News On The Tax Front--The latest tax news.
IRS Continues On Line Launch of Business Tools
In Brief:--Tax, business, and personal finance tips.
Previously Reported In Daily Update
If you're covered by a high deductible health plan (HDHP), you may be able to make deductible contributions to a Health Savings Account (HSA). An HDHP is a health plan that satisfies certain requirements with respect to minimum annual deductibles and maximum annual out-of-pocket expenses. Generally, if substantially all of the coverage in a health plan that is intended to be an HDHP is provided through a health FSA (flexible spending arrangement) or HRA (health reimbursement arrangement), the health plan is not an HDHP. In Rev. Rul. 2004-45 (IRB 2004-22) the IRS described 5 situations where an individual was covered by a HDHP and a health FSA or HRA and ruled on whether or not the individual could make contributions to a HSA in each situation.
The House has begun revisions on the bill to replace the FSC Repeal and Extraterritorial Income Exclusion (ETI) Act. The House version would replace the ETI Act with increased Sec. 179 expensing and a reduction in the corporate tax rate while the Senate version contains a tax deduction designed to encourage domestic manufacturers.
A provision was introduced that would be included in the Jumpstart Our Business Strength (JOBS) Act that will change the rules for charitable donations of vehicles.
In order for alimony payments to be deductible by the payor, they must meet certain requirements. In Jay Mukherjee (T.C. Memo. 2004-98) the taxpayer's divorce called for a lump-sum alimony payment. The Court found that the payment would have met the definition of alimony, but for the fact the taxpayer's obligation to make the payment did not terminate on the death of his former wife. The divorce decree did not contain specific language requiring termination.
Passive losses from rental properties may be used to offset up to $25,000 of ordinary income (subject to the phaseout rules) or can offset passive income from other properties. In Cal Interiors Incorporated, et al. (T.C. Memo. 2004-99) the taxpayers had net income from the rental of a portion of their home as an office for their C corporations. They offset the income by the losses from other rental properties. The IRS argued that the taxpayers' net income from their rental of the office was nonpassive income under the recharacterization rule of Section 1.469-2(f)(6), because the taxpayers materially participated in the business activity of the lessees; i.e., the corporations. Thus, the IRS determined, the net income from the office could not be offset by any of the losses from the other rental properties. The Court agreed.
There's considerable concern about more and more taxpayers becoming subject to the alternative minimum tax (AMT). The case of Scott William Katz (T.C. Memo. 2004-97) brings home the issue. On this tax return, the taxpayer had adjusted gross income of $46,834.16, itemized deductions of $54,275.81, and personal exemptions of $2,800. The taxpayer computed his taxable income as zero, and his tax liability as zero. He showed $133.66 as withheld income tax, all of which he wished refunded. The IRS issued the full refund. The IRS later determined the taxpayer was liable for the alternative minimum tax in the amount of $4,214. The AMT applied because much of the taxpayer's itemized deductions did not reduce his alternative minimum taxable income. The taxpayer argued that the intent of the AMT was to prevent high-income taxpayers from escaping all income tax liability by using exclusions, deductions and credits and that the AMT should not apply to the taxpayer. The Tax Court held that the tax did indeed apply to the taxpayer. Furthermore, Congress did give consideration to the tax affecting lower income taxpayers by including an exemption amount.
The IRS has announced (IR-2004-66) that taxpayers who encounter systemic tax problems can now bring them directly to the attention of the IRS Taxpayer Advocate Service. The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers resolve problems with the IRS and recommends changes that will prevent problems. Those wishing to bring issues to the attention of TAS can go to www.irs.gov/advocate and click on "What is Systemic Advocacy." Private information, such as taxpayer names and identification numbers, will be screened out of any submissions. The system will also automatically generate a receipt notice for those taxpayers, tax practitioners, academicians and researchers who use it. Advocacy projects will be initiated on those items that affect multiple taxpayers and relate to IRS systems, policies and procedures. TAS opens advocacy projects on systemic issues that affect individual taxpayers, business taxpayers or both. In contrast with taxpayer-specific cases, systemic issues affect segments of the taxpayer population--locally, regionally or nationally. To submit suggestions for advocacy projects, taxpayers previously were required to complete IRS Form 14411, "Systemic Advocacy Issue Submission Form," online and then e-mail or fax the submission. While this method is still available, taxpayers generally should find the Web-based application easier to use.
