Tax Update Blog: December 2007 Archives
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SCENES FROM THE FRONT
December 31, 2007
The Iowa Caucus campaigns are in their final frenzy on an otherwise quiet semi-holiday in Downtown Des Moines.
Here the Hillary! campaign puts together a platform for tonight's rally at Capitol Square.
Huckabee supporters stack big signs outside their headquarters...
...while the Huckabus idles a block away. If Huckabee loses, will it be because he forgot to have the "myLuxuryBus.com" logo painted over?
Huckabee may have the LuxuryBus, but Ron Paul has clearly won the battle for domination of strategic 6th Street storefront space in the Des Moines Building, squeezing the HuckaBees into a forlorn corner.
Meanwhile, a bitter and ugly usage battle in the Des Moines Register editorial board spills into the open:
Ask not for whom the bell tolls...
...when you can ask for who the bell tolls.
The circus leaves town Friday, to the disappointment of landlords of class C street level space throughout Iowa.
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LAST DAY OF THE YEAR CHECKLIST
December 31, 2007
There's no extension for this deadline. The tax year ends at midnight tonight, and with it ends most of the best opportunities to reduce your 2007 taxes. If you are so inclined, here are a few things you can do yet today:
- Sell loser stocks to offset capital gains, plus $3,000.
- Make a charitable donation by check or credit card.
- Make an annual exclusion personal gift, if the funds or assets transfer today. A check written today that doesn't clear until next year is considered a 2008 gift.
- If you are a cash-basis taxpayer, any deductible expense in a check mailed today or charged to a credit card today is deductible this year.
- If you are an accrual method taxpayer, be sure to make checks today for any related-party expenses that you want to deduct this year.
- Today's the last day to establish a qualified retirement or profit-sharing plan if you want a 2007 deduction.
- If you have an S corporation with current losses, a capital contribution or loan by you to the corporation today may allow you to deduct your loss this year.
- If you're in love, or are falling out of love, remember - your filing status at the end of the year is your filing status for the whole year.
See you in 2008!
This is the final installment of our 2007 year-end planning series.
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WHAT DO YOU SUPPOSE TIPPED HIM OFF?
December 31, 2007
"In hindsight, I believe I was not wise."
What do you suppose tipped off Minnesotan Robert Beale that it wasn't a good idea to embrace tax-protester arguments, stop paying taxes, and then jump bail before his trial? Maybe this:
Now Beale wears the orange jumpsuit of a jail inmate, back in custody after 14 months as a fugitive. His wife has divorced him and seized his assets. His son has ousted him from the Maple Grove computer firm Beale founded.He spends his days in a jail cell, preparing for a trial that could send him to federal prison for a decade or more for tax evasion and unlawful flight.
That sort of insight must have helped Robert Beale build his successful computer firm in Minnesota. The quotes are from an interesting and sad profile of Mr. Beale in the Mineapolis Star-Tribune.
While Mr. Beale has finally grasped the obvious -- that his strategy was unwise -- it appears that he doesn't yet fully grasp just how unwise he was, and how unpersuasive he sounds. Here he speaks of the nearly $5.7 million in income he skipped taxes on after having it paid to a dummy corporation:
"It wasn't hidden from anyone," said Beale. "The accounting department knew what my income was. The government could have called me or written my company and found out what my income was."
Right. All the IRS had to do was call Mr. Beale, and he would have patiently explained the entire tax fraud. Why are they picking on him?
While he was on the run, his wife divorced him, walking away with his $5.6 million stake in the computer company he founded, his $2 million home in North Oaks, Minnesota, and his $1.9 million Florida place. Now the 64-year old Mr. Beale faces a decade in prison instead of a warm Florida retirement.
Mr. Beale says he started on this path after reading a book by tax-protest pied piper Irwin Shiff. It's stories like this that make it very hard to feel bad about the 13-year prison sentence that Mr. Schiff is serving.
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ENORMOUS VEHICLE TAX CREDITS
December 31, 2007
If you want the biggest "green" machine on the block, the IRS has answered your wishes by certifying the certifiably enormous GMC Yukon Hybrid model for a $2,200 hybrid vehicle credit for the 2008 model year (IR-2007-210). The Yukon and the Chevy Tahoe 2008 models are certified in both the 2-wheel drive and 4-wheel drive versions.
The IRS also certified the Saturn View Green Line for a $1,550 credit.
Remember, the hybrid credit only works for regular tax -- not for alternative minimum tax.
Link: list of qualifying vehicles.
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LAST DAY TO CAST YOUR 2007 TAXPAYER OF THE YEAR VOTE!
December 31, 2007
Yes, the polls close for selecting the prestigious Tax Update 2007 Taxpayer of the Year after today. Wesley Snipes, who just failed to get his trial moved out of Florida, holds a strong lead, but his fate is in your hands!
Lean about all of our worthy nominees here.
Meanwhile, Taxable Talk has named former NASCAR team owner Gene Haas his "Tax Offender of the Year." Mr. Haas won the award for using tax fraud to avenge himself for losing a patent infringement lawsuit -- an approach that logically is like robbing a bank because somebody wrote you a bad check. Mr. Haas will be able to celebrate his award when he is released following his two-year sentence.
