Archive for the ‘Taxes’ Category

How good is Do-It-Yourself estate planning?

Thursday, June 2nd, 2011

Clients have asked me why they should pay an estate planning attorney $2,000 to $4,000 or some similar amount to get their estate plans in order when Legalzoom.com offers a basic Will for $69.  What services is an estate planning attorney providing that Legalzoom.com cannot?  How complicated is a Will?

Using words to express a thought or to follow instructions is an inexact science.   How many people feel Help Manuals are easy to understand?  An estate planning attorney has to combine all the goals, objectives and philosophies of a client with all relevant state and federal law, including all applicable state and federal tax law, to create one document. The drafting of the Will is the simple part.  Understanding the law and it’s subtleties with respect to the wishes of the client can be quite complicated.  However, the most difficult part is providing sound advice, which requires both knowledge and experience. 

Legalzoom.com or other do-it-yourself websites require users answer a string of questions using a “decision tree” form of logic.    These sites do not offer assistance on a question that would be considered legal in nature.   Their documents assume a mother and father with illiquid assets, no special needs children, and harmonious heirs is the same as a mother and father with liquid assets (stocks and bonds), a special needs child and a highly combative family.  These do-it-yourself website tools treat all families and situations alike. 

Bottom line: Why would anyone be “penny wise and dollar foolish” on an estate planning document?  Mistakes can cost hundreds of thousands of dollars or more if the documents are drafted poorly.  An estate planning attorney has the ability to tailor estate planning documents to adhere to  a client’s unique circumstances, whereas, do-it-yourself websites, such as Legalzoom.com, are unable to  provide this level of customization or advice.

Always Asking, Never Assuming™

Christopher Holtby

Posted in Estate Planning, Investments, Legacy Planning, Retirement Planning, Taxes, Wealth Management | No Comments »

New IRS rules on cost basis calculation and record keeping

Saturday, October 30th, 2010

One of the oddest parts of the American tax system was that the IRS relied on taxpayers to correctly report their realized investment gains.   The fear driving taxpayers to correctly report those gains was the threat of an IRS audit.  There was no automatic process for the IRS to confirm whether the reported cost basis on the taxpayers tax return (Form 1040, Schedule D) was correct.  The Emergency Economic Stabilization Act of 2008 requires for investments such as stocks and mutual funds, that brokerage firms, banks and mutual fund companies report to the IRS the actual costs basis.  IRAs and trusts, if I interpreted the IRS guidelines correctly, are exempted.   When the taxpayer sells a portion or all of the investment, the IRS can match the taxpayer’s reported cost basis against that of the brokerage firm’s etc reported cost basis.  Those firms will be providing IRS Form 1099-B to taxpayers in a more detailed fashion.

When an investment is purchased, one tax lot is created with purchase date and cost.  When that investment pays a dividend or interest (for mutual funds), whose proceeds are re-invested in the investment that creates another tax lot changing that investments costs.  Taxpayers will need to decide on what type of tax lot reporting they want.  There are a few choices: First in First Out, Last in First Out, high cost, low cost or average cost.  Each have different tax implications.  The custodian of your investments are likely to have default tax lot report settings for those taxpayers not deciding which method they prefer.  

Bottom line: Taxpayers have to discuss with their CPA or research on their own which tax lot reporting method they should choose.

Always Asking, Never Assuming™

Christopher Holtby

Tags:, , , , , , , , , , , , , , , ,
Posted in Taxes | No Comments »

3.8% Surtax and tax planning

Tuesday, April 13th, 2010

Several new taxes will be levied to pay for the new Health Care Bill (which will fail in its goal to reduce our health care costs).  One, in particular, affects taxpayers who have substantial retirement plans:  the 3.8% surtax on investment income.  Combining the new surtax with the expiration of the Bush-era tax cuts in December 2010 will increase the highest marginal tax rate from 35% to 43.4% unless Congress makes changes.

A few definitions: Net investment income is interest, dividends, annuities, rents, royalties, income from passive activities and net capital gains reduced by allowed deductions; Modified Adjusted Gross Income (MAGI) (Form 1040, line 37) is compared against the threshold amount to determine the net investment income subject to the surtax; Threshold is a key measure in the “lessor of” formula for single and married individuals and estates/trusts; and “Lessor Of” formula, which already exists in the statutes, deals with the final outcome of net investment income, MAGI and the threshold amount.

Traditional IRA distributions are part of MAGI, and Roth IRA distributions are not.  The decision about whether to convert to a Roth IRA is not straightforward.  There are many variables which a taxpayer or a taxpayer’s CPA needs to analyze to determine the effects a Roth IRA conversion will have on the surtax calculation.

