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-percent 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.
ADDITIONAL UPDATE: January 28, 2009
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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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HOLIDAY CARNIVAL
December 18, 2007
The lights are up, you're tired of shopping, so it's time to curl up with your computer and the latest blog carnivals!
The Carnival of Taxes is up at Kay Bell's place. The Carnival of Personal Finance is running at Get Rich Slowly. Always lots of good stuff there.
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SKYWALK MUSIC
December 17, 2007
There's lots of good music this time of year on the Des Moines Skywalk system. The Scott Davis Quartet entertained at Capitol Square today. Yes, they are a quartet; the bass player is the invisible guy in the middle.
Celebrate the holidays by participating in our "Taxpayer of the Year" voting. Vote daily through December 31.
You can learn about our worthy nominees here.
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SUBLIMINAL MESSAGES FROM THE IRS?
December 17, 2007
When you are on hold for the IRS practitioner helpline, they play selections from "The Nutcracker." So much for "kinder and gentler"?
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IT'S BETTER TO GIVE THAN TO RECEIVE; TO DEDUCT IS BETTER STILL
December 17, 2007
It's the time of year for giving. If you are in the under-70 set, you can't make big charitable contributions out of your IRA. Taxwise, then, your best way to give is with appreciated long-term capital gain property. A gift of, say, appreciated stock to a public charity is deductible at full fair-market value, and you never have to pay tax on the appreciation.
Publicly-traded stock is the most convenient way to give appreciated property, as there is no requirement for an appraisal. If you donate other long-term capital gain property, you have to get a "qualified appraisal" on gifts of $5,000 or more. No appraisal, no deduction. And remember, the stock has to be long-term capital gain property, held for over one year; ordinary income property is normally only deductible at cost (or value, if less).
Other year-end planning links:
Gina on 2007 IRA contributions
Kay Bell's year-end series, installments three, four and five.
This is another installment of our series on 2007 year-end planning. Check pack each day for another post through December 31!
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FRENZY OF FOOLISHNESS
December 17, 2007
As the Congressional year winds down, our elected representatives are working feverishly to do as much damage as possible in the short time allowed. The Senate did its part with a typically awful farm bill and a bill for the benefit of mortgage deadbeats.
Both bills have to be reconciled with differing House bills, so I won't wade into the details right now. Still, having recently ranted about the foolish policy generated by the "pay-as-you-go" budget rules, I can't help noting this from the Tax Analysts coverage of the deadbeat bill ($link):
To comply with five-year "pay as you go" budget rules, the legislation would increase by 1.5 percentage points the corporate estimated tax payments due for corporations with assets of at least $1 billion for payments due in July, August, and September of 2012.
So the provision is "paid for" by accelerating estimated taxes from the first three months after the end of the current "budget window," as if it were real new revenue. And these people criticize private-sector accounting practices.
I think I'm going to adopt a personal 5-week pay-as-you-go budget window. That means anything I don't have to pay in the next five weeks doesn't count as an expense. Time to buy that Ferrari! Hey, it's just what Congress does, only with a smaller window.
The TaxProf has rounded up coverage of the mortgage bill.
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WHISTLEBLOWER MURPHY ASKS FOR SUPREME COURT HEARING
December 17, 2007
Marrita Murphy, the whistleblower who rocked the tax world when she won a since-reversed decision ruling that taxing her damage award was unconstitutional, has asked the Supreme Court to hear her case.
Gregory Germain examines the Murphy certiorari petition at the TaxProf Blog today.
In sum, I would be very surprised if the Supreme Court granted this petition. Most of Ms. Murphy’s arguments are flawed and easily refuted. They have identified no real conflict among the circuits. Certainly, no other court has adopted the roundly rejected theories expressed in Murphy I, which form the core of the petition. Yes, the Court of Appeals in Murphy II did a poor job with the statutory issues, but ultimately they reached the right ruling.
I'll be shocked if the Supreme Court decides to take this case.
Link: Complete Tax Update Murphy Coverage
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NOT THE SAME THING, MIND YOU, BUT JUST LIKE THEM
December 17, 2007
Villanova tax professor James Maule knows his lawyers, given that he teaches them for a living. He has made a discovery about his students:
Lawyers Are Just Like People: Some Good, Some Bad
While making his case, Mr. Maule provides evidence that some lawyers are more like weasels or black widow spiders. I'll just note his phrasing: he is careful to say that lawyers are "just like people" -- not "just like other people." Such distinctions are helpful.
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HELLO, NEW YORK!
December 17, 2007
The Tax Update was featured, along with The TaxProf Blog, as "Website of the Month" for December in the New York State Society of CPA's "The CPA Journal Online." Very nice of them.
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SHOULD YOU PREPAY YOUR STATE AND LOCAL TAXES?
December 16, 2007
Paying your state and local taxes early is one of the oldest tricks in the year-end tax planning book. If you are going to owe the state in April, you might as well take the deduction now, right?
Maybe.
While prepaying taxes might seem like a simple "yes or no" question, it's not necessarily so. You need to consider several factors:
Are you going to be itemizing deductions for 2007? If not, then there's no point in paying early.
Are you going to be paying alternative minimum tax for 2007? The itemized deduction for state and local taxes doesn't apply in computing AMT, so you might be wasting your time getting your taxes paid early - and if you won't be in AMT in 2008, you might be squandering a deduction if you do pay early.
Is it worth giving up the interest the payment would earn to get that deduction in April? The chart below shows whether prepaying makes sense for a taxpayer who is not in AMT for either 2007 or 2008, at different tax brackets, and who won't have penalties for underpayment of estimated tax whether or not taxes are prepaid. The dates shown are typical deadlines for state and local tax payments (detail below the fold). It shows that it always makes sense for a non-AMT taxpayer to prepay a 4th quarter state payment, but only high-bracket taxpayers benefit from prepaying you state taxes due next April.
But this chart only works if you meet all of the simplifying assumptions. If you are basing your estimated taxes on your actual 2007 income, rather than, say, your 2006 taxes, a state tax payment now might wipe out a federal tax underpayment penalty due from the first, second and third quarters - which obviously changes the math. And if you are in a low bracket this year, but next year you have a windfall coming, it's likely the deduction will be worth more to you next year. And vice-versa.
In any case, you need to start by running the numbers.
This is another of a daily series of 2007 year-end tax planning posts running through December 31. Add to your collection!
