement on Form 8594 with the income tax return for the taxable year in which the increase or decrease is properly taken into account [Reg. 1.1060-1(c)(2)]. <img src="cid:5.2.1.1.2.20031022150849.00b74988@mail.cpatax.net.1" width=1 height alt="4b7dda6.jpg"> Corporation Buying Another Corporation
If a client has incorporated his or her business, the corporation may buy another corporation by buying the stock of the acquired corporation. In this case, Section 338 of the Internal Revenue Code allows the corporations to treat the stock purchase as the purchase of the acquired corporation's underlying assets. A detailed look at Section 338 is beyond the scope of this article. But, if the corporations elect to treat the stock purchase as an asset purchase, the acquired corporation is basically treated as having sold all its assets for a price reflecting the stock purchased price. The acquired corporation must recognize gain or loss on this deemed asset sale. The acquired corporation is then treated as a newcorporation that purchases the assets, generally resulting in a step-up in basis to the stock purchase price. The purchase price is allocated among the new corporation's assets using the residual method outlined above [Reg. 1.338-6(b)].
The acquired corporation files its final return for the tax year that ends at the close of the acquisition date and reports its tax liability on the deemed sale. The purchasing corporation makes the Code Sec. 338 election on Form 8023, Elections Under Section 338 For Corporations Making Qualified Stock Purchases, which must be filed by the 15th day of the ninth month that begins after the month in which the acquisition date occurs. <img src="cid:5.2.1.1.2.20031022150849.00b74988@mail.cpatax.net.2" width=1 height alt="4b7ddba.jpg"> After the Purchase
Assets purchased as part of a business are generally handled the same way for tax purposes as if they were acquired outside of a business purchase. For example, if a purchase of a business includes depreciable equipment, the equipment is written off using the same recovery period and the same depreciation method as if it were purchased separately. (Note: The 30%/50% bonus first-year depreciation allowance will generally not be available for depreciable property acquired in the purchase of a business because the original use of the property will not have begun with the buyer of the business.)
Section 197 intangibles: Special rules apply to Section 197 intangibles.Section 197 intangibles are certain intangibles acquired after August 10, 1993, in connection with a business or income-producing activity. Under Code Section 197, the cost of the intangibles is capitalized and amortized over a period of 15 years.
Section 197 intangibles include the following:
Goodwill.
Going concern value.
Workforce in place.
Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers.
A patent, copyright, formula, process, design, pattern, know-how, format, or similar item.
A customer-based intangible.
A supplier-based intangible.
A license, permit, or other right granted by a governmental unit or agency (including issuances and renewals).
A covenant not to compete entered into in connection with the acquisition of an interest in a business.
A franchise, trademark, or trade name (including renewals).
A contract for the use of, or a term interest in, any item in listed above [IRC Sec.197(d)].
The following assets are considered Section 197 intangibles only if they are acquired in connection with the purchase of a business: (1) an interest in a film, sound recording, video tape, book, or similar property; (2) a right to receive tangible property or services under a contract or from a governmental agency; (3) an interest in a patent or copyright; (4) an interest in an existing lease or sublease of tangible property or a debt that was in existence when the interest was acquired; and (5) a professional sports franchise or any item acquired in connection with the franchise. [Reg. 1.197-2(c)]
If computer software is acquired in connection with the purchase of a business, it is considered a Section 197 intangible unless (1) it is (or has been) readily available for purchase by the general public; (2) it is subject to a nonexclusive license, and (3) it has not been substantially modified. [Reg. 1.197-2(c)(4)]
3:19:10 PM
Friday, October 17, 2003
Don't let your life insurance be
subject to estate taxes
Life insurance is a valuable tool for estate planning. By having adequate
life insurance to pay estate taxes, you can leave more to the next
generation. The pitfall is that if you have any "incidents of
ownership" in the policy, proceeds from your life insurance will be
included in your estate and will be subject to estate taxes.
"Incidents of ownership" include the right to cancel or assign
a policy, revoke an assignment, use the policy as collateral for a loan,
borrow the cash value, or change a beneficiary.
Who should own your policy? Life insurance policies can be owned in many
forms: directly by you, by your spouse, by your children, or by a trust.
Setting up an irrevocable life insurance trust during your lifetime to
own the policy, or having a family member other than you own the policy,
can avoid having the proceeds included in your taxable estate.
Removing life insurance from your estate avoids the potential estate tax
of 37% to 49% on the proceeds of the life insurance.
Can you transfer ownership? If you transfer an existing policy to a trust
or an individual, the proceeds will still be included in your taxable
estate if the transfer has taken place within three years prior to your
death. Depending on the value of the policy and other factors, the
transfer may escape gift tax (and the generation skipping tax).
The drawback to transferring ownership of your life insurance policy is
that you no longer have control over the policy, including the ability to
change beneficiaries.
Smart planning will save taxes. Proper planning for the ownership of your
life insurance is essential. Keeping life insurance out of your gross
estate will leave more to your beneficiaries. Contact us if you would
like details about this and other strategies that could reduce taxes on
your estate.