Notice 2004-37 (IRB 2004-21) announces those circumstances under which a consolidated group that owns stock of an includible corporation will be treated as satisfying the value requirement of Sec.1504(a)(2)(B) for certain purposes. It also announces the intention of the IRS to propose regulations pursuant to Sec. 1504(a)(5)(C) providing that the value requirement will be treated as satisfied if the affiliated group, in reliance on a good faith determination of value, treated such requirement as satisfied. In addition, pursuant to Sec. 1504(a)(5)(D), the proposed regulations will disregard an inadvertent ceasing to satisfy the value requirement by reason of changes in relative values of different classes of stock. The Notice also describes the issues that the IRS is studying.
The IRS has issued final regulations (T.D. 9127) regarding the reduction of tax attributes under Sections 108 and 1017. These final regulations affect taxpayers that realize income from the discharge of indebtedness that is excluded from gross income pursuant to section 108.
The rules for electing S corporation status provides that when stock of the corporation is owned by husband and wife as community property (or the income from the stock is community property), each person having a community interest in the stock or income therefrom must consent to the election. In Rev. Proc. 2004-35 (IRB 3004-23) provides automatic relief for late filing of shareholder consents for spouses of S corporation shareholders in community property states.
The IRS has announced that tax returns filed electronically from residences climbed more than 20 percent, topping 14 million. Tax professionals' use of e-file increased more than 15 percent from the same period in 2003, reaching almost 42 million this year.
Section 163(a) generally allows a deduction for all interest paid or accrued within the taxable year on indebtedness. Section 265(a)(2), however, provides that no deduction will be allowed for interest on indebtedness incurred or continued to purchase or carry obligations where the interest is exempt from federal income taxes. Section 246A reduces the dividends received deduction under Sec. 243, 244, or 245(a) to the extent that the stock is debt-financed. Stock is treated as debt-financed if there is indebtedness directly attributable to the stock investment. Section 7701(f) provides that the IRS will prescribe regulations to prevent the avoidance of the provisions of the Code that deal with (1) the linking of borrowing to investment, or (2) diminishing risk, through the use of related persons, pass-thru entities, or other intermediaries. The IRS is soliciting comments and suggestions regarding the scope and details of regulations that may be proposed under Section 7701(f) to address the application of sections 265(a)(2) and 246A in transactions involving related parties, pass-through entities, or other intermediaries. See REG-128572-03.
The IRS has issued proposed regulations (REG-128590-03) under Section 265(a)(2) that affect corporations filing consolidated returns. These regulations provide special rules for the treatment of certain intercompany transactions involving interest on intercompany obligations.
The March 2004 revision of Form 2848, Power of Attorney and Declaration of Representative, is now available as a fill-in form at www.irs.gov/pub/irs-fill/f2848.pdf. Practitioners and their clients can fill in and print the form for signing and submitting to the IRS. Reminder: as explained in the instructions for Form 2848, if the representative you appoint is not qualified to sign Part II of this form, Form 2848 will not be honored and will be returned to you. As of March 2004, the IRS will no longer treat such invalid forms as authority for the person you named to receive your tax information.
The law allows you to deduct certain moving expenses if they are related to an employment change. In Hamid and Eolina Bajramovic (T.C. Memo. 2004-96) the Court found the taxpayers incurred moving expenses in 1998. The taxpayers claimed a moving deduction in 1999 but provided no testimony or evidence to prove they paid or incurred any such expenses in 1999. The Court held that the taxpayers were not allowed a deduction in 1999 for moving expenses incurred in 1998.
The IRS has issued Rev. Proc. 2004-31 (IRB 2004-22) that provides procedures for taxpayers to change their method of accounting for deducting under Sec. 461(f) for amounts transferred to trusts in transactions described in Notice 2003-77, IRB 2003-49. The revenue procedure provides additional guidance to temporary regulations under Sec. 461(f) published in November, 2003. These regulations clarify that the transfer of a taxpayer's note or promise to provide property or services in the future is not a transfer for the satisfaction of a contested liability under Sec. 461(f). The regulations also provide that a transfer of a taxpayer's stock or the stock or note of a related party is not a transfer for the satisfaction of a contested liability under Sec. 461(f). The regulations further provide that, in general, economic performance does not occur when a taxpayer transfers money or other property to a trust, escrow account, or court to provide for the satisfaction of a contested workers compensation, tort, or other payment liability. Rather, economic performance occurs when payment is made to the claimant.
