Tis the Time For New Year's Resolutions

Category: Elder Law, Estate Planning, Business Law and Planning, Tax Law and Planning, Financial Planning

Ah, the presents have been opened, you have been eating cookies and leftovers for days, and the commute is remarkably smooth this week - it must be the week before New Years. With each New Year comes New Year's Resolutions - those things you are absolutely and positively going to do in 2006 (or meant to do in 2005 or 2004 - lets be honest). Some thoughts to consider for 2006's list:

• Don't have a Will, Power of Attorney or Living Will? Get one. Search through prior posts here for some consequences of failing to plan. See the article Make a will: Your #1 family New Year's resolution for more reasons to plan.
• Have a Will? Haven't looked at it in 5 years or more? Get it out, dust it off, and read it. Does it say what want? Do you understand it? If not, call an attorney and have it reviewed.
• Own a business? Get a business succession plan in place. Without a business succession plan, your family is likely to receive pennies on the dollar for the value of your business at your death.
• Got insurance? Review your insurance - health, disability, life, long-term care, property. Are you really covered for your needs? Do you understand your coverage? Have you had your insurance reviewed by a professional in the past 3 years or so? Insurance can be a large annual outlay - you should be sure you are getting the best return for your investment. Most professional insurance agents will give you a free review.
• Planning to retire? How are you financing your plan? A meeting with a financial planner may give you ideas as to how good of a job you are doing getting to where you want to be. Again, the meeting is likely to be free.
• Kids going to college? Do you have a plan beyond hoping that there will be enough equity in your house in interest rates stay low? Look into a 529 Plan (try savingforcollege.com for more information) . See what a financial planner has to say.
• Have an accountant? Can him or her and make a meeting to discuss your tax profile and ideas to reduce taxes - note that dropping a bag off at the office on April 8 is not a meeting. Your accountant is an expert,particularly with income taxes, those most likely to effect you. Why not take the time to reduce the governments share of your earnings? Call TODAY for last minute year end planning items (see Happy new year! Now, call your accountant )
• Don't have an accountant? Consider whether a tax professional could help you pay less. You still have time before December 31 to change your tax profile for 2005. (See 5 Year-End Tax Tips and Year-End Tax Tips from ABC News)
• Have seniors in your family? Consider how they are doing and ways you can help. Would Medicare D save them any money? Go the AARP website for tools to find out the answers. Could they use help with driving, cooking, housekeeping? Consider a service (and speak to your accountant about the tax deductions). Are they safe and secure in their homes? If not, consider alternates within the family and in the community.

None of these thoughts are sexy or exciting, but they do fall under the heading of things a responsible adult should be doing, and items high on this years New Years Resolutions (otherwise known as The Great To Do List).

Life Cycle of a Public Charity

Category: Business Law and Planning, Tax Law and Planning

Often a client approaches us to set up a charity. A public charity must benefit the public, that it, some objectively defined group of persons for a public purpose. Once formed, the charity must then apply for and receive recognition as a public charity - the most common are 501(c) charities, so called to refer to the Code section under which they are organized. For federal tax purposes, a person can only deduct contributions to an entity that has been recognized as a public charity by the IRS. Once formed and approved by the IRS, the public charity must comply with various reporting requirements. Of course, being a charity, the organization is also usually looking to minimize its legal and accounting expenses.

The IRS has taken some of the mystery out of forming and being a public charity through a section of its website called Life Cycle of a Public Charity.

"During its existence, a public charity has numerous interactions with the IRS - from filing an application for recognition of tax-exempt status, to filing the required annual information returns, to making changes in its mission and purpose. The IRS provides information, explanations, guides, forms and publications on all of these subjects - they are available through this IRS Web site. The illustration below provides an easy-to-use way of linking to the documents most charities will need as they proceed though the phases of their "life cycle."

There is also a one page a graphical depiction of the life cycle of the public charity, which includes functioning links back to various forms and publications.