A. For income tax purposes, your first step is to get the IRS application to be recognized as tax exempt (package 1023 or package 1024). The IRS' forms number is 1-800-829-3676. If you are going to be incorporated, or if you are going to solicit contributions from the public, check with the Georgia Secretary of State's Office. They handle the registering of corporations doing business in Georgia (404-656-2817) and the Charitable Solicitations Act (404-656-4910). After you have received your determination letter from the IRS, and your certificate of incorporation from the Secretary of State's Office, you file form 3605with the Georgia Department of Revenue, to apply for a state income tax determination letter.
If you have employees, you need to register for withholding the same as any other employer. If you have questions on any other type of tax, you need to check with the division that administers that tax.
Q. I have received a determination letter from the IRS. What do I do for Georgia?
A. File Georgia form 3605 (application for state income tax determination letter) with the required organizational documents listed on the form.
A. No. Check with the Sales & Use Tax Division to see if you qualify for any exemption from sales tax. Form 3605 relates only to state income tax.
Q. We are a tax exempt organization. What do we file with the Georgia Department of Revenue?
A. It depends on what you are filing with the IRS. (See above for info on form 3605.)
Q. We are filing form 990, 990EZ or 990PF with the IRS. What do we file with Georgia?
A. You are required to file a copy of the federal return. We do not have a form equivalent
to the IRS informational returns 990, 990EZ or 990PF.
3:25:53 PM
ALL OF US HAVE SOME "DE MINIMIS" FRINGE
BENEFITS ------ Can You Identify Them?
Any employer-provided property or service having a value so small that accounting for it would be unreasonable or administratively impracticable, may be excluded from income as a "de minimis" fringe benefit.The frequency with which the benefit is provided is a factor to be considered when determining that the value is small.Examples of "de minimis" benefits for employees include:
---An occasional ticket to the theater or a sporting
event
---Occasional meal money or cab fare when
employees are required to work overtime,
provided the payments are not calculated
on the basis of the number of hours worked
---Occasional typing of personal letters or personal
use of office copying machines
---Occasional parties and picnics for employees,
coffee and doughnuts
---The value of meals provided at a reduced price
when provided at an employer-operated
eating facility whose revenues at least
equal its operating costs.
However, SEASON tickets to sporting or theatrical events, free use of a company car to commute to and from work, or the use of an employer-owned or leased boat, hunting lodge, etc., for a weekend may not be considered "de minimis" benefits.Therefore, withholding for Federal income tax, Social Security and Medicare taxes, and the employer-paid FUTA tax, would apply to the fair market value.
1:42:06 PM
UNCLAIMEDWAGES --- Who Keeps Them?
After working for you about six months, Tom quit and moved to another part of the country without leaving a forwarding address.Some time later, you notice that several of the last paychecks you gave him have never been cashed.What should you do?
Alternatively, suppose Tom's last paycheck was mailed to him at his last-known address, but today the U.S. Postal Service returns the check in an envelope stamped "Addressee Unknown."What should you do?
Sometimes an employee agrees to work instead of taking vacation.In effect, such employees are choosing additional pay in lieu of time off for vacation.For withholding purposes, such vacation pay is treated the same as the pay out of unused vacation upon termination or retirement, discussed above.Thus, the employee is paid two times for the vacation period in question, and the vacation pay portion is taxed as supplemental wages.
Regardless of the method used to withhold income tax on supplemental wages, such payments are subject to Social Security and Medicare taxes, and FUTA tax.But, note that advance vacation payments, such as for Terri in the example above, do not qualify for use of the Federal supplemental wage withholding method.Also, state income tax withholding practices vary in regard to supplemental wages, and should be examined for the particular state.
1:33:17 PM
Tuesday, October 07, 2003
Windows XP Ways to add to security
One of the strengths--- and weaknesses--- of Microsoft software is that there are usually about nine different ways to do something. On the plus side, that means you can accomplish a given task using whatever way "feels" right to you--- no matter how you do it, the end results are the same..
The downside is that there may indeed be nine different ways to accomplish every task. <g> It can be confusing; and sometimes, it means that you end up on a longer, harder path than need be, just because that's the way you're used to doing things.
Here's a simple example: To change the resolution of your screen, you can:
1) right click the standard desktop, select properties, then settings: You're there.
2) (in Win9x) click Start/Settings/Control Panel/Display. You're there.
3) (in XP) click Start/Control Panel/Appearance/Display. You're there.
4) (if your setup includes a Control Panel shortcut elsewhere, such as in "My Computer") click that Control Panel shortcut, drill down to "display," and you're there.
5) (if your PC has a display widget in the "tray" or "notification area" near the clock) click or right click that until you get to the display settings: You're there.
And so on (yes, there are other ways, too). All these are correct; there's no right way or wrong way. The only right way is the one that's easiest for you to use and remember.
