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Tax Update Blog: 2005 Year-end planning Archives

What price citizenship?

October 28, 2010

Sobering statistics from international tax attorney Andrew Mitchel show that Americans are turning in their passports in record numbers.


It could be just a coincidence that this increase occurs as Treasury steps up its shoot-the-jaywalkers approach to international tax compliance, but I doubt it.

Related: FBAR est FUBAR

Tags: ..

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December 03, 2006

A reader asks:

Your Dec. 1 column advises different tax strategies depending on whether you're subject to the AMT. The only problem is that as of Dec. 1 the IRS has not posted a 2006 AMT form (6251). How can taxpayers decide whether they're subject to the AMT without the 2006 form?

Good question. There should be few changes to the AMT form. The biggest change is the increased exemption amounts legislated last May for 2006, and the change in the breakpoints for the 15% bracket for regular tax. To help those who want to estimate their 2006 AMT, I have dummied up a 2006 form by updating the 2005 form with the new exemption and 15% bracket figures. You can find them in the extended entry below; to see them in full size, click on them.

Remember - these are not official forms, so don't use them to prepare your 2006 returns.

Click here to see the article the correspondent refers to.

UPDATE: Doh! Kerry Kerstetter kindly points out the IRS Draft AMT form is up at the IRS website, here. Instructions are here.

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May 11, 2006

Well, it wasn't just alien luck after all.

Back in March the Wall Street Journal ($link) noted how the stock options of Affiliated Computer Services CEO Jeffrey Rich were always priced at exactly the low point of a stock decline - minimizing his option cost and maximizing his profit. Mr. Rich attributed his amazing streak of low option prices to "blind luck." The WSJ said he was lucky indeed - in fact, they said, a lottery ticket is twice as likely to win the Powerball drawing as his options were to be priced so consistently at market troughs.

Well, apparently Lady Luck had a little help:

Affiliated Computer Services Inc.'s shares lost ground Thursday after the technology outsourcer delayed its quarterly filing with regulators and expects to take a charge of around $40 million related to an internal probe into its stock-option grant practices.

ACS admitted in a filing with the Securities and Exchange Commission overnight that it granted stock options to executives with effective dates that "generally preceded" the date on which all members of its board's compensation committee gave written approval.

This is bad luck for the ACS tax department. The failure to properly price the options on the actual issue date will likely cost the company a lot of its tax deductions.

An excecutive who exercises a normal (non-ISO) stock option has income to the extent of the "spread" - the amount that the stock value exceeds the price paid to exercise the option. The tax law limits annual compensation deductions to $1 million per each public company executive. The biggest loophole to this rule is for stock options; the spread is deductible, even if over $1 million, if it is "solely" from the increase in option value after the grant date. When options are issued with a price lower than the stock value on the grant date, they flunk the "solely" test.

Apparently UnitedHealth is also questioning the luck of its own executives. The Wall Street Journal ($links) has more:


WSJ on United Health

Tax Update prior coverage




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December 30, 2005

Today's the last business day of the year for most taxpayers. We hope you've gotten your tax tax planning in hand by now so you can start celebrating the new year early. If not, there's still time to put a dent in your 2005 tax bill.

- Go online and make a charitable gift to a worthy cause with your credit card.

- If you won't pay alternative minimum tax for 2005, you can still prepay 2005 state and local taxes due next year. Iowans can prepay federal taxes due next year to deduct them on their 2005 Iowa returns.

- If you have a calendar-year S corporation with a loss, you can still make sure you have enough basis to deduct the loss.

- You can still close out long positions in loser stocks today and deduct the losses in 2005 (to the extent of 2005 capital gains + $3,000). For losses on short positions, though, it's too late for this year, as those aren't counted as tax losses until the settlement date.

- If you are a cash-basis taxpayer, you can write checks today for business expenses and deduct them this year.

- If you are an accrual-basis taxpayer, remember that expenses accrued to related cash-basis taxpayers have to be paid this year to be deductible this year.

- If you pay Iowa individual taxes, you can make a 2005 contribution to College Savings Iowa and deduct it on your 2005 Iowa return.

- You can help your estate planning by making personal gifts of up to $11,000 per donee, per donor. If you are a married couple, it doesn't matter which account the gift comes from, if you elect gift splitting on your 2005 Form 709. Remember, you will never have another chance to use your 2005 annual gift tax exclusion.

And remember, 2006 year-end planning can start January 1!

This is the final installment of our series on 2005 year-end tax planning.