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DON'T BUY SOMEONE ELSE'S TAX BILL
December 15, 2007
It's not a good idea to spend your hard-earned money for the privilege of paying taxes on someone else's earnings. That means you should be careful if you buy mutual funds in December.
The tax law requires mutual funds to distribute capital gains on their stock sales annually, and most distribute the whole amount in December. If you buy into a mutual fund the day before the distribution, you buy a share of the whole year's liability.
Many funds put the amounts and dates of expected capital gain distributions on their web site. It's worth a few minutes on the web to avoid buying a year's worth of mutual fund tax liability.
There is another handy way to avoid capital gain distributions: stick with index funds. These funds only trade to track changes in the components of their indexes, so they have very small capital gain distributions. If you visit the Vanguard Funds 2007 capital gain distribution list, you will find only one index fund with a capital gain distribtion - and only for a penny per share. Contrast that with the actively-traded funds, with taxable distributions as high as $8.37 per share.
For more on fund distributions, here is a good Kiplinger article. For more on index fund investing in general, go here or here.
This is another installment of our series of 2007 year-end planning ideas. Don't miss a one!
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IS THIS THE YEAR TO SPEND YOUR IRA ON CHARITY?
December 14, 2007
A key tax break for charitable-minded taxpayers is scheduled to expire at the end of this year. If you are over age 70 1/2, you are eligible to transfer up to $100,000 from your IRA directly to charity.
Such a transfer is better than taking the money from the IRA and writing a check to charity because the funds don't run through your tax return. Your AGI isn't increased, so you don't lose itemized deductions; also, the contribution isn't affected by the tax law's limit of charitable deductions to 50% of AGI.
For taxpayers with enough net worth to be tsubject to the estate tax, giving away IRAs to charity has two benefits: it avoids estate tax on the donated funds, and it avoids income tax to the beneficiaries.
If you want to make this donation by year-end, you should act right away; the IRA custodians need some time for their paperwork.
This is part of our daily series of posts on 2007 year end tax planning that will appear through December 31. Collect them all!
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BUSINESS GROUP COMES OUT FOR TAKING AND TAXING SOME BUSINESSES TO BENEFIT OTHERS
December 14, 2007
The Greater Des Moines Partnership, our local chamber of commerce, has unveiled its legislative agenda for the 2008 legislative session. We can only hope it does as well as their big goal in 2007, Project Destiny; the sales tax increase managed a spectacular 15% of the vote in a special referendum last summer.
The Partnership's legislative agenda is virtually indistinguishable from that of legislative Democrats. It includes:
- Loosening eminent domain restrictions, making it easier for well-connected businessmen to use the state to sieze coveted real estate.
- Making it easier for local governments to negotiate giveways without having to tell those pesky voters.
- More funding for the Grow Iowa Values Fund, so politicians can tax give away money taxed away from some businesses to lure and subsidize their competitors.
The Partnership makes a pretty statement on sound principles of taxation:
The Partnership supports creating a more competitive business climate to encourage business expansion and foster the growth of new and existing businesses through comprehensive and meaningful tax reform and removing regulations that act as hidden taxes, inhibit innovation and investment, hinder productivity, and stifle economic growth. The Partnership believes Iowa’s tax code should encourage business growth, limit the size and costs of government, and reflect the principles of equity, neutrality, simplicity, and predictability.
In the next breath, the partnership comes out for tax credits that stifle business growth, increase government, and violate the principles of equity, neutrality and simplicity. These violations include tax credits for the insurance industry, a "wage benefit tax credit," rehab credits, and research credits - all of which favor some taxpayers at the expense of others and require government involvement to administer, and none of which are simple.
Other provisions include:
- Protecting TIF funding, so that property tax payers can also be taxed to lure and subsidize their competitors.
- A 2% hotel and motel tax.
The only positive things on the agenda are lip service for tax reform and opposition to "combined" corporation reporting and gross receipts taxes.
A real pro-business, pro-growth group would come out forthrightly for specific and drastic state tax reform and would oppose the Iowa Values Fund corporate welfare scheme. It would draft and push a tax plan that would bring the income tax rate down below 5% while slashing or eliminating our highest-in-the-nation corporation tax. The Des Moines Partnership, unfortunately, acts more as a business affiliate of the Polk County political establishment.
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DOG BITES MAN, IT'S COLD IN DECEMBER, AND THERE'S...
December 14, 2007
...Corruption and Tax Fraud in Illinois. Russ Fox reports:
Christopher Kelly, a former adviser to Illinois Governor Rod Blagojevich, has been indicted on federal charges of tax fraud. Mr. Kelly is accused of understating more than $1.3 million on his business and personal income tax returns.
You have to love Illinois Governor Blagojevich's mad skills in selecting advisors:
The indictment alleges that he placed wagers worth millions with both bookies in Chicago and at Las Vegas casinos and then paid the debts off with corporate funds from his roofing business as business expenses. Governor Blagojevich, according to the Chicago Tribune, selected Mr. Kelly to be his gambling adviser "...because Kelly is an avid gambler and high-roller and he often travels to Las Vegas on weekends."
No word on whether he has binge drinkers on his liquor boards and meth addicts on his drug policy advisory panels.
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SNIPES STEPS UP TAXPAYER OF THE YEAR CAMPAIGN
December 14, 2007
Much as the presidential candidates have stepped up their frenzied efforts as the caucuses approach, Wesley Snipes is turning on the heat to pad his lead in our Taxpayer of the Year Contest. He reportedly has "broken his silence" on his federal tax evation charges:
"People think I'm Nino Brown (Snipes' gangster character in 1991's 'New Jack City') or (vampire character) 'Blade'. They think I'm an evil dude."And Snipes claims he has no idea why he has been charged, as he never received the tax refunds in the first place.
He adds: "I never got a dime. I didn't defraud the government by taking money that was not mine. We never got it."
Mr. Snipes attempted to claim a $12 million tax refund for his 1996 and 1997 taxes on various tax protester grounds, as well as for failing to file returns from 1999 to 2004. It's an interesting defense, and one that would if successful be a boon to shoplifters everywhere who get caught before they leave the store -- "I didn't steal anything, because I didn't get away!"
Does this make Wesley a worthy taxpayer of the year? That's how the polls are running so far. But you want to cast an informed vote, so check out our candidate's platforms here.
And unlike the caucuses, you can vote every day through December 31!
UPDATE: The TaxProf has more.