In Rev. Proc. 2004-32 (IRB 2004-22) the IRS provided guidance to credit card issuers with respect to accounting for annual fee income. The revenue procedure also provides automatic consent procedures for changing accounting methods for annual fees. In Rev. Proc. 2004-33 (IRB 2004-22) the Service described conditions under which the IRS will allow a taxpayer to treat its income from credit card late fees as interest income on a pool of credit card loans.
In Rev. Rul. 2004-51 (IRB 2004-22) the IRS provided guidance with respect to whether an organization that forms a joint venture through an LLC with a for-profit corporation would continue to qualify for tax-exempt status and whether the organization is subject to the unrelated business income tax (Sec. 511) on its distributive share of the LLC's income.
The IRS issued final regulations (T.D. 9125) relating to the deduction for interest paid on qualified education loans. The regulations deal with the treatment of capitalized interest and certain fees, interest paid by someone other than the taxpayer, definition of an eligible educational institution and qualified education loan and certain other provisions.
The IRS has issued Rev. Proc. 2004-34 (IRB 2004-22) that provides taxpayers that use an accrual method of accounting a limited deferral beyond the year of receipt for certain types of advance payments. The revenue procedure finalizes a proposed revenue procedure published in late 2002. An accompanying announcement (Announcement 2004-48; IRB 2004-22) discusses the most significant issues considered in connection with finalizing the revenue procedure. While taxpayers must generally include advance payments for goods or services in income in the taxable year received, existing regulations allow taxpayers to defer certain advance payments for goods and prior guidance provided a safe harbor method for taxpayers to obtain a limited deferral to the following taxable year for certain advance payments for services. In addition to allowing deferral of payments for services, the revenue procedure also allows limited deferral of certain other payments. If only part of a payment qualifies for deferral, the revenue procedure allows partial deferral. Although deferrals under the new revenue procedure generally are limited to one taxable year, the revenue procedure includes a special rule allowing deferral for two taxable years in the case of certain short taxable years. In addition, the revenue procedure allows deferral to the following taxable year even if the term of the agreement extends beyond the end of the following taxable year. Taxpayers may also continue to use the existing regulations to defer advance payments for goods.
The IRS has issued guidance (Notice 2004-39; IRB 2004-22) to clarify that capital gain dividends received from a mutual fund in 2004 will be taxed at the new, lower capital gain rates enacted last year. Concern had been expressed that the existing rules for dividend designation and the transition to the new, lower capital gain rates enacted last year might cause some 2004 capital gain dividends to be taxed to fund shareholders at the old, higher capital gain rates. This guidance clarifies that this will not occur.
Employee or independent contractor? In Stephen Del Monico et ux. (T.C. Memo. 2004-92) the taxpayer was an employee working as a dispatcher for a trucking company for the first two-thirds of the year. For the final third, he was paid as an independent contractor. The taxpayer argued that he did not realize his status had changed and that he assumed the all his earnings were reported on the W-2. The Tax Court said that a reasonable and prudent taxpayer in these circumstances would have noticed the discrepancy between the amount of income he earned and the amount reported on the Form W-2, and at least would have contacted his employer to verify the accuracy of the company's information return. The difference between the amount on the Form W-2 and petitioner's actual receipts during the year was so great, and such a high proportion of his total income, that the Court considered his explanation entirely unbelievable. Consequently, the Court held that, without a satisfactory reason, the taxpayer reported on his federal income tax return for the year far less income than he received. From the record in this case it was plain that the taxpayers must have realized that they were severely understating their income on their federal income tax return for the year. Even if the taxpayer did not receive a Form 1099, a cursory review of his Form W-2 should have alerted petitioner to the fact that $28,320 only represented approximately two-thirds of his total income. The taxpayer also testified that he believed the company continued to withhold during the last third of the year and that he should be entitled to a credit for withheld taxes. The Court did not agree. It noted a credit could be claimed if his employer withheld, but did not deposit the taxes, but not if the taxes were not withheld. The Court did find the taxpayer became an independent contractor for the last third of the year. There was clearly a change in the nature of the relationship with the company, the employee often worked from home, and the Court noted certain other relationships which led it to believe the taxpayer was an independent contractor.