Bottom line: According to Alan E. Webster, JD, “a tax Bermuda Triangle [exists] where IRA distributions cause investment income to be trapped in the uncharted nebula – ‘a place where no man has gone before.’ ”  Plan accordingly.

[This blog should not be considered tax advice.  This blog is meant for informational purposes only.  Please consult your CPA for verification of all facts stated in this blog.]

 

Always Asking, Never Assuming™

Christopher Holtby

Tags:, , , , , , , , , , ,
Posted in Taxes | No Comments »

Tax risks for non-cash charitable contributions

Wednesday, March 17th, 2010

The case of Newton J. Friedman et ux. v. Commissioner provides a recent ruling on the tax complications that can arise from non-cash charitable contributions. 

The couple in question made two non-cash charitable contributions in 2001 and 2002.   The returns were prepared by their CPA.  Their returns had included Form 8283, Noncash Charitable Contributions, which consisted of an appraisal and a list of the items which were appraised.  The IRS selected the Friedmans’ 2001 and 2002 returns for an examination.  The IRS decided that not only were the non-cash charitable contributions disallowed, but a 20% penalty was also levied for lack of appropriate substantiation.  The Court ruled with the IRS.

A few lessons can be learned from the fact pattern of this case: 1) taxpayers need to “obtain a qualified and timely appraisal for the contributed property” no later than the due date of the return, 2) appraisals need to be very detailed, allowing someone not familiar with the property contributed to understand characteristics of property, 3) ensure Form 8283 details how market value was calculated, the date of the valuation, and the cost basis, 4) keep very detailed records, 5) get the charity to recognize what was received, and state that no services/goods were provided, and 6) provide your CPA with all the details he/she requests no matter how annoying.    

Bottom Line:  This case provides a pivotal example of why it is important for clients to tell their CPAs everything, provide all the detailed information requested by their CPA, and to ensure that their tax advisor explains all the nuances of out-of-the-norm planning. 

Always Asking, Never Assuming™

Christopher Holtby

Tags:, , , , , , , , , , ,
Posted in Taxes | No Comments »

Stop Tax Haven Abuse Act (S. 681)

Thursday, December 4th, 2008

In early 2007, Senators Levin, Coleman and Obama introduced a bill called the Stop Tax Haven Abuse Act to restrict U.S. taxpayers using offshore tax havens and abusive tax shelters to avoid paying taxes.  There have been articles written on the unintended consequences of this bill.  Here are some points to note:

1) There is no such thing as legal tax haven for U.S. taxpayers, since they are taxable on their worldwide income.

2) Currently the rules regarding controlled foreign corporations, passive foreign investment companies and foreign trusts created by U.S. persons are all taxable and reportable to the IRS.  There are even more rules and reporting requirements regarding U.S. persons having trusts, entities, investments offshore or receiving gifts from foreign persons.  

3) The bill could create a situation where anything or any amount transferred to or from a U.S. person to an offshore entity could be presumed to be unreported income.  

4) Under current Internal Revenue Code section 7491, the burden of proof is placed on the Secretary of the Treasury if the taxpayer shows  ”credible evidence” and tax returns are filed with account statements.  The proposed bill places the burden of proof on the taxpayer, who is prohibited from introducing “foreign based documents” unless authenticated in court by a real person.  

Bottom line – If you will be affected by the proposed bill, make sure your legal and tax advisors have clearly explained how your planning will be impacted if the bill becomes law as written.  

Always Asking, Never Assuming™

Christopher Holtby

Posted in Taxes | No Comments »

Tax changes for 2009

Saturday, November 8th, 2008

Below are some tax changes for the 2009 tax year:

 

Gift Tax Annual Exclusion – $13,000

Gift Tax Annual Exclusion to Non-US Citizen Spouse – $133,000

 

Estate Tax Exclusion Amount – $3,500,000 (gift amount still $1,000,000)

GSTT Exemption Amount – $3,500,000

 

Employee Contribution to 401(k) – $16,500

            Over Age 50 “Catch-Up” – $5,500

Employer Contribution to 401(k) – $49,000

 

Top Income Tax Rate – 35%, for taxable income over $372,950

Phase Out of Itemized Deductions – begins at $166,800 AGI

Always Asking, Never Assuming™

Christopher Holtby

Posted in Taxes | No Comments »

Tax laws for second homes

Sunday, October 26th, 2008

I was in San Miguel de Allende (Mexico) and Angel Fire (New Mexico) this summer, talking with people as I met them.  I found there is a lot of misinformation out there regarding taxes and second homes.  The IRS has clear cut rules on second homes.  