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TIP YOUR WAITRESS
December 31, 2007
A grumpy restaurant regular left a big tip, even though he wasn't ever going to return for a meal:
For nearly seven years Melina Salazar did her best to put on a smile and tend to the every need of her most loyal and cantankerous customer. She made sure his food was as hot as he wanted, even if it meant he burned his mouth. And she smiled through his demands and curses. The 89-year-old Walter "Buck" Swords obviously appreciated it, leaving the waitress $50,000 and a 2000 Buick when he died.
As a bonus, she'll get the money tax free, as bequests aren't subject to income tax. Still, it's not wise to assure your waitress that you'll tip her over your dead body.
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PARTY LIKE IT'S 2007...
December 31, 2007
...at the new Carnival of Taxes at Kay Bell's place.
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EXTREME YEAR-END TAX PLANNING
December 30, 2007
The Tax Update's 16-year old son is the bass player for a little jazz combo. They had their first wedding gig last night, which makes my romantic mind ponder whether the happy couple could have paid the band with their tax savings had they put off the wedding for a week. It matters - your marital status on the last day of the year is your status for the entire year, for tax purposes.
Congress attacked the marriage penalty with much fanfare a few years ago, but as with most things politicians talk a lot about, it was more talk than action (it's the stuff they don't talk about that really causes trouble). They did get rid of the marriage penalty for the 15% tax bracket, but at higher income levels, getting married still carries a tax penalty. If our happy couple were both upwardly mobile professionals with taxable incomes of $74,200 in 2007, getting married in 2007 would cost them $597 - and that goes a long way towards paying the band.
In addition to the penalty built into the rates (and, some misanthropes would say, into the institution), there are some other tax penalties to marriage. These include a quicker phase-out of itemized deductions and a reduced ability to deduct capital losses.
So if tomorrow is the day you and yours plan to yoke your fates together, best wishes - especially if you try to convince her to wait a week to save on your taxes.
And if you are the person who found the Tax Update with the Google search, "how much tax savings for a new baby before year end," now that's extreme tax planning. But go for it! A baby born today or tomorrow gets you the same 2007 $3,400 dependent exemption and $1,000 child credit as one born last March. Or you can at least get started on next year's tax planning.
Now, ladies and gentlemen, get ready to ring out 2007 with The Saturn V:
This is the penultimate installment of our 2007 year-end tax planning series.
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CHARGE!
December 29, 2007
Yesterday's post explained how "the check is in the mail" rule works for getting deductions this year. But who uses checks anymore? All those new economy whippersnappers use credit or debit cards or online transfer services like Paypal to pay their bills. When does a cash-basis taxpayer -- and that means almost all humans -- get deductions for those transactions?
For expenses charged to a credit card, the expense is deductible the day the expense is charged to the card -- not the later date when you pay the credit card company.
If you use a debit card or Paypal, the deduction likewise should occur for tax purposes at the time of the initial transaction. A debit card immediately transfers funds from your bank account, while Paypal either debits your bank account or charges your credit card, giving you the deduction either way.
There are two more installments in our series of 2007 year-end tax planning posts, assuming 2007 isn't extended. Collect them all!
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YEAR-END DEDUCTIONS: IS THE CHECK IN THE MAIL?
December 28, 2007
Yesterday we talked about how "the check is in the mail" doesn't cut it for estate and gift tax purposes.
Fortunately, a looser standard applies for income tax purposes. If a cash-basis taxpayer wants to claim a deduction for income tax purposes, it's normally good enough to have the check in the mail by December 31 this year to claim your deduction.
There are exceptions, of course. Having the check in the mail obviously doesn't create a deduction for something that's not deductible to begin with. Also, it doesn't override the related-party rules, so a check to an expense due a related party either has to be included in that party's income in the year the check is written, or the deduction has to be deferred until the income is reportable.
But for the most part, having the check in the mail gets you the deduction. If the deduction is a big one, it's wise to send the check using certified mail, return receipt requested, to prove that you mailed the check. It's worth the extra postage to avoid trying to explain to the IRS why a charity didn't bother to cash that big check until March.
There will be three more installments in our 2007 year-end tax planning series. Don't miss any!
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TAX PROCESSING TO START ON TIME FOR MOST TAXPAYERS
December 28, 2007
The IRS has announced that tax processing will start on time for most taxpayers, but that return processing will be delayed for some taxpayers affected by the belated enactment of the AMT patch. Processing won't start until around February 11 for taxpayers with the following forms in their returns:
* Form 8863, Education Credits.
* Form 5695, Residential Energy Credits.
* Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
* Form 8396, Mortgage Interest Credit.
* Form 8859, District of Columbia First-Time Homebuyer Credit.
Kay Bell and Russ Fox have more.
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LOOKING BACK, LOOKING AHEAD
December 28, 2007
The Tax Grrrl looks back on 2007, while the Tax Policy Blog has a 10-item wish list for 2008. Sadly, I think they'll go 0-10.
Meanwhile, our Taxpayer of the Year voting is coming down to the wire. Remember, we're like the South Side - just because you've voted doesn't mean you can vote again! At least through December 31.
Learn more about the worthy nominees here.
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GUYS CAN BE INNOCENT SPOUSES TOO
December 28, 2007
Russ Fox tells the story of a guy who married an embezzling tax cheat, but thanks to the Tax Court, didn't adopt her tax liability.
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WHEN IS A GIFT COMPLETED?
December 27, 2007
So far in our 2007 year-end tax planning series, we've talked about things you have to do for year end. We haven't really talked that much about exactly how you get some things done.