For me, I usually prefer the shortest, fastest way--- but sometimes I get lost in the maze of alternate solutions, too. For example:
Fred, Thanks for another great newsletter. In "Clean To The Bare Metal" ( http://www.langa.com/newsletters/2003/2003-02-24.htm#2 ) you mentioned an XP registry tweak to clear virtual memory on shutdown. There seems to be an easier way. Go into Administration Tools [under "Performance and Maintenance" in Control Panel], then Local Security Policy, Security Settings, Local Policies, Security Options. Scroll down to "Shutdown: Clear Virtual Memory Pagefile". Right click and select properties then click "Enabled". It's probably easier than playing around in the registry. Regards, Pat Padberg
10:53:15 AM
Friday, October 03, 2003
The New Tax Law -
Small in Size, Big in Implications
Well, the Congress did it & sort of. The new tax law is small in
pages, but very big in implications. Those of you not vacationing on the
far side of Mars probably have heard that the maximum tax rate on
dividends and capital gains has declined to 15 percent; lower-bracket
taxpayers are facing a maximum five-percent -- and in 2008, miracle of
miracles, zero percent -- tax rate on such classes of income. This change
alone has substantial implications both for the investor and
small-business owner that present enough opportunities and pitfalls that
accountants, the well informed, will be called on for significant tax
advice during the next five years. Surgent is offering a full-day course
exploring the implications of the entire tax law beginning in July at
many locations throughout the country.
Tax rates for other taxpayers decline significantly by accelerating the
"final" rates under the Economic Growth and Tax Relief
Reconciliation Act of 2001. The brackets now are 10 percent, 15 percent,
25 percent, 28 percent, 33 percent, and 35 percent. Thus, taxpayers who
were scheduled to be in the highest tax bracket of 38.6 percent will find
themselves in the 35-percent tax bracket instead. These provisions have
retroactive effect to the beginning of the year. The Service has issued
revised withholding tables that most employers will put into effect on
July 1, so take-home pay will increase for many taxpayers. Whether
taxpayers should accept the decreased withholding is another
question.
Most taxpayers also benefit from the expanded 10-percent and 15-percent
tax brackets. These rates don't change, but in the case of single or
married taxpayers, the end point of the 10-percent rate has been
increased, shifting $1,000 ($2,000 in the case of married filing jointly)
from the 15-percent rate bracket to the 10-percent bracket. In addition,
those married filing jointly increase the size of the 15-percent bracket
at the expense of the next higher bracket (which was scheduled to be 27
percent in 2003, but is now 25 percent). A married taxpayer was scheduled
to reach the top of the 15-percent bracket at $47,450, but now this will
occur at $56,800. Married taxpayers having taxable incomes of at least
$56,800 save $935 ([0.25 - 0.15] x [$56,800 - $47,450]) from this
acceleration of marriage relief alone.
With decreased tax brackets comes lower regular tax liabilities, which in
turn increases exposure to the alternative minimum tax (AMT). To counter
this, the new law increases the AMT exemption from $49,000 to $58,000 for
married filing jointly and surviving spouses; $35,750 to $40,250 for
heads of household and unmarried taxpayers; and $24,500 to $29,000 in the
case of married filing separately. This increase replaces the scheduled
increases enacted under the 2001 tax law, and like that law, the
increases are effective only through 2004. Expect AMT shock in 2005 when
the exemptions return to $45,000, $33,750, and $22,500.
The tax law provides some additional significant incentives for
businesses to purchase new capital. The 30-percent bonus depreciation has
been sweetened for property acquired after May 5, 2003 and placed in
service generally by December 31, 2004 by increasing the bonus percentage
to 50 percent. The property eligible for the bonus-depreciation election
has not changed from the classes established under the 2002 tax law. In
the case of new automobiles purchased and placed in service after May 5,
2003 and before January 1, 2005, the first-year limit has been increased
by $7,650 (up from a $4,600 increase for new autos purchased after
September 10, 2001 and placed in service before May 6, 2003). The
Service, which releases a revenue procedure each year to announce the
§280F limitations for automobiles placed in service during the year, has
not yet issued this information for 2003. However, assuming no adjustment
from the 2002 level, the first-year limit for post-May 5, 2003 purchased
new automobiles is $10,710 ($7,650 "bonus" limit + $3,060
"regular" limit).
Expensing of new personal property is significantly enhanced by
increasing both the dollar limitation and the phase-out threshold. For
property placed in service after December 31, 2002, businesses may deduct
up to $100,000 of expenditures chargeable to capital account (up from
$25,000, which was scheduled to take effect in 2003) on qualifying
property, and for these purposes, computer software will now qualify for
this treatment. By increasing the level of capital placed in service
during the year at which the maximum amount of qualifying expenditures is
reduced dollar for dollar to $400,000 (up from $200,000), more companies
will be able to take advantage of §179 than could in prior years.
Remember that neither §179 expensing nor bonus depreciation (and any
regular depreciation taken on bonus-depreciation property) is treated as
an adjustment or tax preference for AMT purposes.
8:53:29 AM
It's that time of the year in
which numbers applicable to the following year are being announced.
Social Security -- The Social Security Administration has
announced that the taxable wage base for Social Security in 2003 will
increase to $87,000, up from $84,900 in 2002. In consequence, the maximum
yearly Social Security tax paid by employees and employers will increase
by $130.20 each for a total of $5,394, according to what the SSA said in
a news release. For self-employed workers, the tax will rise by $260.40
for a total of $10,788.00. Moreover, the level of earnings below which a
retired individual under age 65 may receive Social Security benefits
without reduction has increased to $960 per month ($11,520 annually); for
those age 65, the level increases to $2,560 per month.