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December 27, 2005

OK, you've been busy. Packages to wrap, football to watch, dinner to cook, kids to haul... and you've neglected your tax planning. While real year-end tax planning is best started January 1, all is not lost. You can still get a 2005 charitable deduction, and help a good cause in the bargain.

If you write a check to charity and it's postmarked by December 31, it counts this year. It also counts this year if you go online and pay with your credit card -- even if you don't pay your credit card bill until next year.

Many worthy charities make it easy to give online. Here are a few of my favorites:

Salvation Army. If you want your charitable dollars to be used helping people who really need it, rather than to pay for administration and fund raising, the Army can't be beat.

Hospice of Central Iowa. The Hospice people do tremendous and underappreciated work to help those facing death, and their families.

And don't forget that it's winter in southwest Asia, which last month suffered enormous earthquake damage. You can help the Save the Children relief effort here.

If you want to find out whether your favorite charity takes online donations, the Network for Good is the place to go.

This is another installment in our series on 2005 year-end tax planning.

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December 23, 2005

Gifting looms large this time of year, and the tax world is no exception. Of course, it's easier for tax folk, for we tend to tell other people to give money away, but it's the thought that counts.

We tell people with enough money to worry about estate taxes to give generously each year to their family members. The Estate Tax doesn't look like it's going away, and gifting is a good way to to fend off the grim estate tax reaper. Taxpayers can give away $11,000 per year, per donee, without the gift counting against your lifetime estate and gift tax exemption. A couple with one married child and three grandchildren - five donees - can put $110,000 out of reach of the tax collector each year with annual gifts.

The flip side of the annual exclusion is that once the year is over, the opportunity is gone. The the couple with five donees that fails to use the annual exclusion has blown a $110,000 estate planning opportunity forever.


Making a gift should be easy, but creative taxpayers have found an amazing number of ways to screw it up:

- One taxpayer endoresed shares of stock to his son. He put them in a safe deposit box with a note that the stock belong to his son. The son never knew about it, so the gift didn't count.

- A farmer deeded properties to grandchildren as gifts and recorded the deeds, but never told the grandchildren and continued to run the farms as if he owned them. The gift didn't count.

- A taxpayer meant to forgive notes owed her by her kids, but never got around to it. The "gift" didn't count.

- A taxpayer wrote gift checks but died before they were cashed. The gifts didn't count.

If you want to make sure the gift counts in 2005, don't be too cute. If you give cash and you are close to the deadline, have the bank make an electronic transfer, or deliver a cashiers check. If you are giving away stock or mutual fund shares, get them to the donee account before year end. And make sure they know; if you never tell the donee that they have a gift, the tax law says they don't.

This is another installment in our series on 2005 year-end tax planning.

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December 21, 2005

When a business has a bad year and loses money, sometimes the tax return is the silver lining to a dark cloud. When the business is run through a pass-through entity, like an S corporation or partnership, losses can pass through to the owners returns, reducing the owners taxes.

In theory, anyway.


The tax law only allows owners of pass-through entities to deduct pass-through losses to the extent of their basis in a pass-through entity. Basis starts with what you pay for the entity. It is increased by your share of earnings and capital contributions, and reduced by losses and distributions to owners. S corporation shareholders can get basis for losses by loaning money to their corporations, but NOT by guaranteeing S corporation debt. Partners get basis to the extent of their share of debt inside the partnership.

If you don't have basis in excess of your losses, you can only deduct the losses up to your basis; the excess losses carry forward to years in which you have income from the pass-through or make additional capital contributions.


Taxpayers have learned to their sorrow that you have to be careful when you make year-end loans or capital contributions to enable you to use losses. This is especially a problem when taxpayers use loans to obtain basis. If the loans contributions lack "substance" or are funded by borrowings that are not "at-risk," the deductions will be denied.


The Oren case illustrates this problem. An owner of multiple S corporations found that it needed to get basis in a loss corporation by year-end. One corporation then loaned money to the owner, who loaned it to the loss corporation, which then loaned it back to the corporation that made the first loan - the money all ending where it started.

While the taxpayer did all of the paperwork correctly, the courts ruled that there was no substance to the loans, because everyone ended up pretty much where they started. They also ruled the loan was not "at-risk" because it was borrowed from a related party.



- Don't borrow money from a related party (family member, another business you own, or a business owned by a family member, for example).

- Don't put money into the pass-through on December 31 and withdraw it on January 1. Leave the money in the business a decent lenght of time.

- Don't send the money right back where it came from.


- If you must borrow to fund the capital contribution, borrow from an unrelated party, like your friendly community banker.

- If you must use funds from a related business, take them out as a distribution, rather than a loan.

- Leave the money in the loss business for a decent length of time.