One area where getting something done by year-end is critical is the gift tax area. If you fail to use your $12,000 per-donor, per-donee annual exclusion for 2007, it is lost forever. That means you have to make sure you complete your annual exclusion gifts before the clock strikes 12:00 January 1.
The check has to clear to complete the gift. If you write a check for a $12,000 gift on December 31, 2007, but the recipient doesn't cash it until January 2008, it is a 2008 gift. The IRS says a check isn't a completed gift until it is cashed.
So if you want to give somebody a check as your year-end gift, you'll want to give them a cashier's check before year-end. The tax law calls that a completed gift because there you can't stop payment on a cashier's check.
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BROKEN JADE
December 27, 2007
The IRS has won an across-the-board victory in the U.S. Court of Claims over the "Son of Boss" tax shelter.
The case involved three Texans who together had $40 million in capital gains on which they didn't care to pay taxes. They each bought bought a Euro option for $15,000,020 and sold an offsetting option for $14,850,018 - a spread of $150,002. Any increase in the value of one option was almost perfectly offset by a decline in the value of the other option, so there was only $150,002 really at stake, and that was all the each of the Three Texans were out-of-pocket. Well, that and $900,000 in fees to the promoters and facilitators of the shelter.
The partners contributed the offsetting positions to Jade Trading LLC, which was treated as a partnership under federal tax rules. They claimed a basis of $15,000,020 basis in each partnership interest, relying on a technical reading of the tax law that ignored their "contingent" liability for the $14,850,018 option they wrote. They then sold their partnership interests for their $150,000 fair market value, claiming the $14,850,000 difference as a capital loss.
The Court of Federal Claims struck down the transaction under what you might call the "too good to be true doctrine." The court said there was no "economic substance" to the deal, so the tax law does not have to respect its formalities:
A final indicium of the lack of economic substance here, while not dispositive in and of itself, is the highly disproportionate tax advantage to the underlying monetary outlay -- the tax loss per brother, $14.9 million, was roughly 65 times greater than each LLC's $225,002 financial commitment to Jade, almost 100 times each LLC's $150,002 investment in the spread transaction which generated the loss, and approximately 100 times the $140,000 potential net profit each LLC could have earned.In sum, this transaction's fictional loss, inability to realize a profit, lack of investment character, meaningless inclusion in a partnership, and disproportionate tax advantage as compared to the amount invested and potential return, compel a conclusion that the spread transaction objectively lacked economic substance.
The court disallowed the deduction and upheld a 40% "gross valuation misstatement penalty," making the transaction a bad deal all around for the participants.
The shelter at issue in Jade Trading was the brainchild of accounting firm BDO Seidman's "TAX $ELLS!" division, "known internally as the 'Wolf Pack.'" Other national firms sold similar shelters, including those that triggered the KPMG criminal prosecutions. Defenders of the promoters used to say that "these shelters haven't been ruled illegal." Not any more.
The TaxProf has more, including a link to the opinion.
Other coverage:
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MORE ON S CORPORATION HEALTH INSURANCE
December 27, 2007
I discussed Notice 2008-1 with one of its authors this morning. The notice outlines the IRS views on how S corporations should deal with employer-provided health insurance for 2% shareholder-employees (background here).
The key to the ruling is this statement:
In order for the 2-pecent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employee’s Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040, U.S. Individual Income Tax Return.
The ruling didn't spell out how this would work in some situations. For example, many employers only cover part of the cost of employee health insurance, with the rest of the cost withheld from employee compensation -- on an after-tax basis, for shareholder employees. According to Mireille Khoury of the IRS, such employees will be able to deduct their contribution to the health insurance costs as long as the amount withheld to cover their share is included in the employees' "Box 1" income on Form W-2, and as long as the employer makes the actual remittance to the insurer. The same result will apply even if the entire premium amount is withheld from after-tax income for remittance by the employer.
Prior coverage here.
UPDATE here.
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IS IT STILL DEAD?
December 27, 2007
President Bush has signed the Humongnibus Budget Train Wreck Act (HR 2764), which pulls the $50 million federal funding for Earthpork, the indoor $180-$300+ million giant tulip garden / casino rainforest slated for Pella. Unless the Department of Energy acted quietly before the signing on Earthpork's last minute matching-funds application, this means the project will have to proceed without federal funds. As it has yet to raise any private cash (as distinguished from funny-money "in-kind" grants), that would seem to spell the end of the line for a project that has been variously slated for Des Moines, Coralville, Grinnell, Dubuque, and Riverside.
More here.
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WHEN DO I HAVE TO PAY AN EXPENSE TO DEDUCT IT?
December 26, 2007
The headline of this post is one of the more common search phrases used to reach the Tax Update from search engines. The answer? As with so many things in the tax law, it depends.
In general, if you are a cash-basis taxpayer, you have to pay your business expenses by the last day of the year to deduct them. If you are an accrual-basis taxpayer, you have to clear the "all-events test" -- that is, all events to determine the liability must have taken place by year-end, and the liability must be determinable with reasonable accuracy.
But that it would be so simple. For example, even cash-basis taxpayers may deduct deduct contributions made after year-end to qualified retirement plans that are set up by year-end, as long as the contributions are made by the due date of the tax return.