Medicare-- For Medicare Part A, which pays for inpatient hospital,
skilled nursing facility, and some home health care, the deductible paid
by the beneficiary will be $840 in 2003, up from this year's $812
deductible. The monthly premium paid by beneficiaries enrolled in
Medicare Part B, which covers physician services, outpatient hospital
services, certain home health services, durable medical equipment, and
other items, will be $58.70, an increase over the $54 premium for 2002.
The Part A deductible is the beneficiary's only cost for up to 60 days of
Medicare-covered inpatient hospital care. However, for extended
Medicare-covered hospital stays, beneficiaries must pay an additional
$210 per day for days 61 through 90 in 2003, and $420 per day for
hospital stays beyond the ninetieth day in a benefit period. For 2002,
per-day payment for days 61 through 90 was $203, and $406 for beyond 90
days. For beneficiaries in skilled nursing facilities, the daily
co-insurance for days 21 through 100 will be $105 in 2003, compared to
$101.50 in 2002. Seniors and persons under age 65 with disabilities may
obtain Part A coverage even though they have fewer than 30 quarters of
Medicare-covered employment, by paying a monthly premium set according to
a formula in the Medicare statute at $316 for 2003, a reduction of $3
from 2002. Seniors and certain persons under age 65 with disabilities
with 30 to 39 quarters of Medicare-covered employment are entitled to pay
a reduced monthly premium of $174.
Pension plans -- Apart from the scheduled increases in the law,
the COLA adjustments applicable to pension plans and IRAs result in no
change. Thus, in 2003, the defined-benefit limitation is $160,000, the
defined-contribution limit remains $40,000, the compensation taken into
account is $200,000, the compensation level qualifying for SEPs remains
at $450, and the compensation level defining a highly compensated
employee stays at $90,000. As to some of the scheduled changes, the
SIMPLE limit increases to $8,000, the §401(k) elective deferral limit
increases to $12,000, the catch-up applicable to all qualified plans
(other than SIMPLE §401(k) plans) increases to $2,000, the catch-up for
IRAs, SIMPLEs, and SIMPLE §401(k) arrangements increases to $1,000, and
the IRA contribution limit (without regard to catch-up) remains at
$3,000.
Mileage -- The optional standard mileage rate for businesses to
use in deducting automobile costs will decrease from 36.5 cents a mile to
36 cents a mile in 2003. Also for 2003, standard mileage rates will be 14
cents a mile for use of a car when giving services to a charitable
organization, the same as for 2002; 12 cents a mile for use of an
automobile for medical reasons, down from 13 cents; and 12 cents a mile
for computing deductible moving expenses, down from 13 cents per mile.
These declines reflect reduced costs of gasoline.
Per diems -- The per diem rate set forth is $204 for travel to any
"high-cost locality", or $125 for travel to any other locality
within the continental United States. The following localities (listed by
key cities) have been added to the list of high-cost localities: Santa
Monica, California; Baltimore, Maryland; Staten Island, New York; King of
Prussia/Ft. Washington/Bala Cynwyd, Pennsylvania; Philadelphia,
Pennsylvania; and Seattle, Washington.
For purposes of applying the high-low substantiation method and the
§274(n) limitation on meal expenses, the federal M&IE rate shall be
treated as $45 for a high-cost locality and $35 for any other locality
within CONUS.
For travel away from home before January 1, 2003, the term
"incidental expenses" includes, but is not limited to, expenses
for laundry, cleaning and pressing of clothing, and fees and tips for
services, such as for porters and baggage carriers. The term
"incidental expenses" does not include taxicab fares, lodging
taxes, or the costs of telegrams or telephone calls. For travel away from
home after December 31, 2002, the term "incidental expenses"
includes fees and tips given to porters, baggage carriers, bellhops,
hotel housekeepers, stewards or stewardesses and others on ships, and
hotel servants in foreign countries, but does not include expenses for
laundry, cleaning and pressing of clothing, lodging taxes, or the costs
of telegrams or telephone calls.
In lieu of using actual expenses in computing the amount allowable as a
deduction for ordinary and necessary incidental expenses paid or incurred
for travel away from home, employees and self-employed individuals who do
not pay or incur meal expenses for a calendar day (or partial day) of
travel away from home may use an amount computed at the rate of $2 per
day for each calendar day (or partial day) the employee or self-employed
individual is away from home.
Projections -- At this point there are only projections, but they
are from sources that have proven reliable in the past with respect to
other important numbers applicable in 2003:
(i) Personal exemptions: The personal exemption will rise by $50
in 2003 to $3,050. The personal exemption phaseout level will rise in
2003 to $139,500 for single filers, from $137,300; $209,250 for married
joint filers, up from $206,000; $104,625 for married taxpayers filing
separately, up from $103,000; and $174,400 for heads of households, up
from $171,650.
(ii)
Standard
deduction: The standard deduction for single filers will rise by $50
in 2003 to $4,750; taxpayers filing jointly by $100 to $7,950; married
taxpayers filing separately by $50 to $3,975; and heads of households by
$100 to $7,000.
(iii)
Itemized
deductions: The itemized deduction phaseout level will begin at
$139,500 for single filers, joint filers, and heads of households, up
from $137,300, and it will begin at $69,750 for married taxpayers filing
separately, up from $68,650.