In Rev. Rul. 2004-49 (IRB 2004-21) the Service has held that if, pursuant to Sec. 1.704-1(b)(2)(iv)(f), a partnership revalues a Section 197 intangible that was amortizable in the hands of the partnership, then the Sec. 197 anti-churning rules do not apply and the partnership may make reverse Sec. 704(c) allocations (including curative and remedial allocations) of amortization to take into account the built-in gain or loss from the revaluation of the intangible. If the revalued Section 197 intangible was not amortizable in the hands of the partnership, then the partnership may make remedial, but not traditional or curative, allocations of amortization to take into account the built-in gain or loss from the revaluation of the intangible, provided that such allocations are not limited by Sec. 1.197-2(h)(12)(vii)(B).
The IRS announced (IR-2004-64 and Announcement 2004-46, IRB 2004-21 and FS-2004-13) that taxpayers who invested in an abusive tax shelter commonly known as "Son of Boss" will have until June 21 to accept an IRS settlement offer to resolve their tax issues. The IRS is already aware of several thousand transactions involving an understatement of tax in excess of $6 billion, not including interest and penalties. Many of these transactions generated tax losses of between $10 million and $50 million. Under the terms of the agreement, eligible taxpayers must concede 100 percent of the claimed tax losses, must pay all applicable interest and must accept the imposition of a penalty unless they had previously disclosed their participation in the transaction. Participating taxpayers will be allowed to deduct as a loss their out of pocket transaction costs, typically promoter and professional fees. Taxpayers not participating in the settlement will receive a statutory notice of deficiency (90 day letter) disallowing all losses and out of pocket costs and will be assessed maximum applicable penalties. To achieve uniformity and enhance overall compliance with the tax laws, taxpayers will not be afforded the traditional administrative Appeals process. The IRS considers the abuses of this shelter to be particularly severe and announced, should a taxpayer decide to go to court, it will vigorously pursue the full tax due, applicable interest and the maximum penalty. Furthermore, taxpayers should not expect to settle court case on more favorable terms than those offered in the IRS settlement initiative. The IRS has learned of at least 500 previously undisclosed transactions in the last 90 days alone.
The IRS has issued final regulations (T.D. 9126) relating to the capital account maintenance rules under Section 704. These regulations expand the rules regarding a partnership's right to adjust capital accounts to reflect unrealized appreciation and depreciation in the value of partnership assets.
You may be able to settle your debts with the IRS for less than the full amount if you can get them to agree to an offer in compromise. In Joseph B. Borges and Maria R. Borges (2004-1 USTC 50,208; U.S. District Court, Dist. N.M.) the Court sided with the taxpayers in holding that the IRS abused its discretion when it rejected the taxpayers' offer in compromise. One of the Appeals officer rejected the taxpayers' offer because she felt the taxpayers offer would not even cover the interest on the outstanding debt. However, the Court noted the Appeals officer did not take into account the fact that a substantial employment tax deposit had been misapplied. The taxpayers' true liability was some $170,000 less.
Your debts are not automatically discharged in bankruptcy. You must meet certain requirements. In the case of income tax returns, you must have filed a valid return before declaring bankruptcy. In In re John Howard Payne (2004-1 USTC 50,210; U.S. Bankruptcy Court, No. Dist. Ill. East. Div.) the Court sided with the taxpayer in finding that he had filed a valid return. The taxpayer's testimony was corroborated by a copy of a return signed by the taxpayer's accountant at that time. The taxpayer established he filed the return for the year at issue together with returns for other years and the IRS acknowledged receiving all the other returns. The Court held the taxpayer filed the return.
The IRS has issued a revenue procedure (Rev. Proc. 2004-29) providing guidance on the use of statistical sampling in determining deductible business meal and entertainment (M&E) expenses. Deductions for M&E expenses generally are limited to 50% of the expense. However, the 50% disallowance does not apply to certain M&E expenses. That includes expenses that fall under a number of special rules, but the most frequently encountered one is food and beverages provided to employees working overtime, through their lunch hours, etc. This revenue procedure provides a statistical sampling methodology for use in establishing the amount of substantiated M&E expenses excepted from the 50 percent disallowance. The proper use of statistical sampling will relieve taxpayers, especially those with large M&E accounts, of the burden of scrutinizing each and every item relating to an M&E amount.