Most of the time, though, the tax law looks to limit your ability to deduct expenses paid after year-end. For example, even accrual-basis taxpayers can't deduct expenses accrued to "related" cash-basis taxpayers (read the extended entry by clicking "read more" to see who these relatives might be). Such expenses are deductible to the accrual basis taxpayer only when the related cash-basis taxpayer has to record the income. Even when unrelated parties are involved, the expense is deductible only if "economic performance" has occured. That exception to the "all-events" test itself has an exception, the "recurring item exception."
Compensation is normally deductible for accrual-method payors if the expense is actually paid within 2 1/2 months of year-end. When the recipient is a related party, though, the expense is deductible only in the year paid.
Finally, even expenses paid before year-end normally are non-deductible if they purchase a benefit that goes out beyond one year. If, for example, you prepay your tax fees for five years (an idea that I would always encourage for my own selfish reasons), you would only get to deduct the amount for the next 12 months. The remaining prepayment would be capitalized and deducted in the year to which it applies.
So for your year-end planning, this means:
- You have to pay related cash-basis taxpayers by year-end to get the deduction this year.
- You have to have your qualified plan set up by year-end to deduct contributions for this year, but you have until the return due-date to make the contributions.
- Don't overdo prepayments (except perhaps to your friendly tax preparer). If you prepay beyond one year, such prepayments aren't currently deductible.
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DON'T TRY THIS YEAR-END PLANNING TECHNIQUE
December 26, 2007
Don't stop filing your taxes based on tax protester arguments. The IRS really doesn't like that, and you'll lose, like this man:
A federal judge in Corpus Christi on Thursday sentenced a 58-year-old Odem man to a little more than a year in prison for trying to avoid paying income tax for four years.Dale Franklin Chastain was convicted in October on four counts of willfully attempting to evade and defeat income tax from 2000 to 2004, according to a news release from U.S. Attorney’s office
But for heaven's sake, if you do such a foolish thing, at least keep your mouth shut:
Chastain was accused of sending hundreds of pages of letters starting in 1999 to tax officials, members of Congress and others citing a variety of reasons why he was not subject to the country’s tax laws, including that he was a “non-resident alien” and because wages were not income.
A non-tax equivalent to this would be to call ahead to the bank and ask if they are open between 12 and 1 for a hold-up, and then to ask the police department to help you out by staying away from the bank at that time because their presence would be inconvenient.
Russ Fox rounds up other tax crime news.
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TAXATION WITH REPRESENTATION
December 26, 2007
This won't help voter turnout efforts in Thailand:
Tax dodgers arrested at polling boothThree high-profile tax dodgers were arrested on Sunday after years on the run when they turned up to vote at a polling station in Pomprap Sattruphai district.
The presumption of innocence is especially in order in foreign tax cases, which can be spun from thin air to silence opposition (see Putin's Russia). Still, the phenomenon of the civic-minded tax cheat is wonderful to contemplate.
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A TAX TIP FOR CHRISTMAS
December 25, 2007
We promised a tax planning post each day through December 31, and we keep even ill-considered promises at the Tax Update.*
In the spirit of the season, we'll just note today that if a charitable contribution is billed to your credit card in 2007, it is deductible in 2007 - even if you don't pay the bill until 2008.
If you are in a giving mood, here are links to some worthy charities that will take online credit-card donations:
Salvation Army
Heifer Project
Soldiers Angels (assists armed forces members and their families)
USO
Iowa Donor Network (Iowa's organ donation facilitator)
Hospice of Central Iowa
Merry Christmas!
*In case you think we're crazy, we're keeping this promise through the miracle of "scheduled postings."
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PAY EXTRA TAX THIS YEAR? ARE YOU CRAZY?
December 24, 2007
Tax advisors spend a lot of time looking for ways to punt income into the hereafter. It almost feels like heresy to suggest accelerating income. Yet in some narrow circumstances paying extra tax this year can save you money.
One example we see occasionally arises from the way the AMT exemption phases out. For 2007, the AMT exemption is $66,250 on joint returns, but it is reduced by 25 cents for each dollar adjusted gross income exceeds $150,000. This creates a hidden extra bracket for the AMT. While the stated top rate for AMT is 28%, the phase-out makes the real top rate 35% until the entire exemption is phased out (at AGI of $415,000 for joint filers). The phase-out also cause an extra hidden bracket on long-term capital gains, which are otherwise taxable at 15%.
If you have an item of taxable income that you can choose to take in either 2007 or 2008 (lucky you!), you might be better off taking the income this year and paying the tax sooner. It works if:
- Your 2007 income is already above the AMT exemption phase-out amount
- You will be subject to AMT in 2008, and
- Your 2008 income will be in the phase-out range.
A simplified example of an Iowa married couple illustrates this. The couple has $500,000 of 2007 income and will have $200,000 of 2008 income. They have another $100,000 of capital gain income they can choose to take in either year. They have two children, and their only itemized deduction is state income taxes.
If they take the $100,000 in 2007, their combined tax over the two years is reduced by over $6,000; if it is taxed in 2008, it is taxed in the hidden AMT phase-out bracket, while if it is taxed in 2007, it is only taxed at a the normal capital gain rate. The totals:
Be careful! If you are going to accelerate your income, and your taxes, you'd better be pretty confident you know what your income will for both 2007 and 2008. Talk to your tax advisor before you start throwing your income around among your tax years.
This is another in our daily series of 2007 year-end tax planning posts. Look for a new post daily through December 31.
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TIS THE SEASON...