(iv)
Tax rates:
Single filers:
The 27-percent tax bracket will start at taxable
income of $28,400, up from $27,950; the 30-percent bracket will at
$68,800, up from $67,700; the 35-percent bracket at $143,500, up from
$141,250; and the 38.6-percent bracket at $311,950, up from $307,050.
Joint filers: The 27-percent tax bracket will begin at taxable
income of $47,450, up from $46,700; the 30-percent bracket at $114,650,
up from $112,850; the 35-percent bracket at $174,700, up from $171,950,
and the 38.6-percent bracket at $311,950, up from $307,050.
Separate filers: All brackets begin at one-half those for joint
filers (i.e., $23,725, $57,325, $87,350, and $155,975).
Head of household: The 27-percent bracket will start at taxable
income of $37,450, up from $27,950; the 30-percent bracket will at
$96,700, up from $67,700; the 35-percent bracket at $156,600, up from
$141,250; and the 38.6-percent bracket at $311,950, up from $307,05
8:53:26 AM
Monday, September 29, 2003
Interesting bit of information.
Subject: Taxes
Taxes
Accounts Receivable Tax
Building Permit Tax
Capital Gains Tax
CDL license Tax
Cigarette Tax
Corporate Income Tax
Court Fines (indirect taxes)
Dog License Tax
Federal Income Tax
Federal Unemployment Tax (FUTA)
Fishing License Tax
Food License Tax
Fuel permit tax
Gasoline Tax (42 cents per gallon)
Hunting License Tax
Inheritance Tax Interest expense (tax on the money)
Inventory tax IRS Interest Charges (tax on top of tax)
IRS Penalties (tax on top of tax)
Liquor Tax
Local Income Tax
Luxury Taxes
Marriage License Tax
Medicare Tax
Property Tax
Real Estate Tax
Septic Permit Tax
Service Charge Taxes
Social Security Tax
Road Usage Taxes (Truckers)
Sales Taxes
Recreational Vehicle Tax
Road Toll Booth Taxes
School Tax
State Income Tax
State Unemployment Tax (SUTA)
Telephone federal excise tax
Telephone federal universal service fee tax
Telephone federal, state and local surcharge taxes
Telephone minimum usage surcharge tax
Telephone recurring and non-recurring charges tax
Telephone State and local tax
Telephone usage charge tax
Toll Bridge Taxes
Toll Tunnel Taxes
Traffic Fines (indirect taxation)
Trailer registration tax
Utility Taxes
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft registration Tax
Well Permit Tax
Workers Compensation Tax
COMMENTS: Not one of these taxes existed 100 years ago and our nation
was the most prosperous in the world, had absolutely no national
debt, had the
largest middle class in the world and Mom stayed home to
raise the kids.
10:32:03 AM
Wednesday, September 24, 2003
Cost of employer paid fishing trip was deductible business expense, not wages to employees
Townsend Industries, Inc. v. U.S. (CA 8, 9/15/2003)
The Eighth Circuit, reversing a district court, has held that the costs of a company's annual employee fishing trips weren't taxable wages to the employees who went on the trips. Based largely on the testimony of the company's employees, the Eighth Circuit concluded that the company had a specific business purpose for the trips; it was not merely providing a free vacation to employees.
Background. A working condition fringethat an employer provides to its employees is excluded from the employees wages. A working condition fringe is any property or services provided to an employee by his employer to the extent that the cost of the property or services would have been deductible by the employee as a business expense if he had paid for it himself. ( Code Sec. 132(d) ) To be deductible as a business expense (and, in turn, a working condition fringe), Code Sec. 162(a) requires that the expense be ordinary and reasonable. And even if ordinary and reasonable, Code Sec. 274(a)(1)(A) (dealing with entertainment, amusement, or recreation activities) requires that the expense be directly related to or associated with the active conduct of the taxpayer's trade or business.
Facts. Townsend Industries manufactures and sells printing presses. Since the 1960s, it has conducted an annual two-day sales meeting at its headquarters. Sales personnel arrive over a weekend and the meetings are conducted on Monday and Tuesday. A variety of topics are addressed at these meetings, including product technical performance problems and potential solutions, advertising, relationships with customers, etc.
Immediately after the two-day sales meeting, Townsend sponsors a fishing trip for all employees, including sales personnel and factory employees, that runs from Wednesday through Saturday. The fishing trip involves travel to a five-star resort in Canada. The trip is not mandatory, but the company encourages all employees to attend. Typically, more than 50% of the employees go on the trip. Family members are not invited. The company considers the trip to be part of its overall me toophilosophy. The company feels that by placing sales personnel and employees in a comfortable and pleasant setting, business discussions are encouraged and employees afterward will be motivated to perform their jobs better. Townsend seeks to encourage these discussions while individuals are in their living quarters and while they are out on boats by assigning specific individuals to be together during these times. Employees indicated that while on the trip they spent one to four hours a day discussing Townsend related business, and as a result gained an advantage in performing their jobs. For example, at one sales meeting a new printing press was introduced and discussions about the new press continued on the fishing trip.
Employees were paid their regular wages while on the trip. But none of the costs related to the trip were treated as wages taxable to the employees. IRS determined that the per-employee cost of the fishing trips in '96 and '97 was wages and assessed deficiencies against the company for payroll taxes, i.e., income, social security, and medicare taxes, that should have been withheld. Townsend paid a portion of the deficiency and then sued for refund in district court.