The exemption amount for the alternative minimum tax was increased to $40,250 ($58,000 for married couples filing jointly) from $33,750 ($45,000 for married, joint) for 2003 and 2004. If Congress doesn't act it will return to the former levels in 2005. The House plans to move on a bill that would increase the exemption amounts to $40,900 ($58,950) beginning in 2005.
If a taxpayer doesn't keep adequate books and records, the IRS can reconstruct the taxpayer's income by any method that clearly reflects his income. In such cases, IRS may compute a taxpayer's income and income tax liability by a variety of indirect methods, including the net worth method. Under the net worth method, taxable income is computed by reference to the change in the taxpayer's net worth during a year, increased for nondeductible expenses such as living expenses, and decreased for items attributable to nontaxable sources such as gifts and loans. The resulting figure may be considered to represent taxable income, provided: (1) the IRS establishes the taxpayer's opening net worth with reasonable certainty, and (2) the IRS either shows a likely source of unreported income or negates possible nontaxable sources. In Virginia Ferguson, f.k.a. Virginia Del Bosque and Estate of Armand J. Del Bosque, Deceased (T.C. Memo. 2004-90) that's exactly what the IRS did. The Court sided with the IRS and allowed the reconstruction. The taxpayer argued that there were flaws in the IRS computations. The Tax Court said the errors did not render the net worth computation so unreliable as to negate any presumption of correctness.
When a multi-member domestic Limited Liability Company (LLC) incurs federal employment tax liabilities, can the IRS collect the employment taxes owed by the LLC from the members, including by levy on the members' property and rights to property? That was the question posed in Rev. Rul. 2004-41 (IRB 2004-18). The IRS held that, if under state law, the members of the LLC are not liable for the debts of the LLC, then absent fraudulent transfers or other special circumstances, the IRS may not collect the LLC's employment tax liability from the members, including by levy on the property and rights to property of the members.
In Notice 2004-38 (IRB 2004-21) the IRS announced that it will issue temporary and proposed regulations that will modify the definition of "qualified amended return" in Treasury Regulations Sec. 1.6664- 2(c)(3). The temporary regulations will provide that the period for filing a qualified amended return is terminated when the Service serves a John Doe summons under Section 7609(f) with respect to the taxpayer's tax liability. The temporary regulations also will provide that the period for filing a qualified amended return is terminated when the Service contacts a promoter, organizer or material advisor concerning a listed transaction for which the taxpayer has claimed a tax benefit.
In Robert Eugene Poindexter (122 TC--, No. 15) the taxpayer reported tax on his 1994 and 1996 returns but did not remit those amounts. The IRS assessed those amounts and demanded payment. After several years of continued nonpayment, the IRS issued to the taxpayer a notice of intent to levy. The taxpayer timely requested a hearing pursuant to Sec. 6330. At the hearing, the taxpayer asserted that the amounts of tax shown on his 1994 and 1996 returns were incorrect but would not say whether he believed his correct income to be higher or lower than the amounts reported. The IRS subsequently issued to the taxpayer a notice of determination upholding the proposed collection action. The Tax Court held that the taxpayer could challenge the accuracy in a Sec. 6330 hearing. However, the Court granted the IRS summary judgment because the taxpayer failed to present grounds on which the Court could find the Appeals officer erred in the determination.
The IRS has issued final regulations (T.D. 9122) under Sec. 1502 providing guidance regarding the determination of basis in the stock of the former common parent following a group structure change. These final regulations affect corporations filing consolidated returns.
Section 465 limits the deductibility of losses to a taxpayer's economic investment (the amount at risk) in the activity at the close of a taxable year. A taxpayer is generally considered at risk in an activity to the extent of cash and the adjusted basis of property contributed by the taxpayer to the activity. In general, a taxpayer's amount at risk also includes any amounts borrowed for use in the activity if the taxpayer is personally liable for repayment or if property other than property used in the activity is pledged as security. The IRS has issued final regulations (T.D. 9124) finalize the rules relating to the treatment, for purposes of the at-risk limitations, of amounts borrowed from a person who has an interest in an activity other than that of a creditor or from a person related to a person (other than the borrower) with such an interest.