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

Category: Estate and Inheritance Tax, Tax Law and Planning

From the IRS, a quick summary of some inflation adjustments to 2006 tax planning. Revenue Procedure 2005-70 contains a complete list of all 2006 inflation adjustments.

2006 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits

WASHINGTON - Personal exemptions and standard deductions will rise, tax brackets will widen and individuals will be able to make larger tax-free gifts in 2006, thanks to inflation adjustments announced today by the Internal Revenue Service.

By law, a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being modified for 2006. Key changes affecting 2006 returns, filed by most taxpayers in early 2007, include the following:

The value of each personal and dependency exemption, available to most taxpayers, will be $3,300, up $100 from 2005.

The new standard deduction will be $10,300 for married couples filing a joint return, $5,150 for singles and $7,550 for heads of household. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket will be $61,300, up from $59,400 in 2005.

The annual gift tax exemption will be $12,000, up from $11,000 in 2005.
Revenue Procedure 2005-70, containing a complete rundown of inflation adjustments, is posted on the IRS Web site and will appear in Internal Revenue Bulletin 2005-47, dated Nov. 21, 2005.

Judge Orders IRS to Pay $23 Mil in Taxes and Interest

Category: Tax Law and Planning

From Yahoo News....a win, but not exactly for the little guy:

Judge Orders IRS to Pay Buffett's Firm - Yahoo! News: "A federal judge on Friday ordered the Internal Revenue Service to pay billionaire Warren Buffett's investment company more than $23 million in taxes and interest for disallowing certain deductions.

The ruling by U.S. District Judge Lyle Strom ended some three years of legal wrangling between Berkshire Hathaway Inc. and the IRS.

The case stemmed from two lawsuits that alleged the IRS made an 'erroneous, wrongful and illegal' interpretation of the U.S. Tax Code when it denied the deductions."

Katrina (and other disasters) Tax Relief Act - You can be Generous with Charitable Gifts

Category: Tax Law and Planning

In order to help charities assisting in the Hurricane Katrina relief, Congress recently passed the Katrina Emergency Tax Relief Act (KETRA) which allows unlimited gifts to charity up to a donor's total income until the end of 2005. Normally, there are percentage of income limitations on charitable deductions.


KETRA Qualifying cash gifts must be made between August 28, 2005 and December 31, 2005 to a public charity. For individuals, the contribution does not have to be earmarked for Hurricane Relief.

If you are over 59 1/2 and considering making a large charitable contribution this year, consider withdrawing money from and IRA, 401(k), 403(b), or other qualified retirement account, to make the gift. Generally, withdrawals from qualified retirement accounts are subject to income tax in the year made. Under the normal tax code, the charitable contribution deduction to a public charity is limited to 50% of your income. Accordingly, when you make a withdrawal from a qualified plan and donate the entire amount to charity under the normal rules, you must pay tax on 50% of the withdrawn amount, even though 100% went to charity. Under KETRA, 100% of a qualified plan withdrawal that passes to charted may be deducted.

For more information on Katrina tax relief, see the IRS website.

Are you Missing Education Tax Breaks?

Category: Tax Law and Planning

From James Jimenez, CPA of Fass and Associates, CPAs:

"DON’T MISS OUT ON EDUCATION TAX BREAKS

A recent report by the Government Accountability Office pointed out that 27% of 1.8 million taxpayers eligible for education-related tax breaks did not take advantage of them on their income tax returns. As a result, they paid from $169 to over $500 more in taxes than necessary.

If the complexity of the tax credits and deductions for education expenses is keeping you from claiming them, you, too, may be paying higher taxes than necessary. With a little effort, you can get the details and advice you need to make the wisest choices for your particular situation. Here’s a brief rundown of what’s available.

* Education savings accounts let you set aside up to $2,000 per year per child in a tax-deferred account for elementary, secondary, or higher education expenses at either private or public schools.