December 24, 2007
...for the Twelve Blogs of Christmas, Dan Meyer's annual roundup of notable new tax and finance blogs. Celebrate the season bloggily with his roundup of the last three years' worth of Twelve Blogs.
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WHY NOT? I'LL TELL YOU WHY NOT!
December 24, 2007
Don't Mess With Taxes on the mortgage deadbeat tax break:
But, hey. It's Christmas time and the 2008 presidential election year officially begins in a few days. So why shouldn't politicians hand out gifts, tax and otherwise, all around.
Because they're not paying for them! We are. You're not getting a gift when they charge it to your credit card.
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YEAR-END: MID-QUARTER?
December 23, 2007
One of the more obscure tax traps at year-end is the "mid-quarter convention." Normally the tax law computes depreciation on fixed assets as if they were placed in service in the middle of the year - the so-called "half-year convention."
When a company places more than 40% of its new assets in service in the last three months of the year, different rules apply. When that happens, depreciation for each asset starts at the midpoint of the quarter in which it is placed in service. This can have an unhappy effect on your deductions.
Example: Snow Co. has placed in service two assets during the year: a machine costing $600,000 that went into service July 31, and another machine costing $399,000 that was up and running October 15. Both assets have five-year tax depreciation lives. The depreciation for these two assets for the year would be $199,800, computed for 1/2 year under the tax law's 200% declining balance depreciation method.But then Snow decides to go online and buy a $1,001 computer, which is placed in service December 29. Suddenly more than 40% of the new assets for the year have been placed in service in the last three months of the year, and the mid-quarter convention applies. The depreciation for the $600,000 machine is computed starting in the middle of the third quarter and comes out to $90,000. The depreciation for the other $400,001 is computed for 1/8 of a year, as the assets are deemed to go into service at the midpoint of the fourth quarter; that deduction comes out to $20,000.05.
So, by adding a $1,001 asset at year-end, Snow Co. has reduced its depreciation deduction from $199,800 to $110,000. And five cents.
So if you are in a hurry to get assets in service before year-end, slow down and make sure that you don't end up reducing your depreciation by going into the mid-quarter convention.
Stop by daily through December 31 for another year-end tax planning post. Collect them all!
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CSI - NO, NOT THE TV SHOW
December 22, 2007
If you are an Iowan with college costs in your future, or even in your present, the College Savings Iowa Section 529 plan might be a good place to make a year-end tax planning move.
Section 529 plans allow you to put away money in an IRA-like account where the earnings are tax-free, and permanently tax exempt if used for college costs. There is no federal deduction for Section 529 contributions, but you can 2007 deduct contributions to College Savings Iowa on your Iowa 1040, up to $2,595 per donor, per donee. That means a married couple with two children can deduct up to $10,380 in CSI contributions. For a top-bracket Iowan, this works like a 6+% subsidy for making the investment.
You can contribute more than $2,595, but only that much is deductible.
If you have students in college already, you can contribute to the plan and use it to pay the tuition - in effect giving you a deduction for part of the annual tuition.
College Savings Iowa uses low-cost Vanguard "Life Cycle" funds, which helps keep your college savings from being eaten up by broker and mutual fund fees. CSI also has individual portfolios, if you want to try to outsmart the market.
To get your Iowa deduction, make sure you postmark your 2007 contribution by 12/31. You can enroll in CSI online here.
Remember, Section 529 plan gifts count towards the $12,000 annual gift tax exclusion, so keep that in mind if you want to maximize your use of annual gift tax exclustions.
This is another installment in our daily series of year-end planning posts.
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FESTIVE INDOOR JAZZ STYLINGS
December 21, 2007
The Julius Brooks Jazz Trio improved the lunch hour in Downtown this afternoon.
Improve the chances of a deserving nominee to be our 2007 "Taxpayer of the Year." Consider one of the lesser known candidates - someone like Creed J. Pearson, who offered to settle his own back taxes by auditing the Scientologists.
Check out all of the worthy nominees here, and vote daily through December 31!
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INDIVIDUAL RETIREMENT ACCOUNTS COME OUT IN THE WASH (SALE)
December 21, 2007
We mentioned the dangers of "wash sales" the other day. The wash sale rules disallow a loss on the sale of stock if you buy shares of the same stock within the thirty day periods before and after the day you sold the loss stock.
Yesterday the IRS said that the wash sale rules also disallow losses on stock when you buy identical replacement shares in an IRA (Rev. Rul. 2008-05).
This makes buying shares of your loser stock in the 61-day wash sale window a worse deal than buying them personally. If you do a wash sale in a personal account, the disallowed loss increases your basis in the purchased shares that triggered the wash sale rules, so you can get the loss eventually. If you trigger the wash sale rules by purchasing through an IRA, you never get the benefit of the loss.
So - you can still sell loss stock and deduct the losses against capital gains this year. But beware the wash sale rules - and don't try to get around them with your IRA.
Links:
TaxProf Blog
Tax Guide for Investors
This is part of our series of posts on 2007 year end tax planning - one a day through December 31!
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THE BIG PICTURE
December 21, 2007
Part of the Iowa Caucus landscape is yard signs with this picture:
It is an abbreviated version of this:
The signs are from "Iowans for Sensible Priorities," a group that wants to cut defense spending and spend it on other things. The chart shows Pentagon spending as red in the "discretionary spending" pie.