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IF IT'S NOT ON THE W-2, S CORP SHAREHOLDERS CAN'T DEDUCT HEALTH INSURANCE
December 13, 2007
An IRS Notice released this morning spells out the conditions for S corporation shareholders to get tax-free treatment for their health insurance premiums.
Under Notice 2008-1, the corporation has to either pay the premiums directly or reimburse the shareholder for documented premium payments. The S corporation also must include the payments in Box 1 of the shareholder-employee's W-2 form. The employee must then report the W-2 income, but then deduct the premiums on line 29 of form 1040. The net effect of these maneuvers is the same as if the insurance were never included in income in the first place.
The tax law has had screwy treatment of 2% owner-employees for many years. Until the rules were changed in the late 1990s, such shareholder-employees got no tax break for health insurance costs. Now such shareholders have to pick up the premiums in income, but they get an offsetting deduction. Such premiums are included in Box 1 taxable income, but they don't count as wages for FICA or Medicare tax.
This new Notice is a slight liberalization of the rules. The IRS announced in 2006 that only premiums paid directly by the S corporation qualified for the tax break. The new rule expands the line 29 deduction to premiums paid by the shareholder but reimbursed by the corporation.
IMPORTANT POINT: S corporation shareholders need to make sure that their premiums are included on their 2007 W-2s. Many businesses fail to do so. Practitioners in the past have added the premiums left of the W-2 to the "other income" line, and then deducted it on line 29. Notice 2008-1 says that doesn't work.
If you have such premiums, make sure to let your payroll service know the amount so they can add them to the W-2s in their year-end processing. If you are an S corporation shareholder and you have been paying your own premiums, be sure you turn them in for reimbursement before December 31 so they are included on your W-2.
Yes, it is silly to have to go through the gyrations. Who says the tax law has to make sense? But if you fail to follow these directions, the IRS will say your S corporation health premiums are taxable and non-deductible.
UPDATE, 12/27/2007: MORE ON S CORPORATION HEALTH INSURANCE
UPDATE, 1/2/2007: S CORPORATION HEALTH INSURANCE: READER QUESTIONS
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YEAR-END PLANNING: HURRY UP AND ADD FIXED ASSETS?
December 13, 2007
The tax law has always required taxpayers to expense long-lived assets over multiple years through depreciation deductions. These rules have had an important exception, Section 179, which lets you expense in the current year assets that would otherwise need to be depreciated. Congress has expanded the size and scope of Section 179 in recent years, making at a potential year-end planning too.
Taxpayers are allowed to deduct up to $125,000 in business assets that would otherwise have to be depreciated or amortized. If you have a need for such assets, that means you can knock up to $125,000 off your 2007 business income by getting the assets this year.
Before you start writing checks, though, keep in mind some important limitations:
- The assets have to be "placed in service" before the end of the year to qualify; just writing a check for an asset to be delivered next year doesn't work.
- Assets used in a real property rental business don't qualify.
- The deduction phases out dollar-for-dollar as qualifying assets purchased during the year exceed $500,000.
- You have to have "active" taxable income to use the deduction. This sometimes trips up retired taxpayers who are passive investors in a pass-through entity -- a partnership or S corporation -- , as they may not have enough "active" income to use the deduction.
- The $125,000 limit applies per taxpayer. That means a pass-through entity with many owners needs to be sure it doesn't pass-through Section 179 deductions that its owners can't use.
Even with these limits, there are many taxpayers who will find the Section 179 deduction very handy between now and December 31. Just ask any SUV dealer.
Visit taxupdateblog.com every day through December 31 for a new year-end planning idea. Collect them all!
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HOUSE PASSES DOOMED AMT PATCH BILL
December 13, 2007
The House of Representatives yesterday passed an "AMT patch" bill to keep 20 million or so new taxpayers from being hit with the alternative minimum tax. The bill is different from the Senate bill in that it has "pay-fors," or tax increases to generate the same revenue as the pre-patch AMT would. There's no telling how long it will take to reconcile the bills, so the beginning of the IRS 2007 1040 processing season recedes a little further into February 2008.
PAY-GO
The "pay-fors" are the sticking point. Congressional rules have for some years now required tax changes that reduce revenue to be "paid for" by additional revenues from somewhere else. These "Pay-as-you-go," or "Pay-go" rules have generated terrible tax policy and budgeteering chicanery great and small:
GREAT: The entire 2001 Bush tax cut legislation was warped into awful tax policy by the Pay-go" requirements. With enough votes to pass the bills, but without 60 Senate votes to waive the Pay-go rules, the Administration "paid" for its tax rate cuts by leaving the AMT alone. As taxpayers pay the greater of regular tax or AMT, a cut in regular taxes alone mathematically ensures that more people fall into AMT. Ever since then Congress has kicked the day of reckoning down the road one or two years at a time by increasing the AMT exemption amount.
The other great casualty of Pay-go in 2001 was the estate tax repeal. Lacking pay-fors, the 2001 bill increased the lifetime exemption over a period of years until the estate tax was repealed for one year, 2010. The estate tax then roars back in it's pre-2001 form, with top rates over 50%, in 2011. Whether or not you think the estate tax repeal is wise, it's hard to argue that what we have now is sound tax policy.
SMALL: The house-passed bill is full of the little budgeteering chicanery, and bad tax policy, generated by Pay-go. My favorite (via RIA):
Increase for large corporations the required installment of estimated tax which is otherwise due in July, August, or September of 2012 by 52.5 percentage points (with corresponding adjustments to the amount of the next required installment).
This is just a cheesy way to stuff tax revenue from the 2013 fiscal year, which begins in October 2013, into the 2012 fiscal year so they can say that the AMT patch is "paid for" under their through-the-looking-glass scoring rules. That's like "paying" a mortgage payment by taking a cash advance on your credit card.
Who is responsible for the mess? Bob Williams at Tax Vox argues persuasively that there is plenty of blame to go around. The TaxGrrrl just wants the mess cleaned up. And, of course, the TaxProf has a link-rich roundup.
Related: A LATE START TO TAX SEASON?
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IRS NOT SATISFIED WITH 'SCHEDULE M-3' COMPLIANCE
December 13, 2007
Corporate tax returns have long contained a reconciliation between financial statement income and taxable income. The old "Schedule M-1," still available for smaller corporations, was brief, and taxpayers tended to provide minimal detail.