* Section 529 plans include tax-favored college savings plans and prepaid tuition accounts. Tax-free withdrawals can be used to pay for tuition, fees, supplies, equipment, and certain room and board expenses.

* The college expense deduction lets you deduct up to either $2,000 or $4,000 (depending on your income) for tuition and related college expenses. If you qualify, you can deduct these expenses whether or not you itemize

* Student loan interest of up to $2,500 is deductible, subject to income limitations.

* A Hope credit of up to $1,500 per student can be claimed for tuition and fees relating to the first two years of post-secondary education.

* A lifetime learning credit of up to $2,000 per family can be claimed for post-secondary education expenses and certain job-related courses."

AMT - What is it and should you care?

Category: Tax Law and Planning

A client came in yesterday and his questions turned to concern about the Alternative Minimum Tax or AMT. My first response - see your accountant. On further thought, I was considering how misunderstood and under-publicized the AMT is and looked for some resources for a better understanding. I found this Guide to the AMT as a sort of AMT for Dummies. It has helpful subtopics like Alternative Minimum Tax 101 and Top 10 Things that Cause AMT Liability.

As to why you should know about and care about the AMT? The fact is that the number of taxpayers that the AMT reaches is growing each year due to the reach of the AMT expanding downward to taxpayers with lower incomes. Many taxpayers who don't owe AMT still need to go through the calculation, at additional time and expense. Also, if you find yourself owing AMT, some traditional tax strategies that work in a non-AMT environment may not benefit you in an AMT environment.

The Guide to the AMT explains the AMT as follows:

"The alternative minimum tax (or AMT) is an extra tax some people have to pay on top of the regular income tax. The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. But for various reasons the AMT reaches more people each year, including some people who don't have very high income and some people who don't have lots of special tax benefits. Congress is studying ways to correct this problem, but until it does, almost anyone is a potential target for this tax.

The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory these rules determine minimum amount of tax that someone with your income should be required to pay. If you're already paying at least that much because of the 'regular' income tax, you don't have to pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax."

Savings Bonds (Part 2) - What Happens when the Bond Owner Dies?

Category: Estate and Inheritance Tax, Tax Law and Planning, Probate and Estate Administration, Financial Planning

Savings bonds are a ubiquitous asset. However, dealing with savings bonds as part of an estate can in many ways be more complicated then dealing with other investment assets, such as mutual funds, stocks and bonds, where a broker can coordinate transfer and liquidation efforts. In a prior post Saving Bonds (Part 1) - Learning More about those Bonds - I discussed resources to learn more about the value of any bonds. Here, we are looking at what to do with the bonds as part of an estate, or if you inherit bonds as a result of a person's death.

A few general rules, regardless of what series of bonds (E/EE, H/HH or I):

• Single Ownership: If the savings bonds are owned by one person, and that person dies, the bonds are now owned by the person's estate. The executor, personal representative, or administrator, as the case may be, is the only person authorized to deal with the bonds after a person's death. This means that a probate proceeding will need to be opened so that a person is named by the court to liquidate or transfer title to the bonds.
  
  
• Joint Ownership: If the bonds have co-owners, and one owner dies, the bond now belongs entirely to the co-owner. The co-owner may now liquidate the bond, change title to his or her own name, or change title to the surviving owner and another person of the owner's choosing.
  
  
• Named Beneficiary: If the bond owner named a beneficiary to the bonds on the bonds (not through her will) then upon the bond owner's death, the bond ownership is automatically transferred to the beneficiary. The named beneficiary may now liquidate the bond, change title to his or her own name, or change title to the named beneficiary and another person of the beneficiary's choosing.
  