Talking only about "discretionary" spending leaves something out. So, courtesy of Marginal Revolution, here is the big picture:
It looks a little bit different if you include the three largest domestic spending programs, Social Security, Medicare and Medicaid, and interest on the federal debt. But they are on auto-pilot, so we're not supposed to talk about them in polite company.
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RANGELING A VIRGIN ISLANDS TAX BREAK
December 21, 2007
A U.S. Virgin Islands economic development program has developed a lot of IRS trouble for some rich folks, reports the New York Times today.
Congress last year made it easier on the IRS to track down Virgin Islands tax cheats by enacting an open-ended statute of limitations for them. Now Charles Rangel, the Chairman of the House Ways and Means Committee, wants to restore the three-year limit.
The IRS has written Senator Grassley to oppose closing the statute, and the letter shows that the IRS has a keen interest in Virgin Islands "residents," with 279 examinations underway. The IRS says the Rangel proposal would shut down many of the audits:
The IRS is conducting civil income tax examinations on 279 individual taxpayers who claimed to be bona fide residents of the USVI and filed their income tax returns with the BIR and not the IRS. Examinations of 260 of these individuals involve taxable years prior to 2004 that would be immediately affected by the statute of limitations change, which will esult in barred deficiencies. In addition, examinations of 16 entities would be immediately affected by the proposed change.
In addition to the 279 civil audits, there are 80 criminal investigations underway, according to the letter, 21 of which have been referred to the justice department for prosecution. These include an Illinois auto dealer whose case we've talked about.
The Virgin Islands arrangements were peddled nationwide to wealthy individuals, including some in Iowa (though I know of no Iowans who bought such an arrangement). The letter says the median income of those being audited is $750,000, and that the taxpayers under investigation include 18 hedge fund managers. The total tax credits claimed under the Virgin Islands economic development program that underlies the arrangements exceed $370 million, according to the letter.
It's interesting how the Charlie Rangel, scourge of the hedge fund manager, is trying to be a good friend to a few of them.
LInks:
November 9 letter from IRS to Senator Grassley on USVI examination activity
Notice 2004-45, where the IRS announced its unhappiness with the Virgin Islands arrangements.
Tax Update coverage: TREASURY GOES AFTER VIRGIN ISLAND TAX SCHEMES
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AN UNDERSTANDABLE REACTION TO THE CAUCUSES
December 20, 2007
A man takes a high dive into a shallow Des Moines river - and survives. The linked video shows his rescue (after an annoying commercial). Note the bridge height, and the water depth, in the link.
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THE $12,000 CHRISTMAS PRESENT
December 20, 2007
The income tax isn't the only tax that deserves holiday season attention. You still have 11 days to make a dent in your estate tax. Don't assume that Congress will deal wisely and responsibly with the estate tax. If they do nothing, it will come roaring back in 2007 with a lower exemption and a higher rate.
Assuming you are fortunate enough to have such worries, there are some easy things you may still be able to do this year. The first tool you should reach for is the $12,000 per donor, per donee annual gift tax exclusion. This is available every year, but once the year is over, your chance to use that exemption is gone forever.
You might think that if you have a net worth high enough to worry about the estate tax - over $1 million, assuming current law and assuming you live to 2011 - the $12,000 exclusion is too small to worry about. You'd be wrong. Think about the math. Say you are a married couple with two children and four grandchidren. Assuming you like them, that means you can give away between the two of you 12 annual exclusion gifts each year, totalling $144,000. If you continue to like your descendants, you can push $1,440,000 out of your taxable estate over ten years $12,000 at a time, saving about half that in estate taxes on your death.
Remember, the checks have to clear by year-end, so if you are making your year-end gifts, don't wait much longer.
Visit the Tax Update each day through December 31 for the latest installment in our year-end tax planning series.
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THANKS, SANTA, BUT GO AWAY
December 20, 2007
If it's true that tax practitioners like new legislation adding complications so that our clients become even more dependent on us, well, our cup runneth over for the holidays. Congress is finishing up five bills to the president this week affecting the tax law in one way or another:
- The AMT Patch
- The mortgage debt forgiveness bill
- The energy bill
- A bill for military tax breaks, with attached technical corrections
- A bill with tax breaks for families receiving funds from the Virginia Tech shootings
The Congresscritters are also working on a farm bill with tax provisions larded in among the New-Deal subsidies that have outlasted the Depression by 67 years now. If they pass it, all tax geeks will need from Santa is a bigger stocking.
The only bad thing about these "gifts" is we can't return them for something useful.
AWFUL TAX POLICY IN SO MANY WAYS
There is so much bad tax policy in these bills, it's hard to know where to start. First, when you change the tax law constantly - six times just this month - that is bad policy by itself. When the law constantly changes, even the most diligent tax professional has trouble keeping up, and the poor taxpayr doesn't have a chance.
The AMT Patch is bad policy spawned by bad policy. The idea of having an "alternative" tax system as a "backup" for the regular system is just a way for politicians to have their cake while eating it. It gives away tax breaks with one hand to buy votes while taking them away with the other to show their concern for the "little guy" who isn't paying income taxes anyway. Rather than enacting a tax law that gets rid of the AMT and deals with the abuses it was supposed to address, the Patch just kicks the problem into next year, where Congress again will flail to deal with it ad-hoc.