District court. The district court held that the expenses didn't satisfy the ordinary and necessary requirement, and therefore weren't working condition fringe benefits, because of the lax attendance policy for the trip and the disconnect between the sales meeting and the fishing trip. While all employees were invited and encouraged to attend the fishing trip, a significant number did not. And while business was discussed on the fishing trip, it was not done in an organized and monitored environment.
Eighth Circuit reverses. Looking at the trial record, and in particular the testimony of Townsend's employees, the Eighth Circuit found that the employees clearly viewed the annual fishing trip as part of their regular course of business. There was no lack of evidence concerning specific and general business discussions and the attendant benefits. The court also found it significant that spouses and children were not invited on the fishing trip. The absence of family indicates that the trip was not some sort of paid vacation (which an employee would normally take with his family).
The Eighth Circuit also said it was noteworthy that Townsend stopped inviting employees of its plastics division on the annual trip three years before it sold the division. The court said this indicated that Townsend had a specific business purpose for the fishing trips. If it was simply a matter of providing a free vacation to employees, Townsend would have continued to include the employees of the plastics division.
Eighth Circuit's decision is not a blank check. The Eighth Circuit expressly said that its decision does not stand for the proposition that company sponsored hunting, fishing, or other trips to luxury vacation spots can avoid being treated as wages simply on the basis of testimony relating to business allegedly conducted during the trip. A trial court should be suspicious of oral, non-contemporaneous evidence; it may well be that in most cases the cost of these trips would be taxable to each employee.
Observation:
Although Townsend prevailed here, it did so only after incurring the costs to litigate the issue through the trial and appellate courts.
Observation:
Aside from the precedential value of this case, taxpayers who seek to exclude from their employees' wages the costs of similar fishing, etc., trips can strengthen their position by formally requiring employees to go on the trip, having an agenda for the trip which designates specific time periods during which attendees must be present for business discussions, and documenting the business benefits of each trip.
WASHINGTON (AP) - The House on Wednesday passed more than $12 billion
in tax cuts to encourage charitable giving, while some Democrats said the
bill's generosity will cost future generations billions in extra debt.
The bill, passed 408-13, is the legislative offspring of President Bush's
effort to give religious organizations federal money and encourage them
to take a bigger role in providing social services.
Majority Whip Roy Blunt, R-Mo., said the tax breaks will encourage $45
billion to $50 billion in additional charitable donations over the next
decade.
"It's really about $50 billion - $50 billion that the American
people decide they want to give to charities to help their fellow
citizens," he said.
The biggest tax break gives new charity-contribution incentives to
taxpayers who can't deduct charitable donations from their taxes because
they don't itemize their deductions. Taxpayers using the standard
deduction could deduct up to $250 in charitable contributions. The new
deduction would be in effect for two years.
Rep. Harold Ford, D-Tenn., said the new deduction will reward those who
regularly give small amounts to their churches or other local charities.
"They want to give, but they also want to have money to pay the
bills," Ford said. "This bill is one way we can empower people
to give more to charity, for it empowers those whose compassion runs
deep, especially those who do not have deep pockets."
Other Democrats praised the bill but argued that its $12.7 billion,
10-year cost should be paid for by shutting down corporate tax shelters.
The Senate's version of the bill, passed in April, included language
targeting illegal tax shelters and would cost the Treasury nothing.
"For every tax cut we give today, it goes on the deficit, and your
kids and your grandkids are going to pay for it," said Rep. Jerry
Kleczka, D-Wis., calling himself "the skunk at the picnic."
"The plain, simple fact is, it's nice but we can't afford it,"
he said.
The House rejected, 220-203, a Democratic effort to push a bill similar
to the Senate's. The Senate reduced the bill's cost to zero by balancing
the new tax breaks with a ban on transactions corporations use solely to
reduce their taxes but which have no apparent business purpose. Blunt
said lawmakers have not yet scheduled a meeting to work on a compromise
between the House and Senate bills, but he said he expected the bill will
be completed and sent to the president later this year.
The House on Wednesday also passed a bill permanently banning taxes on
Internet access.
The charitable giving bill changes the rules governing charitable
foundations, which are required to donate 5 percent of their assets to
charity each year. Some administrative expenses, including salaries over
$100,000 and first-class airfare, would be excluded from the 5 percent
gift calculation.
Other portions gradually increase tax-deductible donations for
corporations from 10 percent of taxable income to 20 percent by 2012.
Companies could also get tax breaks for donating food, scientific
equipment and computers.
Rep. Mark Green, R-Wis., praised language in the bill encouraging
companies to increase their donations to religious organizations. He
pointed to a study by the Capital Research Center, a group that argues
the growth of government has increasingly eroded volunteerism, which said
six of 10 largest corporations ban or restrict contributions to
faith-based organizations.
"Many of our nation's largest foundations have a bias against giving
to the community of faith," he said. "Let's hope that the
public, let's hope that shareholders demand a change."
---=
The bill is H.R. 7.