  
• Estate Tax Consequences: Where the bonds are owned by one person (or by one person who names a beneficiary), 100% of the value of the bonds as of date of death is includible in a person's taxable estate. Where the bonds are owned by more then one person, there is a presumption that 100% of the value of the bonds is includible in the taxable estate of the first person to die. This presumption can be rebutted if the surviving co-owner actually contributed money to buy the bonds. The more likely scenario is that grandma bought a bond naming grandchild as co-owner with grandma's money. In this situation, 100% of the value of the bond on the date of grandma's death is included in her estate, even though she had a co-owner.
  
  
• Income Tax Consequences: Interest income on bonds is generally reported only when the bonds are cashed, disposed of (note: a change of ownership is considered a "disposition" of the bonds and interest accrued to that date must be reported at that time), or reach final maturity. Unlike other types of investments, there is no "step up in basis" for savings bonds, and the accrued, but as yet untaxed income, must be reported as some point by the estate or the beneficiaries.
  
  If a person owned bonds in their own name with no beneficiary, reporting the interest on those bonds for federal income tax purposes is the responsibility of either (a) the estate if the executor, personal representative, or administrator as the case may be, redeems the bonds; or (b) the beneficiaries of the estate if the bonds are transferred to them as new owners, in the year in which they redeem bonds or the bonds reach final maturity.
  
  Where there is a co-owner or beneficiary named, the co-owner or beneficiary is the new owner and as such is required to include on his or her return interest earned on the bonds for the year the bonds are redeemed or disposed of (including re-registration by substituting a new owner for the original living owner) or the bonds reach final maturity, whichever occurs first. Alternatively, even when there is a surviving co-owner or beneficiary, the person filing the decedent's final 1040 has the option of reporting on that return all interest earned on the bonds to the date of death. This option might be used where a person on a low income tax bracket has died, leaving the bonds to a person in a higher tax bracket.

The Bureau of Public Debt, on the Treasury Direct website, has detailed articles specifically outlining how savings bonds are to be treated in the event of the death of a bond holder.

• Series EE/E - What To Do When a Bond Owner Has Died
  
• Series HH/H - What To Do When a Bond Owner Has Died
  
• Series I - I Bond(s) Owners Deceased
  

Time to get Serious about 2005 Tax Planning

Category: Tax Law and Planning

From James Jimenez, CPA of Fass & Associates, P.C.. James can be reached at jnez@fasscpa.com:

"IT’S TIME TO GET SERIOUS ABOUT 2005 TAX PLANNING

Interested in saving taxes? Now’s the time to act. Reviewing your business or personal situation before year-end can help lower your 2005 tax bill. Here are some strategies to consider.

Keep an eye on your tax bracket. Moving upward from bracket to bracket costs you at least two percent higher tax on the additional income. Knowing when to take — or delay — earnings such as bonuses or commissions allows you to control your tax bracket. If you’re a business owner, think about adjusting your salary between years.

Boost contributions to your 401(k) or other retirement plan. The benefits are two-fold: current taxable income is reduced, and you enjoy tax deferral on the plan growth.

Delay sales to qualify for long-term rates. The tax rate for most long-term capital gain assets is 15% (5% for those in the lower two tax brackets). Short-term gains are taxed at ordinary income rates, which can be as high as 35%. Consider holding assets long enough (more than 12 months) to qualify for the lower rates.

Elect the installment method. If delaying an asset sale is not an option, you still might be able to defer the income and related tax. For sales of certain property, you can choose installment reporting.

Regulate your investment income. Delay interest income until 2006 by purchasing a certificate of deposit (CD) or other security that matures after year-end.

If you’ve made a loan that you’re now unable to collect, you may be entitled to a bad debt deduction. It’s important to be able to show that you tried to collect, so take the necessary steps before year-end.

More tax-saving strategies to implement before year-end include transferring assets to children, making charitable contributions, bunching itemized deductions, and taking advantage of increased business asset expensing amounts."