To make life easier for its examiners, the IRS started requiring a more detailed reconciliation for larger taxpayers in 2004. Tax Analysts reports ($link) that many taxpayers aren't doing well with the new "Schedule M-3." The report cites IRS technical advisor Judy McNamara as saying 10% of taxpayers required to file an M-3 failed to do so, and 30 percent of the M-3s that were filed had errors:
A significant number of errors involved Part 1, line 4 of the schedule not tying to the appropriate number on the financial statement. "The whole point of Part 1 [of Schedule M-3] is so that agents don't have to reconcile to [a taxpayer's] financial accounting information," which could take months, said McNamara. McNamara said that to avoid a delay in audits, agents are being instructed that they are not supposed to reconcile that number if that number doesn't tie into the financial statements.
Other taxpayers failed to provide the line-item detail required in the report, or to include supporting schedules. Ms. McNamara says the IRS will ask for a specific non-compliance penalty if things don't improve.
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A LOSER IN LIFE'S LOTTERY
December 13, 2007
Things have gone so badly for Jose Betancourt that even a lottery jackpot does him no good.
The Fifth Circuit Court of Appeals puts in directly:
Jose Betancourt was convicted of two counts of possession with intent to distribute cocaine and one count of conspiracy to possess with intent to distribute more than five kilograms of cocaine. He was sentenced to serve 292 months in prison and to forfeit, inter alia, his fifty percent share of the proceeds from a Texas lottery jackpot of over five million dollars.
I'm willing to bet his $2.5 million in lottery winnings exceeds what he will earn during his 292 months in prison.
Mr. Betancourt also was given a $150,000 payment by his lottery ticket co-owner to forfeit his claim on the winnings. The IRS found out, and they wanted that to go against outstanding tax liabilities. Mr. Betancourt's attorney wanted the money to cover his legal fees. The IRS won.
The Moral? Don't buy your lottery tickets with your drug earnings, I suppose.
Cite: U.S v. Betancourt, No. 06-40266
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THE SUBPRIME MORTGAGE CRISIS...
December 12, 2007
...claims a victim in Coralville (link fixed - sorry about that).
Somehow that homeowner looks familiar.
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IS A QUALIFIED PLAN A GOOD MOVE BY YEAR-END?
December 12, 2007
Most year-end tax planning moves require you to write a check before the end of the year to get a deduction. For business owners, there is one year-end tax planning move that doesn't need to be funded until as late as next fall: a qualified retirement plan contribution.
A qualified plan can be especially attractive to a self-employed businessman. If you are the only plan participant, a contribution to your plan gives you a tax deduction for taking money from one pocket and putting it in another. With a "solo 401(k)" plan, you can contribute the first $15,500 of your pre-tax business income to the plan - or up to $20,500 if you are age 50 by December 31 (but not if you have another 401(k) plan from another job). You might even be able to put in more than that, to a maximum of $45,000; you can make a profit sharing contribution to the extent it, when added to your 401(k) contribution, doesn't exceed 25% of your pre-tax income.
There is a catch. While you don't have to fund a 2007 plan contribution until the due date of your tax return - including extensions - you have to have the plan in place by the end of your tax year. If you want to put a plan in place by the end of this year, you need to move quickly.
Link: Kiplinger: SEP vs. Solo 401(k)
This is the third in a daily series of year-end planning ideas that will run through December 31. Collect them all!
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HAVE YOU VOTED TODAY?
December 12, 2007
Voting continues in our "Taxpayer of the Year" contest for 2007. You can read about the contenders here.
Vote early, vote daily!
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CUT YOUR INCOME?
December 12, 2007
Sometimes a lower adjusted gross income can qualify you for a coveted tax break. Gina explains how.
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INEPTITUDE ISN'T THEFT
December 12, 2007
Almost anybody who has had a house custom-built has a story to tell about construction truamas. James and Elaine Wanchek had it worse than usual; their New Mexico home became, in the words of the Tax Court, a "living nightmare." They eventually settled with the contractor, but they still felt they had been robbed. So they took a theft loss deduction for the home cost.
The Tax Court yesterday disallowed the deduction:
Petitioners were the victims of poor workmanship, which, without more, is not a crime.
If it were, they couldn't build enough jails.
Cite: Wanchek, T.C. Memo 2007-366.
UPDATE: The TaxProf has more.
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START LATER, BUT FINISH AT THE SAME TIME.
December 12, 2007
While Congressional diddling with the Alternative Minimum Tax will delay the start of tax return processing for the IRS, it won't delay the end of tax season. Tax Analyst reports ($link):
The IRS has no plans to extend the filing deadline beyond April 15 despite the likelihood of at least a two-week delay in the beginning of the filing season, IRS Deputy Director of Submission Processing Pamela Walker said on a December 11 Tax Talk Today webcast.Walker said late legislation on the alternative minimum tax will almost certainly force the IRS to delay the beginning of the filing season for all taxpayers.
But no matter how badly you want that refund, don't fall for the "rapid refund" loan scam. The effective rate on these things place them with car-title loans and payday loans as financial tools for suckers.
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THE BAD WEATHER DRIVES THEM INSIDE
December 11, 2007
Presidential candidate Mitt Romney explains that he is not Ranger Gord to a confused lunch crowd this afternoon at the Kaleidescope Food Court in downtown Des Moines, while man in striped suit asks if he can have Mr. Romney's french fries.
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LOVELY WEATHER WE'RE HAVING
December 11, 2007
That was at 8:00 this morning. Now it's snowing. Schools are all closed. Yuk.
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GOT BUSINESS LOSSES? GET BASIS
December 11, 2007
The dark cloud of business losses can have a silver lining of tax refunds. If you own a money-losing S corporation, you might even be able to eliminate all of your tax for this year and get back taxes from earlier years.
But only if you have basis.
S corporation stock basis starts with your investment in S corporation stock. It increases with income and capital contributions, and it goes down with losses and distributions.
If you have no remaining basis in your S corporation stock, you can deduct losses to the extent of your basis in loans you have made to your S corporation. As with stock, this basis goes down if you take losses; any income restores debt basis before it restores stock basis.
Your basis for taking losses is determined at the end of the year, so you still have time to add to your basis for a calendar-year S corporation. While many taxpayers like to add to their basis by making cash advances, recently-proposed regulations make this a potential trap. Better to make a contribution to corporate capital, unless the business is in such dire financial shape that bankruptcy creditor status is crucial (and if that's the case, maybe you shouldn't throw good money after bad).