When you're selling just a portion of your shares in a corporation and you purchased the shares at different times or prices, you can identify the shares being sold. That allows you to say, sell the highest cost shares to minimize your gain (or maximize your loss). If you don't specify to your broker which shares you're selling, the law assumes the shares purchased first and the first ones sold. Things get more complicated in a reorganization or merger where you receive stock in a new corporation for your existing shares. The IRS has now proposed regulations (REG-116564-03) that remove Sec. 1.358-2(a)(2) through (5) and (c) and replace these provisions with a more complete set of rules for determining the basis of each share or security received in a reorganization described in Section 368 and a distribution to which Section 355 applies. These proposed regulations generally provide that the basis of each share of stock or security received in an exchange to which Section 354, 355, or 356 applies will be the same as the basis of the share or shares of stock or security or securities exchanged therefor. The determination of which share of stock or security is received in exchange for, or with respect to, a particular share of stock or security will be made in accordance with the terms of the exchange or distribution.
The IRS has issued corrections to the final and temporary regulations (T.D. 9115) relating to the depreciation of property acquired in a like-kind exchange or as a result of an involuntary conversion.
In Treasury Department News Release JS-1293 the IRS reported that, if left unchanged the alternative minimum tax (AMT) will affect increasing numbers of taxpayers. Assuming the 2001 and 2003 tax cuts are made permanent, the number of taxpayers with increased taxes due to the AMT will increase from 3.3 million in 2004 to 16.2 million in 2005 and to 46.4 million in 2014.
IRS Continues On Line Launch of Business Tools
With record numbers of Americans e-filing their tax returns and recently announced e-filing options for corporations and tax exempt organizations, the IRS has launched a new online form that gives tax professionals a faster, easier method of applying to become an authorized e-filer.
As more and more taxpayers ask for e-file, tax professionals now have an online application form that cuts processing time and reduces errors associated with using the paper Form 8633, Application to Participate in IRS e-file. Once the application is approved by the IRS, tax professionals can e-file returns for their clients.
The online application is the latest segment of a suite of Internet-based business tools called "e-services" that give tax professionals and financial institutions new choices for working electronically with the IRS and easier access to client information. The online form joins four other products in the e-services line that serves tax professionals and those who file select information returns, such as banks and other financial institutions. The suite of e-services were developed and delivered through the IRS Business Systems Modernization program.
The e-service announced today joins four other applications already released, including:
Future e-services include premium products for e-filers who file more than 100 electronic returns, and include:
All of these premium e-services are being tested now by a select group of registered users. Disclosure Authorization and Electronic Account Resolution are scheduled for delivery this spring; Transcript Delivery System is due for release this summer.
Only approved IRS business partners, such as e-filing tax professionals and payers are eligible to use e-services. Tax professionals and payers can register for e-services immediately through the Tax Professional's page on IRS.gov.
Link to IRS.gov:
What are the e-services products? www.irs.gov/taxpros/article/0,,id=107478,00.html
Previously Reported In Daily Update
Terminating a business? . . . There are a number of tax and nontax actions you've got to take. One is to provide W-2s to your employees for the calendar year of termination by the due date of your final Form 941. You must also file Forms W-2 with the Social Security Administration by the last day of the month that follows the due date of your final Form 941. Check the rules if any of your employees are immediately employed by a successor employer. And check the rules for the states you do business in.
Preferred customers . . . If you don't keep track of who your preferred customers are, you should. If it's not easy to do using your current systems, update them so that you can. Preferred customers generally order more frequently and place larger orders, making them much more profitable. Make sure you take care of them. That can include offering them specials restricted to a small group, providing them with an assigned customer service rep, provide them with periodic thank you notes, free upgrades, and gifts. Giving excess inventory as a gift can be especially useful, particularly if disposing of the items might be difficult. But don't send junk. The object is to make those customers feel special.
Leaving the business to your children? . . . The odds are not with you. Studies have shown that many businesses are not passed to the owner's children or close relatives. There can be a number of reasons, some of which you may be able to correct (gradually pass off responsibility, etc.), some of which you can't. But don't automatically assume your son or daughter will take over. Set up a plan well ahead of time. Interestingly, some studies have shown that nearly the same percentage of employees take over businesses as do the owner's children. It's never too early to set up a succession plan. Consider one soon after you start, just in case you have an accident or become disabled.