The Associated Press News Service
Copyright 2003 by The Associated Press
All Rights Reserved
10:32:26 AM
Update on Internet Taxation
U.S. House Votes to Make
Internet Sales Tax Exemption Permanent Source: San Jose
Mercury News
Publication date: 2003-09-18
Arrival time: 2003-09-17
Sep. 18--WASHINGTON--The House of Representatives approved
legislation Wednesday that would make permanent a 5-year-old ban on
Internet-only taxes, such as levies on high-speed Internet access.
Congress passed the original Internet tax moratorium in 1998 to protect
fledgling e-commerce companies from taxes that could hamper their
competitiveness as they were just getting off the ground. The moratorium
was extended for two years in 2001, and it expires Nov. 1 unless Congress
acts.
The moratorium bans state and local governments from taxing Internet
access through any technology -- dial-up, DSL, satellite or cable modem.
It also forbids state and local governments from imposing taxes on
e-commerce that don't apply equally to brick-and-mortar businesses.
A nearly identical measure was passed by the Senate Commerce Committee
and is awaiting a final vote on the Senate floor, where it's expected to
pass. The Bush Administration has endorsed the legislation.
The bill approved by the House, HR 49, would close a loophole that had
allowed 10 states to tax Internet access, including Texas, Ohio and
Washington.
But the measure did not cover the thornier question of how to collect
state sales taxes on electronic commerce. At stake in that issue are
potentially billions of dollars that states say they lose from
uncollected sales taxes on transactions over the Internet.
Last week, the California state Assembly passed a bill that would require
out-of-state companies that want to do business with the state of
California to collect sales tax from their California customers making
purchases online. The California Senate is likely to follow suit. Gov.
Gray Davis vetoed a similar bill in 2000, but he has indicated his
willingness to reconsider the issue.
In Washington, members of Congress praised Wednesday's voice vote in
favor of the tax moratorium legislation, saying it will allow the
Internet to continue to flourish.
"The Internet is still transforming itself," said Rep.
Christopher Cox, R-Newport Beach, author of the legislation. "We
don't want tax policy to weigh it down so it can't become what it might
be to serve all of us."
The Congressional Budget Office estimates that closing the loophole on
the 10 states currently taxing Internet access would cost state and local
governments between $80 million and $120 million annually beginning in
2004.
Cox said the legislation would help boost the economy because it will
encourage continued growth of the Internet. Expanded Internet usage will
add $500 billion a year to the economy over the next decade, he said.
Other lawmakers argued that the bill should be considered only in the
broader context of resolving the issue of how to tax sales over the
Internet.
Most purchases on the Internet have gone tax-free because of a 1992
Supreme Court decision that says companies aren't required to collect
state and local sales taxes unless they have a physical presence in the
state, such as a store or warehouse.
The collection of sales tax from online transactions also has been
complicated by the fact that there are more than 7,500 different taxing
jurisdictions in the United States which tax goods and services
differently. The Supreme Court said merchants don't have to collect state
sales taxes from out-of-state customers until the states simplify their
tax systems.
Customers are supposed to report their online purchases to their home
state, but usually don't.
A group of nearly 40 states, including California, has been working to
simplify the tax code, a step in making online sales taxes a reality.
Congressional action or a decision by the Supreme Court would be needed
to give states the authority to begin collecting taxes from out-of-state
sales, including online sales.
-----
To see more of the San Jose Mercury News, or to subscribe to the
newspaper, go to
http://www.mercurynews.com.
(c) 2003, San Jose Mercury News, Calif. Distributed by Knight
Ridder/Tribune Business News.
Publication date: 2003-09-18
10:22:20 AM
In praise of Nexus?
Crunching numbers most
taxing Source: Cincinnati
Post
Publication date: 2003-09-18
Arrival time: 2003-09-19
It's getting to be time to file quarterly taxes, and Mike Mangeot is
gnashing his teeth once again. Not because he doesn't think he should pay
taxes, but because the process is nightmare from Bonkerslovakia.
Mike is CEO of Century Construction in Erlanger, a small company that
does business throughout the region. Century has a payroll of about 125
employees
and last year had sales of around $30 million. Mike also is a former
Covington city commissioner and Kenton county commissioner, so perhaps he
knows a bit more than the rest of us about how local taxing entities
think.
At the moment, he's going down the list with me. After he signs his
federal 941 employer's quarterly withholding return and the Kentucky and
Indiana income tax withholding forms, Mike also has to file withholding
for Nebraska because, once upon a time, Century did some work in that
state and it's still on the books. Century owes the State of Nebraska
$0.00 this quarter, according to the figures reflected on the 941N form
-- but Mike has to file nonetheless.
Ditto the cities of Silver Grove, Sharonville, Norwood, North College
Hill, Middleton, Mason, Addyston, Bellevue and Blue Ash, along with
Carroll County.
"Evidently, we once did work in each those places, athough not in
the last quarter," Mike says.
"Still, you gotta file the forms. And everybody has a different
form. It would make too much sense to have any uniformity between them.
They all gotta do it their own way."
Dozens of other forms from municipalities far and wide reflect
bottom-line withholdings that range from the picayune ($5.24 to Elsmere,
$3.40 to Springdale, $2.76 to Hamilton) to the prodigious ($1,327.06 to
the city of St. Bernard and $2,167.14 to the city of Cincinnati).