And no, a loan guarantee doesn't get you S corporation basis; you need to go "back-to-back," borrowing the money yourself and loaning (or contributing) it to the corporation.
If you have to borrow the money to add to your S corporation basis, be careful. If you borrow it from a "related party," the tax law might say you aren't "at-risk" for the borrowing, making your new basis useless for taking losses.
Finally, remember that you need to get past the "passive loss" rules to deduct S corporation losses.
This is part of a series on 2007 year-end tax planning. Check every day for a new one!
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NEGATIVE ROLE MODELS
December 11, 2007
When we think of role models, we usually think of inspirational figures whose examples we would like to follow. I suspect, though, that we are often more influenced by cautionary role models -- as teenagers by the kid who went drinking and wrecked the car, and as adults by the guy who spent too much time at the casino and wrecked his life.
Frank Black, a North Carolina investment broker, modeled a whole series of behaviors that can inspire us to do the opposite thing. According to the Tax Court, he was nothing if not ambitious in his attempts to get around the income tax:
- He set up a "church" in his own house and donated over $45,000 to himself that way over three years, claiming it as a deduction.
- He bought a new electric range for his house and deducted the cost as "supplies."
- He spent $1,150 on an aquarium for his son's sixth birthday, and deducted the cost as "supplies."
- He bought more $929 more "supplies" in the form of having a sofa in his house reupholstered.
- When he wrote checks to his college-age daughter, he deducted the amounts as "supplies" and equipment purchases.
- He told the Tax Court that his six and eight-year old children worked 1,000 hours per year in his business.
This all worked out badly for Mr. Black. The Tax Court imposed over $70,000 in civil fraud penalties on him yesterday. So don't do that stuff.
Cite: Black, T.C. Memo 2007-364.
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FAIR TAX, OR FOUL?
December 11, 2007
Foul, says Howard Gleckman at TaxVox:
If this tax ever did become law, it would induce staggering sticker shock among consumers and massive evasion would follow. “Paper or plastic” would be replaced with a new question at the checkout line: “How much for cash?”
Even without the lobbying and cheating, policy experts say the rate could never get close to 23 percent. Don’t take my word for it. In 2005, President Bush’s Tax Reform Commission figured the rate would be at least 34%. The Tax Policy Center’s Bill Gale estimates it would be at least 44% and probably lots higher.
My take on the FairTax is here. For pro-Fair Tax news, try the Fair Tax Blog.
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AN ATTEMPT TO RECRUIT TAX COLLECTORS?
December 11, 2007
The Governor of Texas is looking to topless bars to top off state coffers, reports the Tax Policy Blog, which warns that such fees threaten high-paying jobs in the service sector:
If Governor Perry and the rest of the legislators want to continue on their moral crusade, why not ban strip clubs? But they wouldn't be able to do this very easily because no tax revenue would come from this policy.One other point: the proponents of this bill are forgetting that there is often an easy substitute for in-person adult entertainment when the price gets too high: virtual entertainment.
And just how would they know, eh?
Considering that so much of the online "adult" industry is offshore, this proposal looks downright unpatriotic.
On the other hand, the Texas Revenue Department might never again have trouble recruiting agents, at least male ones.
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MORE YEAR-END FUN
December 11, 2007
We aren't the only ones thinking about year end. Kay Bell has a year-end planning series going at Don't Mess With Taxes:
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KNOW YOUR CANDIDATES: III
December 10, 2007
Wesley Snipes maintains his early lead in our 2007 Taxpayer of the Year voting? Is it because he is a worthy candidate, or just because he's a big star?
In the interest of fairness, we are introducing the lesser-known nominees for our coveted award. Today we feature Families Against Government Slavery. They won our award when they became a taxpayer upon the revocation of their exempt status. The organization was set up to fight a dark secret federal conspiracy. As the Tax Court explained, it fought a conspiracy so vast...
...that the Federal Bureau of Investigation kidnaps Hollywood celebrities and that law enforcement personnel and private gangs are joined in a conspiracy to kill, trap, and enslave Hollywood celebrities and minorities "to gain more financial support" and to engage in activities that petitioner describes as "blood sport". Language in petitioner's documents also alleges that Government-sponsored welfare and housing programs force minority women to participate in the above alleged conspiracy.
Unfortunately the group failed to run their name through an acronym checker, putting them in the infamous company of Team America's Film Actor's Guild and Ann Coulter.
Even though the Tax Court voted against them, you can still vote for them!
Vote every day through December 31!
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IT'S DECEMBER. DO YOU KNOW WHERE YOUR TAXABLE INCOME IS?
December 10, 2007
Most of us have three weeks left in our taxable year. It's asking a lot of three weeks to cure the tax sins of the other 49, but there still may be time to pull it off.
The place to start is to figure out what your taxable income will be if you don't do anything else. Unless you know where you stand, you are like a traveler without a map, a compass, or even a destination.
Here are some steps to help you get there:
Get out your 2006 1040. Look it over line-by-line, and see what items are likely to change. Did you have a big capital gain? Did you sell a business? Did something happen in 2006 that won't happen again?
Look at your last paycheck. Add in any more checks this year, and any year-end bonuses you might have. This will give you your expected 2007 salary, withholding, 401(k) contributions, and any other deductible take-outs from your paycheck.
Get out your last brokerage statement and look at where you stand for capital gains for the year. It should also have your dividends and interest, and if you have any, your investment interest.
Look at your mutual fund statements to see where they stand for the year. You should also go online and see what they plan on doing for year-end capital gain distributions.
Do you have any retirement plan payouts going? Any other income items? If you are a business owner, where does that income stand?
Then think over your deduction side. DId you have an unusual losses? Did you contribute to an individual retirement account? A health savings account? Did you refinance your mortgage or buy a new house? Did you do something big for charity?
Once you have this information, you can see what your taxes look like so far. Then it's time to see what you can do about it.
This is the first installment of a daily series on 2007 year-end tax planning that will run through December 31. Don't miss a one!
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WHAT'S A MEDICAL EXPENSE?
December 10, 2007
A new Revenue Ruling, Rev. Rul. 2007-72, illustrates the medical deduction rules for routine exams, optional diagnostic procedures, and home pregnancy tests (emphasis added):
In Situation 1, the amount A pays for the annual physical examination is for diagnosis and qualifies as an expense for medical care even though A is not experiencing any symptoms of illness.In Situation 2, the amount B pays for the full-body scan is for diagnosis and qualifies as an expense for medical care even though B is not experiencing symptoms of illness and has not obtained a physician's recommendation before undergoing the procedure. The procedure serves no non-medical function and the expense is not disallowed because of the high cost or possible existence of less expensive alternatives.