Sell your house to save taxes . . . Some taxpayers believe the rollover rules are still alive. That's wrong. They've been replaced by the $500,000 exemption for a married couple filing jointly or $250,000 for most other taxpayers. (That exclusion is generally available every two years.) That means if you're single and have a $400,000 gain on your home, you'll pay capital gains tax on $150,000 (even if you buy a more expensive home the next day). And in many real estate markets, a substantial gain is not unusual. From a pure tax standpoint, you should sell your existing principal residence each time you reach the $250,000/$500,000 gain threshold. From a practical standpoint, that may or may not make sense. For one thing, there are transaction costs involved. You've got to weigh them against the tax saving. And there are other factors. You may just want to stay in the house and pass it on to your children. And selling probably doesn't make sense if a rapid run up is just ending in your market. Get good advice before acting. While saving taxes is important, it's far from the only consideration.
Arbitration doesn't mean you don't need a lawyer . . . Many businesses now have a clause in their customer agreements that specify the only remedy is arbitration. That means you can't sue for damages. That's the case with most brokerage accounts, credit card agreements, etc. But that doesn't mean you shouldn't seek legal advice. If you have a dispute that's going to arbitration and the dollar amount is significant, get legal advice well in advance of any hearing. If you have an airtight case, you might not need a lawyer at the proceeding, but you might want to do so anyway. It's almost certain the other side will have a lawyer present.
Throw out that paper! . . . Bank statements, brokerage statements, invoices, etc. Whether for business or personal, businesses still like to send out paper. We just got a 5-sheet (10 page) bank statement. The first and second page was almost all promotional, the remainder of the second page was a statement of terms and conditions as was the 9th page. Page 7 (and page 8, the blank reverse side) was a form for paying down a checking plus balance. Not needed. That left pages 3-6 or 2 sheets of paper to file. There are several lessons here. First, go through such statements on receipt, before filing them. Anything you can toss now you won't have to handle again later. Second, there's still a lot of excess paper coming in. Some is necessary; much isn't. Toss what isn't. Third, if you're the sender, consider the cost-benefit ratio of including flyers in your statements. It can be a way of sending an ad to existing customers, but you want to keep the cost and the paper volume down. A 1/3-page 2-color flyer printed on light paper may be a cheaper way to get the message across. A final point. All taxpayers need to keep records, businesses more than individuals, and business owners, no matter how they do business (as a corporation, LLC, etc.) need to keep better records than individuals who just work as an employee. But you may be able to reduce the paper by having your invoices, statements, etc. sent via e-mail or download them directly.
Timely filing . . . The usual rule is "timely mailing is timely filing". That means, if your return or other document is postmarked on the due date, it's considered filed on time. That's true for every IRS requirement that we can think of. And most states have adopted the same rule. But not all! Some states require that certain returns are only filed on time when they are received by the taxing authority. Check the rules in the states you do business in.
More than one CPI index . . . Contracts, particularly leases, often contain a clause that allows for an increase in price, rent, etc. based on the consumer price index. But there's more than one consumer price index. The most frequently cited one is the All Urban Consumers (CPI-U) index. There are CPIs for many large cities, for regions and series such as rent of primary residence. Before you sign the contract make sure a specific index is stated and it's appropriate for the contract.
Waiver of IRA rollover requirement denied . . . You have 60 days in which to rollover a distribution from an IRA. In the past, the IRS strictly adhered to the deadline--no exceptions. Recently, the IRS has allowed exceptions in certain cases. In a recent letter ruling (LTR 200417033) the taxpayer requested a waiver of the deadline because he was unemployed and apparently needed the money for living expenses and tuition. The IRS said that Rev. Proc. 2003-16 (IRB 2003-4) provides that in determining whether to grant a waiver of the 60-day rollover requirement the IRS will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check. whether the check was cashed); and (4) the time elapsed since the distribution occurred. The IRS refused to grant the waiver, citing the use of the funds as being similar to a loan and that was not what Congress intended when it allowed the 60-day rollover period.
Comparison shop . . . You may be lulled into thinking one vendor, provider, channel, etc. is the cheapest approach. But pricing can vary widely. Madison Inc. may be the lowest cost supplier for hammers, but not for power tools. The internet may be the cheapest way to buy certain brands of clothing, but not others. Many sellers have learned that they have to be the lowest cost supplier for some items to attract customers. They recoup their profit by charging more for other items. And, don't assume that each provider, item, etc. will be identical in features, quality, etc. Custom manufacturing is now allowing companies to more easily produce different grades in the same product.
Copyright 2004 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536