Savings Bonds (Part 1) - Learning More about those Bonds

Category: Elder Law, Estate Planning, Tax Law and Planning, Probate and Estate Administration, Financial Planning

Many people have invested in saving bonds at one time or another, or another has done so for them. For the most part, they sit in a safe deposit box until cash is needed (or you remember that you have them). However, there may be a need to find out more about the bonds or liquidate them as part of estate planning, estate administration, or elder law, or just sound financial planning for yourself.

Savings bonds are investment in the US government. There are various types of bonds, that earn interest in different fashions, and have unique tax consequences. Luckily, there are some wonderful resources on the web to cut through all of this information.

The US Government provides a very informative website at www.savingbonds.gov that goes through the purchase and redemption of various government investments (T-Bills, T-Notes, T-Bonds, I Bonds, EE Bonds, HH Bonds) and explains the differences between the various investments.

There is a very useful toolbox a the website for determining the current and future value of your investment:

Have Your Treasury Securities Stopped Earning Interest?

Savings Bond Wizard

Savings Bond Calculator

Growth Calculator

Savings Planner

Tax Advantages Calculator


Another excellent site is www.savingsbonds.com. This is a commercial site oriented to financial planning. It does have excellent step-by-step guides on bond redemption, including the practicalities of redemption and guidelines to the tax consequences.

Energy Tax Incentives Act of 2005 - Dollars to you?

Smartmoney.com: Tax Matters: What the New Energy Bill Means for You describes some generous new tax incentives for consumers.

"The best part: They all come in the form of tax credits, the very best kind of tax break. A credit lowers your federal income tax bill dollar for dollar. In contrast, a deduction lowers only the amount on which you're taxed, so your bill is reduced only by a percentage of the write-off. "

Some highlights from the Article:

Four New Tax Credits for Energy-Efficient Vehicles

Credit No. 1 for Hybrid Vehicles: Up to a maximum credit of $3,400.

Credit No. 2 for Lean-Burn Technology Vehicles: "Qualified "lean burn" vehicles are passenger cars and trucks with internal combustion engines that use a direct injection of a fuel mix with a higher-than-normal percentage of air." The credits are still unknown.

Credit No. 3 for Fuel-Cell Vehicles: "Qualified fuel-cell vehicles include, for example, cars that run on hydrogen cells." The credit amount can be as high as $12,000.

Credit No. 4 for Alternative-Fuel Vehicles: "Qualified alternative-fuel vehicles include cars and trucks that run solely on compressed or liquefied natural gas, liquefied petroleum gas, hydrogen, or any liquid that is at least 85% methanol...The maximum credit for garden-variety autos and light trucks is $4,000."

New Tax Credit for Residential Energy Improvements
"This personal tax credit has a $500 lifetime limit, but it's broad enough that many folks will benefit even though the numbers won't be very big."

New Tax Credit for Other Residential Energy Equipment
"You can also collect a completely separate personal tax credit equal to 30% of the cost of:

* Qualified solar water-heating equipment (maximum credit of $2,000).
* Qualified electricity generating solar photo-voltaic property (maximum credit of $2,000).
* Qualified fuel-cell property (maximum credit of $500 for each 0.5 kilowatt of capacity)."

So You Want to Be a Landlord - Tax Benefits

Category: Tax Law and Planning, Financial Planning

I have discussed here before some of the risks with owning rental real estate in your own name ("Rental Real Estate - What are the Risks?") - it should be titled to an LLC or some other entity to create a barrier between your personal assets and the property. As a general rule, if rental real estate is owned by an LLC, the LLC is the only entity that is liable in the event of a lawsuit, and only to the extent of its assets.

The article Smartmoney.com - Tax Matters: So You Want to Be a Landlord discusses the income tax benefits of owning rental real estate (as opposed to purchasing real estate to fix up and flip).

