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