In Situation 3, the amount C pays for the pregnancy test qualifies as an expense for medical care even though its purpose is to test the healthy functioning of the body rather than to detect disease.
Few returns actually benefit from the medical expense deduction because non-reimbursed costs have to exceed 7.5% of adjusted gross income before they count. The ruling is important, though, in that the same rules govern expenses that can be used for determining allowable expenses for Health Savings Account and cafeteria plan withdrawals.
While the link hasn't gone live as this is posted, it should be available soon here.
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DOWN WITH HUMANS!
December 10, 2007
That seems to be the rallying cry of Barry Walters, an Australian academic, as cited by the Tax Grrrl:
He believes that families should pay a $5000-plus “baby levy” at birth and an annual carbon tax of up to $800 per child. His proposal appears in a current edition of the Medical Journal of Australia. He also suggests that population controls like those used in China and India aren’t such a bad thing.
It's not such a bad thing to have state snoops drag you in for forced abortions? To have neighborhood ovulation monitors? If that's not a bad thing, you are setting the bar for bad things awfully high.
If Mr. Walters thinks humans are so bad, he can always leave. If he stays around, though, there are some fun people he can hang out with.
UPDATE: The Soylent Green Movement!
UPDATE II: The TaxProf roundup.
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THERE IS NO 'H-E-R' IN 'JOINT'
December 10, 2007
William Schroeder messed up on his 2003 return. The Indiana resident failed to report income from a K-1 he received on his joint return. The IRS caught up with him and asked for the taxes.
By this time, Mrs. Schroeder had stopped being Mrs. Schroeder. Still, since it was a joint return, Mr. Schroeder felt that she should help out with the tax bill. He took this argument to the Tax Court.
Unfortunately for Mrs. Schroeder, when you file a "joint" return, you each sign up for the whole bill. The IRS doesn't have to go after your ex if they want to collect it all from you. And that's how the Tax Court ruled last week.
The moral? Two can live cheaper than one, but one might end up footing the tax bill for two.
Cite: Schroeder, T.C. Summary Opinion 2007-204.
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KNOW YOUR CANDIDATES: II
December 07, 2007
Movie stars have an unfair advantage in life, and also in the Taxpayer of the Year voting. That's why Wesley Snipes has jumped to an early lead. To level the playing field, we are profiling som of the less-known but still deserving nominees.
The Pittsburgh Tribune-Review tells the story of Anthony Vincent Miller, who beat the rap on a charge of evading $2.4 million of taxes:
Lawyers for Miller, who now lives in Melbourne, Fla., argued that a chronic obsessive-compulsive disorder made it nearly impossible for him to perform certain tasks in a timely manner, such as paying his bills.Because of his condition, the lawyers argued, Miller relied on an accountant, who led him to believe he had a three-year extension to pay the taxes.
I like to think you don't need to be obsessive-compulsive to use an accountant; some would say that makes you more likely to be one. In any case, it's a creative enough excuse to make the ballot.
Vote daily; cast your vote wisely!
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A PAINFUL EXTRACTION FROM DENTAL PRACTICE
December 07, 2007
Nancy Montgomery-Ware, the Florida dentist who "learned" from her husband, and from "hours of study," that she didn't have to pay taxes, now has 33 months to ponder her conclusions. A federal judge also sentenced Ms. Montgomery-Ware three years of supervised release and a $25,000 fine. She also had to pay her back taxes.
She isn't the only female dentist to come to grief tax-wise from listening to her husband. Elaine Brown famously holed up in a New Hampshire fortress-house with her husband, tax protester Ed Brown, until their recent arrest by federal marshals.
While Elaine Brown stuck by her husband to the end, Ms. Montgomery-Ware has filed for divorce, according to this story.
Prior coverage: BELIEVING HUSBANDS AND THE DANGERS OF OVERSTUDYING
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BUSH ON MORTGAGE TAX BREAK BANDWAGON
December 07, 2007
The President joined the panic over the subprime mortgage debacle yesterday. His bad ideas include two tax provisions: tax-exempt mortgage bonds and exclusion of debt forgiveness for solvent taxpayers.
The Tax Policy Blog offers some badly-needed perspective:
Effective Tax Rate on Capital Income = 13.8 percentEffective Tax Rate on Capital Income Derived from Owner-Occupied Housing = - 5.1 percent
Yes, that's a negative effective tax rate.
And if you lose your gamble on real estate and interest rates, the president wants to make it lower still.
The TaxProf has more.
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SENATE AMT BILL ADVANCES
December 07, 2007
The Senate voted for a one year alternative minimum tax "patch" yesterday without offsetting tax increases and without extending the usual "expiring provisions." The Senate bill has to be reconciled with a House-passed patch with offsets coming from hedge fund managers, among others. Each day Congress fails to act is likely to be another delay in the start of processing 2007 returns. Happy tax season!
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RAMPANT CHEATING BY REAL ESTATE PARTNERS?
December 07, 2007
Are real estate partnerships cheating taxes in a big way?
David Cay Johnston of the New York Times has an article today saying "Ex-I.R.S. Agent Says Tax Evasion by Real Estate Partners Is Huge." The article quotes a former IRS agent, Jerry Cornutt, saying that the IRS loses millions by failing to audit partnerships for the year they sell their property, enabling them to improperly report gain.
Just one form of real estate partner income, known as a 1231 gain after a section of the tax code, totaled $181.3 billion in 2005, up 87 percent over 2004. The actual gain, Mr. Curnutt said, was at least $232 billion and probably much more.This form of income, for gains on previously depreciated real estate, is subject to a 25 percent capital gains tax rate. Tens of billions of dollars of such gains go untaxed each year, Mr. Curnutt said, because they are either not reported at all or are misreported as long-term capital gains and taxed at a 15 percent rate.
Is cheating that widespread? I'm sure it happens, but I'm less sure it's as common as Mr. Carnutt believes.
For starters, if it were extremely common, I wouldn't have so many of my own clients wailing and gnashing teeth when they receive partnership K-1s on the sale of an old real estate tax shelter showing large chunks of capital gains and unrecaptured Sec. 1250 income - especially when they received little cash in the deal.