"But the real kicker is that you can depreciate the cost of residential buildings over 27.5 years, even while they are (you hope) increasing in value. Say your rental property (not including the land) cost $100,000. The annual depreciation deduction is $3,636, which means you can have that much in positive cash flow without owing any income taxes. That's a pretty good deal, especially after you own several properties. Commercial buildings must be depreciated over a much longer 39 years, but the write-offs will still shelter some cash flow from taxes. "

Since an LLC is a pass-through entity for tax purposes, if the rental real estate is owned in an LLC, the tax benefits will flow through to your personal return.

Midyear Financial and Tax Planning Checkup

Category: Tax Law and Planning, Financial Planning

Portsmouth Herald Financially Speaking by Holly Hunter: Mark calendar for midyear financial checkup - If your spring cleaning resulting in a pile of papers to go through, or you resolved to make some financial housekeeping changes this year, some food for thought.

Also, some views from James Jimenez, CPA, a partber at Fass & Associates, certified public accountants located in Parsippany, New Jersey as to mid-year tax tuneups:

"CUT YOUR TAXES WITH MID-YEAR PLANNING

ItÂ’s summertime! Probably the last thing on your mind is tax planning. The problem is that if you wait until December to think about your 2005 taxes, there wonÂ’t be enough time for any tax strategy to take effect. But if you take the time to plan now, you still have six months for your strategy to work this year. So set aside some time for tax planning right now. Begin by pulling out your 2004 tax return.

* Review your income and deductions for last year. Did you lose any credits or deductions because your income was above a certain threshold amount? If so, find out what you can do to keep this yearÂ’s income below the threshold in order to save the tax break.

* Evaluate your investment portfolio. By now you should have an idea whether youÂ’ll be selling any investments this year. Taking losses by pruning your portfolio can be an effective way to manage income.

* Build a retirement fund and cut taxes too. Take advantage of the new higher contributions allowed for IRAs, SIMPLEs, SEPs, and 401(k) plans. If you will be 50 or older by December 31, take advantage of the additional “catch up” contributions you can make to your retirement plan.

* Check out education tax breaks. If you or your children are in college, review the education tax breaks for 2005. These include the deduction for higher education expenses, a deduction for student loan interest, and contributions to Section 529 plans or education savings accounts.

* DonÂ’t overpay your taxes. Finally, if you received a large refund on last yearÂ’s taxes, consider reducing your withholding for this year. To adjust your withholding, file a new Form W-4 with your employer."

Don't just deed your house to your child

Category: Elder Law, Estate Planning, Tax Law and Planning

TimesDispatch.com MAIL BAG: Mom made a costly error in deeding house to child is an example of good intentions coupled with a lack of understanding of tax laws resulting in a large unexpected tax.

While the owner of their own primary residence enjoys an exemption from capital gains tax on the sale under IRC Section 121, a non-resident owner does not. See IRS Publication 523 for more information.

Here, mom gifted her house to son, and when he went to sell it to pay for mom's care, he found out that he owed capital gains tax on over $400,000 on the sale of the house. He (mistakenly) believed there was no tax on the sale of a home. He misunderstood that the tax exemption only applied (1) to his primary residence, not any residence he owned, and (2) only up to certain dollar limitations ($250,000 for a single person and $500,000 for a married couple).

This situation described in this article could have been avoided by considering several other alternative plan with the house such as:

• Mom selling house to son for a note - mom's sale is sheltered from tax through IRC Section 121, and son's basis in the house is the purchase price,
• Mom and son joining together to take out a home equity line so that she can keep the house but pay for her care,
• A reverse mortgage,
• A gift to son with mom retaining a life estate so she can always live in the house. The life estate would also include the house in her taxable estate, which in turn means that upon her death the son's basis is the fair market value at time of death (a "step-up" in basis under IRC Section 1014) - son can rent the house to generate income to pay for mom's care if she can no longer live at home.

Thoughts before making that Charitable Contribution

Category: Tax Law and Planning

Good tips to consider before you make that charitable contribution - you should know what you are contributing to, with what result.Bluefield Daily Telegraph