- Work closely with your tax advisor to make sure you do things right.


There are other limits on pass-through losses besides basis. The "passive loss" rules, for example, disallow many losses even when there is plenty of basis. At-risk limits can apply even to unrelated-party loans in many instances. If you're talking real money at year-end, get your tax pro involved.

This is an installment in our series on 2005 year-end planning.

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December 20, 2005

It's silver lining time.

Iowa has a personal tax system with high rates and byzantine complexity. Yet along with our workhouse gruel, we Iowans occasionally get a chocolate chip cookie. The College Savings Iowa tax deduction is one such tasty morsel.


College Savings Iowa is a state-sponsored Section 529 college savings plan. It is a reasonably well-run plan offering low-cost Vanguard funds, but it has an additional attraction for Iowans: you may deduct up to $2,375 per donee, per year in contributions to college savings Iowa on your Iowa tax return. That means a married couple with two children can deduct $9,500 in 2005 CSI contributions.

If your child is in college already, it's not too late to get CSI benefits. You can qualify for the Iowa deduction simply by funneling your current tuition payments through CSI.


While there is no federal deduction for contributions to Section 529 plans, the earnings accumulate tax-free and may be withdrawn tax-free to pay college costs.

There is also a special gift tax benefit for Section 529 plan contributions. You can take up to five years worth of gift tax exclusion - $55,000 - in a single year if the gift is to a Section 529 plan.


You have to make your CSI payments by December 31 to deduct them on your 2005 Iowa tax return. If you don't have an account yet, you may go online here to set one up.

This is an installment in our series on 2005 year-end tax planning.

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December 16, 2005

Paying state and local non-business taxes early is a time-honored tax planning tool. Sometimes, though, it's best to leave a tool in the box. While prepaying taxes is sometimes wise, sometimes it's nothing but an interest-fee loan to your friends at the Hoover Building.

Before pre-paying 2006 state and local income and property taxes, you need to answer some questions:

1. Can I even itemize this year? If not, and your taxes don't get you over the standard deduction, don't bother.

2. What is my AMT situation for 2005 and 2006? If your tax projection shows you will be paying alternative minimum tax this year, pre-paying your taxes will do you no good. By allocating your payments between two years, you may find that you can avoid AMT in both years and minimize your taxes. If you have AMT next year but not this year, pay up this year, or the deduction is wasted.

3. Is the deduction this year worth giving up use of the cash now? Assuming the amount will be deductible at the same marginal rate either year, this is a time value of money question: is the present value of getting a deduction a year earlier worth more than the lost earnings from the amount you prepay? The further ahead you have to prepay to get the deduction this year, the less you benefit.

In the chart below we compare the time value of accelerating a $1,000 deduction by one year -- reducing tax on April 15, 2006 instead of April 15, 2007 -- to the earnings you will lose on the money by prepaying an amount on December 31, 2005 instead of the actual due date. We compare some due dates for amounts that can be prepaid:

January 31: due date of Iowa fourth quarter estimated taxes.
March 1: due date of first Iowa property tax installment.
April 15: due date of most state individual tax returns.
April 30: due date of Iowa individual tax returns.
September 1: due date of second Iowa property tax installment.


Using a 4% discount rate, you can see that taxpayers in any bracket are better off making their first quarter state payments early. At the lowest brackets, however, it doesn't make sense to pay your March 2006 property taxes early; the value of accelerating the deduction by one year is less than the interest you would earn by waiting until March 1 to make your payment. Only taxpayers in the highest brackets should prepay their state balances due on April 15.


This chart only works if all of its simplifying assumptions are met, and real life seldom works that way. For example, if you are in AMT this year, prepaying never makes sense. If you will be in regular tax this year but AMT next year, you might want to prepay everything you can - maybe even your September property tax installment; then you aren't looking at when you get your deduction, but whether you will get it at all. If you will be in a much lower bracket next year, or you won't be able to itemize, you are probably better off prepaying.

One thing is certain: if you don't run the numbers, you won't be able to make an informed decision.

This is another installment in our series on 2005 year-end tax planning.

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December 14, 2005

Had a good year in the stock market? You're not alone this year. If you're like the rest of us, you may have a few clinkers in the portfolio, too.

If you have sold stock from your taxable portfolio at a gain, it's time to unload some losers. Otherwise you are choosing to pay extra tax, and who wants to do that? A few things to keep in mind:

-We're only talking about your taxable portfolio here. Anything that happened in your 401(k) or IRA stays in your 401(k) or IRA.

-Capital losses are deductible to the extent of capital gain, plus (on 1040s) $3,000.