The prevalance of capital gains shown when a shelter sells its real estate may be less surprising than Mr. Cornutt seems to think. When an old real estate shelter gets sold, you often should see a large chunk of regular capital gain, above the 25%-rate depreciation recapture. When you sell real estate, the sales price you receive over the original price paid is 15% capital gain; only the recovery of depreciation is 25% capital gain. Real estate prices have gone up a lot since the 1970s and 1980s, when these shelters were first sold. It's not surprising, then, that there is a lot of capital gain when these things get sold again decades later.
There are some institutional reasons for partnerships not to cheat. First, the general partner is usually a minority partner - often with only a 1% interest, though often with an increasing interest on the sale gain. The general partner will naturally be reluctant to take a tax risk on behalf of the limited partners. Also, if the partnership is in a state with partner withholding, the general partner isn't going to want to risk underwithholding; if the state catches him, the tax will come out of his pocket.
Finally, even if the partners want to cheat, they have to have their tax preparer in their pocket. While standards of practice aren't what they should be, most preparers are unwilling to risk their license to practice to cheat for their clients. That means the shelter either needs an in-house tax cheat or a sleazy preparer. Yes, such foolishly bold folks are out there, but they aren't the majority, especially at the level of practice that covers multi-million dollar returns.
But even if partnership tax cheating is less widespread than Mr. Cornutt thinks, that's no excuse for the IRS to not use sound practices in auditing real estate partnerships. The IRS probably is auditing too few partnerships, and at the wrong time.
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COALS TO NEWCASTLE, CORN TO IOWA, CHEESE TO WISCONSIN
December 07, 2007
An alert reader passes this along:
You think Iowa politicians come up with goofy ideas for tax giveaways? Wisconsin's Governor wants to give a tax credit to cooperatives.Sounds good, Wisconsin is the dairy state and all that. Except cooperatives are already tax exempt in Wisconsin.
The credit is on the second page of the document at this link, just above the "Whey Initiative." All they need to do is figure out a way to burn cheese, and they'll get alternative fuel tax credits too.
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KNOW YOUR CANDIDATES
December 06, 2007
Wesley Snipes has jumped out to an early lead in our Taxpayer of the Year voting. Vox Populi, Vox Dei and all that, but we shouldn't ignore worthy candidates just because they aren't movie stars. We will therefore introduce you to some of the more obscure, but no less deserving, nominees.
Today we mention psychic Richard Guardino. He has had a rough time in recent years. For example, while awaiting trial on federal tax charges, he had a little domestic run-in:
Police say a self-proclaimed psychic charged with tax evasion is now accused of forcing his way into a motel and attacking his wife and a man she was staying with.David Marius Guardino of Caryville had been allowed to remain free pending trial in federal court on the tax evasion charges.
Now, a petition to revoke his pretrial freedom has been filed following the alleged April 27 incident with his wife.
As we said at the time,
Very strange. He filed a return he had to know would get him in trouble, and he married a woman he had to know he'd find in a motel with another man. Clairvoyance must be overrated.
The 64 year-old, 366 lb. Mr. Guardino clinched his nomination at his sentencing hearing:
A picture may be worth a thousand words, but a whole stack of them did not suit this self-styled seer to the stars."Can I show you my legs?" Caryville psychic David Marius Guardino, 64, asked Senior U.S. District Judge James H. Jarvis Tuesday.
"Come on up here," Jarvis responded, setting the stage for a surreal courtroom encounter in which Jarvis stood up from the bench and peered over it to watch as Guardino hoisted his pant legs to convince the judge he deserves judicial mercy because of health woes.
There's no way judges get paid enough for that.
Cast an informed vote every day through December 31!
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TAX COURT STRIKES DOWN 'SEC 419A' LIFE INSURANCE PLAN
December 06, 2007
The IRS put taxpayers on notice in October that you can't use "Section 419" welfare benefit plans to create a tax deduction for otherwise non-deductible life insurance. The Tax Court underlined their point yesterday by disallowing such deductions for a medical group's plan.
Two doctors set up S corporation professional corporations; the corporations operated their medical practice as a partnership. Each S corporation joined the "Severance Trust Executive Program Multiple Employer Supplemental Benefit Plan and Trust (STEP), a plan that was promoted to wealthy professionals as a welfare benefits fund that was part of a 10-or-more-employer plan described in section 419A(f)(6)"
The S corporations contributed funds to STEP, which they deducted as employee welfare plan contributions. The plans in turn bought whole life policies on hte doctors and their spouses. The Tax Court said this didn't work:
While the STEP plan may have been cleverly designed to appear to be a welfare benefits fund and marketed as such, the facts of these cases establish that the plan was nothing more than a subterfuge through which the participating doctors, through VRD/RTD, used surplus cash of the PCs to purchase cash-laden whole life insurance policies primarily for the benefit of the participating doctors personally.
The case highlights an obscure but occasionally useful benefit of operating as an S corporation. In addition to disallowing the deduction, the IRS asked the Tax Court to assess the doctors with additional income. The court ruled that the payments for insurance were a constructive distribution to the doctors that would be a dividends from a C corporation. Coming from an S corporation, however, they are a return of previously-taxed S corporation income. The disallowance creates taxable income, but there is no second income item for the constructive distribution.
Cite: V.R. DeAngelis M.D. P.C., T.C. Memo. 2007-360.
UPDATE, 7/7/08: A lengthy reader comment is reproduced in full here.
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MEET THE NEW ENERGY BILL, JUST LIKE THE OLD ENERGY BILL
December 06, 2007
Congressional Democrats issued their new Energy Bill yesterday. This shows how a change of parties in Congress can really accomplish something. Where the last energy bill from a Republican Congress was a hodgepodge of tax credits directed to politically-powerful constituencies, the Democrats have instead proposed a hodgepodge of tax credits directed to politically-powerful constituencies.
The bill proposes to pay for the giveaways by punishing the oil industry, repealing the Sec. 199 deduction for oil companies. I'm all in favor of repealing the moronic Sec. 199 deduction, but not just for a few, and not just to replace it with equally foolish targeted tax breaks.
The Tax Prof has the link-rich roundup.
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PAY INDIVIDUAL ESTIMATED TAXES ELECTRONICALLY?
December 06, 2007
Many of us pay our bills electronically via Quicken or our online banking. Did you know you can also pay individual estimated taxes electronically, the same way corporations do? Kay Bell explains.