A vacation home can be categorized in three different ways: personal, rental and dual purpose.  The category depends on the number of days used by the owner and related parties AND the number of days rented.   The categories determining the tax treatment of the second home income and deductions are: 

  • Entirely personal : used as a home and rented fewer than 14 days per year
  • Entirely rental : rented more than 14 days and owner’s personal use does not exceed 14 days OR 10% of the rental days, whichever is greater
  • Dual Purpose : mixed use of personal and rental, where the second home is rented more than 14 days and personal use exceeds 14 days per year OR 10% of total rental days, whichever is greater

Below are some common statements that I’ve heard that might lead the owner of the second home to having a potential IRS problem or leaving money on the table:

“I’ll just sell it and write off the loss”

“Renting doesn’t matter because I’ll never get to deduct my losses”

“At least I can deduct $25,000″

“I’ll donate the house to a charity for the summer, and at least get a charitable deduction”

“My brother said he would rent it from me, so I will be able to treat it as a rental property”

Bottom line – discuss your plans, expectations and goals with your tax advisor/accountant when owning/considering owning a second home.  Visit this IRS site dealing a range of issues of second homes.

Always Asking, Never Assuming™

Christopher Holtby

Posted in Taxes | No Comments »

Inverse tax planning

Friday, September 12th, 2008

Third quarter estimated tax payments are due on 9/15.    At this point you should be talking with your advisors about finalizing year-end planning for 2008 and thinking about calculating marginal tax rates and levels for 2009.   Why?  You now have clarity on this year and some insight into next.  This helps you plan for what income and expenses should be deferred or accelerated.

Especially those folks in high income states (not me because I live in TEXAS), AMT is a key component in your tax life.   You may want to defer your property tax payments to next year or change the timing of your income.  Those owning your own businesses can sandbag revenue as long as you follow the rules (Code, Regulations, Congress Blue Book and Case Law).  

Some big ticket issues are charity giving and trigger of capital gains.   Capital gains can trigger AMT because this event lowers the AMT exemption amounts. 

Anyway, talk to your tax advisor.   Wait until after 9/15 because they are swamped with corporate tax returns right now.

Christopher Holtby

Posted in Taxes, Wealth Management | No Comments »

FLP – the nettlesome details

Wednesday, September 10th, 2008

The family limited partnership (FLP), or it’s cousin, the family limited liability company, can provide substantial wealth transfer benefits.   Advisors and clients should pay particular attention when transferring in marketable securities (cash, stocks, bonds, etc.).

If the FLP meets the definition of an Investment Company do to the funding of the FLP, all of the gains on all assets contributed will be subject to income tax.  This is a one way street, as losses don’t trigger deductions.   Under current tax rules, an Investment Company has more than 80% of value in readily marketable securities.   FLP monitoring is pivotal since any future contributions into the FLP could cause problems, as the IRS may aggregate the various transfers if they believe there was a “plan” (Investment Policy Statements, legal documents or just plain e-mails).

The tax problem of reaching the Investment Company status does not occur until the transfer results in a “diversification of the transferors’ interests.”   This is a tax term, not an investment term.  Key issue here.   A portfolio is considered diversified if less then 25% of the assets are invested in a single security AND less than 50% are invested in any five or fewer securities.

So what to do?  Diversify the portfolio before contributing to the FLP.   Work with accountants and attorneys who really understand the tax rules affecting FLPs and create a comprehensive plan.   Create an IPS for each contributing partner, which assists in avoiding the tax problems.  

There are a host of other challenges.   Ask the questions: How does the IRS ding FLPs?  What are the operational issues which need to be addressed annually?  Is there a simpler way to accomplish the same goal?

Christopher Holtby

Posted in Estate Planning, Taxes | No Comments »

Taxes and Politicians

Sunday, June 15th, 2008

Not a very PC topic.  Someone sent me this very interesting link going over 37 pages of how Obama and McCain are different on tax policy.  There are some subtle and not so subtle issues.  I found it interesting reading. http://www.taxpolicycenter.org/UploadedPDF/411693_CandidateTaxPlans.pdf.

Those who bought investments because of the lowered qualified dividend tax rate (15%) may want to reconsider that allocation, simply because of the current tax effects. Those with large long-term or short-term capital gains would do well to consider locking in current low tax rates.

The tax tail does wag the investment dog, but one would be wise to understand what is going on.

Christopher Holtby

Posted in Estate Planning, Taxes | No Comments »