The mortgage deadbeat relief bill has the bad policy of treating mortgage deadbeats better than other deadbeats just because they gambled on the real estate market, rather than, say, the stock market or the ponies. It does so temporarily, which is a bad idea, while making the exclusion for home sales (arguably a bad idea by itself) yet more complicated, which is never good. It also moves up part of a 2012 corporate estimated tax payment by one quarter, causing software and administrative complications to "pay for" the deadbeat relief by accelerating tax receipts that would be paid anyway by three months.
The energy bill limits itself to diddling with depreciation lives for some energy assets. The military bill makes the umpteenth change in military tax in the last 5 years, while fixing screw-ups from prior hyperactive tax legislative efforts. And the Farm Bill is just loaded with special interest tax subsidies, paid for by obscure traps and foot-faults and an "economic substance" provision that the IRS and Treasury have always opposed as bad and unecessary, but which the Congressional tax scorers call a "revenue raiser," making it an irresistable "pay-for."
Even the Virginia Tech thing is bad policy. Certainly the families of the victims deserve sympathy, but do they deserve it more than, say, the families Omaha Mall shooting victims? Or the family of the teenager who was stabbed in Des Moines this week? If Congress wants to help murder victims, they should write a tax law treating murder victims right to begin with, rather than narrow publicity stunts to ride the headlines.
IS THERE A SOLUTION?
Advocates of various tax elixirs say their plan will keep Congress from diddling with the tax law. That's fantasy. For example, a 30% national sales tax would make the lobbying game an even more high-stakes field than it is now.
Two things would help things get better. One would be an awareness that every tax break comes with a cost. Each tax break adds complexity and takes money out of the pockets of the majority of taxpayers who don't qualify. If politicians promising tax breaks were properly identified as picking your pockets on behalf of some lobbyist, maybe they'd keep their fingers to themselves.
The other thing that would help would be adults in key policy positions - Treasury Secretary, and chairmen and ranking members of the tax policy committees. If they did their jobs, they would be looking out for the interests of the rest of us against those who are constantly trying to take our money through targeted tax breaks. So much for any hope there.
BLOG COVERAGE OF THE AMT PATCH:
Tax Policy Blog (here and here)
Tax Grrrl
The Wandering Tax Pro
Taxable Talk
The TaxProf.
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IRS ISSUES APPLICABLE FEDERAL RATES (AFR) FOR JANUARY 2008
December 20, 2007
The IRS has issued (Rev. Rul. 2008-4) the minimum interest rates for loans made in January 2008:
-Short Term (demand loans and loans with terms of up to 3 years): 3.18%
-Mid-Term (loans from 3-9 years): 3.58%
-Long-Term (over 9 years): 4.46%
Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.
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I WAS ROBOPOLLED
December 19, 2007
I was one of the lucky 496 people who answered the phone for the December 17 Rasmussen automated phone survey of likely Iowa Caucus-goers. I know it was that survey because it asked the screening questions Rasmussen discusses here.
A lot of good it did. Both my first and second choices are at single-digit levels. So much for my influence.
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HOUSE CAVES, AMT PATCH PASSES
December 19, 2007
The House of Representatives caved this afternoon and passed a an "AMT Patch" for 2007 with no offsetting tax increases. The President is expected to sign the bill.
The House apparently passed the version of HR 3996 passed by the Senate December 6. The bill increases the AMT exemption to $66,250 for a joint return and $44,350 for single filers. The amounts were $62,550 and $42,500 for 2006. If Congress had failed to pass a "patch," the exemptions would have reverted to $45,000 for joint returns and $33,750 for singles, adding an estimated 19 million additional taxpayers to the AMT rolls.
As the patch only covers 2007, it kicks the problem into 2008 - an election year. More fun awaits.
Link: Statement by Treasury Secretary
Related: HOUSE PASSES DOOMED AMT PATCH BILL
UPDATE: The TaxProf has a roundup.
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EARTHPORK DEAD?
December 19, 2007
It looks like Congress may have put Earthpark out of its misery. The omnibus budget bill passed last night and headed for signature by President Bush pulls the funding for the indoor rainforest slated for Pella.
There is a slim chance for it to live. The project has filed a request for federal funds with the Department of Energy, and the Des Moines Register reports that "Grassley's office said the grant could still be allocated if the DOE acts before President Bush signs the bill, as expected, on Friday."
If they move that quickly, it will break all sorts of bureaucratic records.
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WIN THE YEAR-END TAX GAME WITH LOSERS
December 19, 2007
This is the time of year when having clinkers in your stock portfolio isn't quite so painful. If you have capital gain for the year, you still have a few trading days to offset them by selling your loser stocks. Just remember a few simple rules:
-The loss has to be realized in a taxable account. Selling a loser in an IRA or 401(k) plan doesn't give you a deductible loss.
-Be sure the trades are executed no later than December 31. For long positions, the trade date controls.
-If you have a loss on a short sale, the settlement date has to be no later than December 31.
-You can't buy the same stock within either 30 days before the sale or 30 days afterwards. If you do, the "wash sale" rules disallow your loss.
Remember: capital losses are fully deductible to the extent of your capital gains. They can also offset up to $3,000 in ordinary income. Losses over that amount carry over to future years. So bid your losers a fitting farewell by selling them this year to help you out at tax time.
This is another in our series of daily tax ideas through December 31. Collect them all!
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RISK FOR THE HOLIDAYS
December 19, 2007
The new Cavalcade of Risk is up at American Consumer News. Always good stuff their on risk-management issues.