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SNOWY DAY RISK
December 06, 2007
It's supposed to snow today. That means you should cozy up with somthing warm and a new Cavalcade of Risk, the insurance and risk management blog carnival. It's worth the price of admission to get to this pithy explanation by Hank Stern:
Not at all. Insurance is about risk assessment ("I'm uninsurable") and risk management ("this stuff is expensive!").
Exactly. So manage your risk, and drive carefully today.
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CHET CULVER ON TAXES: YOU GO FIRST
December 05, 2007
Chet Culver telegraphed a stand-pat agenda on taxes for the legislative session that opens next month when he addressed the Iowa Taxpayers Association yesterday. He made no specific policy proposals, other than saying he opposes increasing the gas tax.
He left the door open for some tax increases when he says one of his priorities is to "Take creative steps to find new revenue." This could, for example, include pushing for combined corporate tax reporting - a potential nightmare for businesses, given Iowa's highest-in-the-nation 12% corporation tax rate.
So we get another year of the 6th worst tax system for businesses, helping cement our place as the worst state for entrepreneurship.
Stories:
Iowapolitics.com
Des Moines Register
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STAND UP AND BE COUNTED!
December 05, 2007
The voting has opened for our 2007 Taxpayer of the Year. Vote daily!
Learn about the candidates here.
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DON'T JUST DO SOMETHING. STAND THERE.
December 05, 2007
The Bush Administration feels it has to "do something" about the subprime mortgage hangover. When the government feels it has to do something, it's usually something dumb, and this is no exception.
Tax Vox points discusses one unwise idea, tax-exempt mortgage bonds. He points out the shady history of such bonds, and he points out some obvious problems, like:
The bonds will probably help the wrong people. Borrowers whose loans are already underwater and are high default risks won't be helped because the bonds will be secured with mortgage payments. The tax-subsidized loans might help some whose credit is OK but can't refinance in the tight mortgage market. But it is more likely that much of the money will go to borrowers who could refinance on their own. The Boston Fed estimates that about half of subprime adjustable rate mortgage bowers have not yet missed payments.
The administration also proposes new tax breaks for mortgage debt forgiveness -- a break broad enough to cover people with $2 million+ homes.
"Doing something" is almost surely just going to prolong the hangover. Arnold Kling is wise when he says:
My instinct is to tell the markets to just suck it up and deal with the losses. With that approach, I hope that the worst will be behind us by 2009.To me, the main problem is to get back to equilibrium in terms of house prices. My fear is that the interest-rate freeze and other bailouts will serve merely to drag the problem out for years.
The sooner we put the foreclosures behind us and get to a market equilibrium in house prices, the sooner the mortgage market will be liquid again. At least, that's my way of looking at it. Obviously, I am in the minority.
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DOG BITES MAN, IT'S COLD IN IOWA IN DECEMBER...
December 05, 2007
...Senate fails to agree on how to fix AMT, and...
Larry D. Harvey loses three cases in Tax Court on whether you have to pay taxes on income earned in Antarctica. If you're counting, he's 0-61.
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TAXPAYER OF THE YEAR 2007: THE POLLS ARE OPEN!
December 04, 2007
It's time, ladies and gentlemen, for our annual recognition of a taxpayer who has found a way to stand out in world of taxes. The nomination criteria is flexible; celebrity helps, but is not requires. So without further ado, let the voting begin!
The nominees and their tax-related fame are outlined below.
Militant Vegan Law Professor Anna E. Charlton gets nominated for her 
Joseph Francis is one of our celebrity nominees. The founder of the "Girls Gone Wild" empire 
Finally, we have to include Link • Taxpayer-of-the-year • Comments (0) Bookmark: del.icio.us • Digg • reddit
IRS ISSUES NEW RELIEF FOR DEFERRED COMP PLAN MISCUES
December 04, 2007
The misbegotten deferred compensation rules of Sec. 409A have created an insatiable demand for relief from its complex and punitive provisions. The IRS issued the newest installment yesterday (Notice 2007-100).
The notice mostly allows service providers to fix operational foot faults under Sec. 409A; without such relief, even minor and inadvertent failures to follow the letter of these stupid rules can impose income tax AND a 20% penalty on the deferred compensation balances of anywhere from one employee to an entire class of employees.
Tax Analysts discussed the new notice with a former IRS attorney ($link):
Small mistakes that are caught and addressed in tax years before 2010 can be fixed, he said, and most other mistakes get relief if they are caught by the end of the year. He said that he expects many people to be disappointed with the notice because many minor plan errors made in ignorance will go undetected for years.
The only way to provide truly effective relief for Sec. 409A is to repeal it. That's up to the same Congressional blockheads who enacted it.
Related: IRS DELAYS SUBSTANTIVE REQUIREMENTS FOR 409A
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IT'S COLD CARNIVALS
December 04, 2007
The new Carnival of Taxes is playing at Don't Mess with Taxes. Tax tips for everyone from brides to home sellers at this roundup of tax-related blog posts.
If you want to know what drives tax bloggers, we share our secrets with The Wandering Tax Pro.
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DON'T IGNORE MINNESOTA
December 03, 2007
A Des Moines truck driver is accused of not filing Minnesota income tax returns that his CPA prepared for him, and now the icy state is throwing the book at him. Mark Anthony Jones was charged last week in Hennepin County District Court with four felony tax evasion charges.
From a Minnesota Department of Revenue press release:
According to the complaint, Jones lived at several addresses in the Twin Cities area between 2000 and 2006. The defendant worked as a salaried and independent contractor truck driver.During the investigation, copies of the defendant's federal and state individual income tax returns were obtained for the years 2004 and 2005. These returns were allegedly prepared by a certified public accounting firm based on information provided by Jones, through his mortgage broker, to the accountant. The prepared, but not filed, returns were used to substantiate the defendant's income before granting him a mortgage.
Based on these returns, the Minnesota tax liability is $2,027 for 2004 and $3,442 for 2005.
Each charge carries a maximum sentence of five years in jail and a $10,000 fine. Not a good payoff for saving $5,469.
The press release stresses that the CPA prepared Minnesota returns for Mr. Jones that were allegedly never filed. If you get a Minnesota return from your preparer, then, think long and hard if you don't intend to file it. Minor amounts seem to be no barrier to major legal problems in South Ontario.
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A LATE START TO TAX SEASON?
December 03, 2007
The IRS might delay the start of 1040 processing at least two weeks because Congress hasn't passed an "AMT patch" for 2007 yet. Failure to pass the fix would throw 20 million new taxpayers into AMT this year.
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