-Short-term and long-term losses can offset both types of capital gains. Short-term losses are first netted against short-term gains before counting against long-term gains, and vice-versa. If you have both types of gain, offset your short-term gains with your short-term losses first, because net short-term they are taxed at ordinary income rates.

-Don't wait until December 31. If you're broker is somewhere warm for the bowl games, he may not get to your sell order as quickly as you might like.

-Watch out for the "wash sale" rules. If you have losses in, say, GM, you can't sell part of your GM portfolio and recognize the loss to the extent you purchase other GM shares in the prior 30 days or the subsequent 30 days.

-If you have losses on a short position, remember that the settlement date, not the trade date, is the date the losses count -- so don't wait to take short losses at the last minute, even if your broker isn't leaving town.

UPDATE: 12/27/2005 A member of a Yahoo finance discussion group refers to this post, saying:

"I think that's only if you sell for a profit. A loss goes by the settlement date."

I should clarify: when I refer to a "short" position, I mean a classic short sale, where stock is borrowed in anticipation of a decline in value; if the short seller is correct, he profits from the price decline by repaying the borrowed stock with cheaper shares. If the stock price goes up, the short-seller has a loss; such a loss is recognized when the short sale is settled.

In a normal "long" position -- where stock is purchased in hopes that the stock price will rice -- the trade date is the date of the loss for tax purposes.

This is another installment in our 2005 year-end planning series.

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December 12, 2005

While December 31 is the deadline for making deductible charitable contributions for this year, folks who have big plans for their 2005 deduction should get busy now.


Charitable gifts of appreciated property are tax-efficient. If the property has been held for over one year you can deduct the full value of the donated property, while never paying tax on the gain.

This benefit has some restrictions. If the donation exceeds $500, you must separately disclose the gift. A qualified appraisal is mandatory for gifts over $5,000, except for gifts of publicly-traded property.

While Big charities usually can handle gifts of stock quickly, they may not be able to quickly process a gift of, say, real estate or artwork. Small charities sometimes are baffled by a gift of stock. It can be very frustrating when a deduction gets pushed back a year because because the donation paperwork isn't processed before year-end, so you need to allow the charity plenty of time.

Remember also that gifts of appreciated property to public charities are subject to a limit of 30% of adjusted gross income; such gifts to private foundations are subject to a 20% limit.


The tax law has a one-time special on cash gifts this year. While normally cash gifts are deductible to the extent of 50% of AGI, the limit for this year was raised to 100% of AGI in the Katrina relief legislation.

Some taxpayers are using this rule to donate IRA balances to charity. Many taxpayer have IRA balances that are well in excess of their other income. The 100% of AGI limit allows taxpayers to withdraw their IRA balances, donate the entire proceeds to charity, and get a full current tax deduction.

This paperwork usually can be processed quickly, but not instantly. If you are serious about doing this, you should be starting the paperwork. Before pulling the trigger, though, keep in mind:

1. If you withdraw the IRA balance on or before age 59 1/2, you will have a 10% penalty, even if you donate it all to charity.

2. Congress is considering legislation that would let you donate IRA balances directly without withdrawing the money. Unfortunately, the final legislation may not be completed by year end, so we may not know this year whether this provision will be enacted at all.

This post is third in a series on 2005 year-end tax planning.

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December 08, 2005

In our first piece on 2005 year-end tax planning I said you need to start with a 2005 tax projection. The first critical piece of knowledge this will produce is whether you are likely to pay alternative minimum tax in 2005. Tax planning for AMT is different.

If it looks like you have AMT this year, it changes your year-end tax planning. A lot of tax planning tricks don't work for AMT. For example, it usually doesn't make sense to prepay your state and local income and property taxes before year-end if you have 2005 AMT, as these items are not AMT-deductible.

If you are in AMT or close to it, you should continue your tax projections into 2006. By judiciously allocating your deductions between 2005 and 2006 - say, by prepaying some of your state and local taxes - you may be able to minimimize your taxes over a two-year period.

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December 06, 2005

If we could first know where we are, and whither we are tending, we could then better judge what to do, and how to do it. -Abraham Lincoln, from his "House Divided" speech of 1856.
What was said then, is true today in tax planning. If you don't know what your taxes will be if you do nothing before year-end, you don't know what steps to take to save money, or even if you need to take any steps at all.

A year-end tax projection is simply a mock up of what your tax return will look like, based on what has happened so far and what you know will happen the rest of the year (bonuses, additional paychecks, and so on). If you don't do this much, trying to do tax planning is like having to start on a trip in the dark without a map or any idea where you are.

This post is the first of a series of year-end planning tips for 2005.

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