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CONGRESS TAXES PEOPLE WHO PAY THEIR LOANS TO GIVE A BREAK TO DEADBEATS (UPDATED AND CORRECTED)
December 19, 2007
The House of Representatives sided decisively with deadbeats against people who pay their loans yesterday. By voice vote, they passed H.R. 3648 to allow taxpayers with a net worth over $2 million to exclude up to $2 million of debt forgiveness from income tax-free.
The "pay-for"? If you have a vacation home that you move into full-time after 2007, your gain exclusion on a future sale will be reduced to reflect the amount of time after 2007 that the house wasn't your primary residence. Or, to put it another way, people who pay their loans will pay higher taxes so deadbeats don't have to.
UPDATE: The vacation home pay-for was omitted from the final bill; I apparently was looking at an earlier version. I apologize for the error.
The sad thing is, if you have negative net worth, or are in bankruptcy, debt-forgiveness is already tax free. By definition, this tax break applies only to people who have enough net worth to pay the amount covered by the tax break. This treats debtors who lost their bets on the real estate market better than, say, those who run up debts stock trading margin accounts or at the casinos.
There must have been overwhelming public support for this giveaway to pass Congress so quickly. Oh, wait...
Congress also passed an energy bill and a veterans benefits bill with minor tax provisions, but the AMT patch bill languishes. The TaxProf rounds things up.
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ANOTHER AREA WHERE DES MOINES IS RANKED HIGHLY
December 19, 2007
Of the largest cities in each state (and D.C), Des Moines has the 6th highest tax burden for a family of three. We're lower than New York, but significantly higher than Kansas City, Minneapolis or Chicago. The burden is $10,225 for Des Moines and $4,257 for 48th-place Sioux Falls.
I wonder if that affects business location decisions?
No wonder Project Destiny was crushed. If it had passed, we'd certainly have leaped past Detroit.
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HEY, GREAT IDEA!
December 19, 2007
I wonder why nobody thought of this before:
“Creditors would be prohibited from…extending credit without considering borrowers’ ability to repay the loan”
- From proposed Federal Reserve Regulations. (Via Tax Vox).
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YEAR-END GIVING: WHY APPRAISALS MATTER
December 18, 2007
Yesterday we mentioned the need to get "qualified appraisals" for charitable donations of property other than publicly-traded securities. The Tax Court issued a decision yesterday that illustrated our point.
The Smith family of Scottsdale, Arizona ran an employee benefits firm called Beneco. They transferred the firm to family partnerships they owned for estate planning purposes. They later donated part of their interests to a charity, claiming all together over $2 million in charitable contributions.
The taxpayers filed the required form 8283, Noncash Charitable Contribtuions, with their returns. And the trouble began.
First, they described the donated property as "FLP Beneco Stk," rather than the name of the actual partnership. They failed to attach the required appraisal summary reports to their tax returns. For some years the appraisals were prepared by their CPA tax preparer, who wasn't a "qualified appraiser." For other years, the appraisal information attached to the return fell short of the tax law's requirements.
The taxpayers said that they should still get their deductions on the grounds that they "substantially complied" with the tax law rules on contributions. The Tax Court held otherwise:
We hold that petitioners did not provide sufficient information and/or submit the documents required to have substantially complied and they are, therefore, not entitled to deductions for noncash charitable contributions of FLP interests, as determined by respondent. Petitioners, in each year under consideration, did not attach to their returns qualified summary appraisal reports as required by the statute and the regulations. In addition, it has not been shown that petitioners' C.P.A. was a qualified appraiser within the meaning of the regulatory requirements. Moreover, certain of the reports that were referenced on the returns were not shown to exist, and none of the purported reports or documentation submitted met the time requirements for their preparation and submission. The contributed property interests were not fully or adequately described so as to permit respondent to understand the valuation methodology, and the documentation submitted was terse and did not adequately explain the bases for the values claimed.
Bottom line? The loss of the entire deduction for all years before the Tax Court.
The Moral? If you are giving year-end gifts other than public securities, don't skimp on the appraisal. If you don't give the IRS the information they want, your deduction may disappear.
Additional tip: If you ARE making year-end gifts of publicly traded securities, get on it - sometimes charities and brokers get behind on their paperwork, and if it isn't done this year, your deduction will have to wait until 2008.
Cite: Smith, T.C. Memo 2007-368
Visit the Tax Update each day through December 31 for another 2007 year-end planning idea.
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IF IT'S SUCH A SMALL WORLD, THAT DATA HAS TO BE AROUND HERE SOMEWHERE
December 18, 2007
Iowa, already famous for it's skills at picking presidential candidates, has achieved another bit of accidental international noteriety:
The British government's IT security woes got deeper today when Transport Secretary Ruth Kelly reported to Parliament that the personal data of some 3 million U.K. drivers has been lost by a contractor in Iowa....
"In May this year, Pearson Driving Assessments Ltd, a private contractor to the Driving Standards Agency, informed the agency that a hard disk drive had gone missing from its secure facility in Iowa City, Iowa," Kelly said. "The hard disk drive contained the records of just over three million candidates for the driving theory test."
The records contained the driver's name, postal address, phone number, the test fee paid, the test center, a code indicating how the test was paid for, and an email address, Kelly said.
E-mail addresses? Just imagine how many wonderful new offers for replica watches and enhanced prowess our U.K. friends will now receive.
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