Then he has to fill out the reciprocal Universal Ohio Use Tax Return and
the Kentucky Consumer's Use Tax Worksheet -- which is where they hit you
if you're doing work in one state, but you buy materials for that job
from another state, in which case you don't pay sales tax. You wait until
it's time for your quarterly payment to do that.
Mike points out that withholding taxes are based on money earned in a
specific municipality. If you live in that town but aren't employed
there, you don't pay that withholding tax.
"This way, local governments aren't put in the unfortunate position
of having to tax their voters -- i.e., the people who put them in
office," Mike says.
While he's at it, Mike pulls out his yearly corporate taxes.
"This is where it really gets me," he says.
He starts with Kenton County, Newport and Wilder.
"They base their yearly taxes on sales -- not profits," he
says.
"So what if I don't make a profit? What if my expenses equal my
sales? Well, if my tax is based on sales and I don't have any money left
over, how am I supposed to pay the tax? You tell me.
"I mean, I don't want to appear to be complaining -- but this
business about basing tax on sales is not equitable," Mike says.
Not only that, but the way it works in the construction business is, you
have sub-contractors. You might have a $1 million job, but you might do
only, say, $300,000 of that yourself.
"The rest is done by people you hire -- painters, plumbers,
electricians," Mike says.
The interesting part about that is, when it's tax time, your
subcontractors are required to report their respective earnings -- which,
in our hypothetical case, would amount to $700,000 in the aggregate. And
as the contractor, you are required to pay tax on the entire $1 million.
"Again, I would like to make it clear: I'm not complaining about the
amount of tax -- except where they're double-dipping," Mike says.
Mike sighs. He and two partners -- a union bricklayer and a union
carpenter; Mike was the numbers guy -- each pitched in a thousand bucks
to launch Century Construction in 1968.
Their philosophy was, "Inch by inch, it's a cinch." They worked
long hours and grew gradually, adding five to 10 full-time employees each
year.
Mike likes to think they did it the way the Founding Fathers had in mind
when they conceived of a United States as the first nation in history
where anyone with a dream could make it happen.
"But I doubt those same fathers envisioned a government that would
find so many ways to get in our way."
10:22:19 AM
-- The percentage of Americans with wills has dropped, says a new survey.
The latest annual survey by the legal Web site FindLaw (
http://www.findlaw.com/
) found that 57 percent of Americans do not have a will, potentially leaving them without any say over issues involving their assets or care of any minor children after they die.
Only 41 percent of American adults currently have a will, a drop of three percentage points from a year ago. The percentage of Americans with wills increased slightly in 2002 -- possibly because of changes to estate tax laws and the impact of terrorist attacks -- but fell back again this year. Two percent of respondents did not know or had no response.
Does everybody need a will?
"If you don't want the state to write your will, then you need to create a will," said James Kosakow, an attorney in Westport, Conn., who specializes in estate planning. "If you die without a will, the state will say who gets what from your estate, who your executors -- those responsible for administering your estate -- will be, and who will take care of your minor children. You won't have the opportunity to reduce or avoid estate taxes, which could potentially be significant; establish trusts for your children or other beneficiaries; donate to charity or bequeath gifts to specific people. The only way you can have any say in these matters is through an estate plan, which generally includes a will."
Although the circumstances of each individual and family are different, FindLaw offers the following suggestions for situations where having a will may be particularly important:
-- Do you have specific wishes for distributing assets from your estate?
-- Do you have minor children?
-- Do you have children from a previous marriage?
-- Is your estate potentially subject to estate taxes?
-- Do you have family-owned property or businesses?
Additional helpful information on the benefits of estate planning and directories for finding estate planning attorneys can be found on Web sites such as http://www.findlaw.com/ .
FindLaw
10:22:16 AM
Friday, September 19, 2003
New retirement plan
options for Business owners
Did you know that a firm as small as one person
can establish a 401(k)? This is not a new phenomenon. It just
never made sense under the old tax law. However, changes in the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) have
made the one-person 401(k) much more attractive for small business owners
and sole practitioners.
Just how attractive is it? Consider a
small business owner of a C or S Corporation at age 50, with $50,000 in
income. Assume the business owner would like to contribute as much
as possible to a tax-deferred retirement plan during 2003. By
adopting a Simple IRA plan, the owner can contribute a maximum of $10,500
for 2003. Alternatively, the owner could adopt a Profit Sharing
Plan or a SEP IRA plan and make a maximum contribution of $12,500 for
2003. However, by adopting a one-person 401(k) plan, the owner can
contribute up to $26,500 for 2003. A small business owner age 50
with $100,000 annual income can contribute up to $39,000 for 2003.
A small business owner with $160,000 annual income can contribute the
maximum $42,000.
As you can see, the one-person 401(k) plan
offers the small business owner the opportunity to make a much larger a
contribution to a tax-deferred retirement plan. This strategy even
works well for small businesses with certain non-owner employees.
Since the contribution amount is entirely discretionary each year, this
savings strategy is very flexible. Furthermore, contributions are
tax-deductible and grow tax-deferred to make this savings strategy very
effective.
Additional incentives found in the new tax
relief act add to the attractiveness of the one-person 401(k) plan.
For example, the new tax relief act provides small business owners with
the ability to take a loan from the one-person 401(k) plan.&n
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