- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/31/2006 11:06:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/30/2006 10:09:00 PM Send this post:

Q:

 Subject: Quicken Question...

I have Quicken 2005 and haven't figured out how to make it do a particular thing.  Maybe you can help me with it.

Let's say I have 4 different accounts:

 

Child 1 (10%)

Child 2 (20%)

Spouse (30%)

Self (40%)

 

I want to create a transaction say of $1000 into Quicken (somehow) and have it split the $1000 out by the percentages and place the money into each account.

 

Child 1 ($100)

Child 2 ($200)

Spouse ($300)

Self ($400)

 

When a certain person uses their money, it should come from their account and they should not be able to draw out more than is in their account.

 

Do you know of any way to do this?

 

Thanks,

A:

There may or may not be a way in which to automate what you want in Quicken.  Having switched all of our clients over to QuickBooks, I haven't used Quicken in so long I can't advise anyone on this.

The best thing would be to work with your professional tax and accounting advisor, specifying what kinds of reports and other info you are looking to be able to produce. S/he should then be able to help you tweak your accounting program in such a way as to accomplish that goal.  You should already be providing your tax return data to him/her via your Quicken data files; so this wouldn't be something entirely new for him/her to help you with.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thanks for the information and for taking the time to answer my question.

I'll check with an accountant to see if such a thing can be done.

Thanks again,

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/30/2006 03:45:00 PM Send this post:

Q:

Subject: Medicare Part B - Time to OPT OUT?

 

Back in May, 2006 I wrote you about the new tax law wherein for the first time, the payors of tax exempt interest are required to report said

interest [on 1099s] to the IRS. You mused that maybe the reason for the reporting was to catch Social Security recipients who are not adding tax

exempt interest on the SS worksheet to determine its taxability. I think there may be another reason; starting in 2007,  Medicare Part B premiums

will be income based for higher bracket individuals. The premiums will be based on "adjusted AGI" which includes tax exempt interest. The higher

Medicare Part B premiums will be phased in over the three year period, 2007 - 2009 & will be based on 2005 - 2007 adjusted AGI respectively. [The

Social Security Administration will now have access to our 1040s - ain't that sweet]. 

 

For a scary preview of the forecasted Part B premiums, see http://www.tscl.org/NewContent/102589.asp

 

I am turning 65 at the end of this year & just received my Medicare card for Part A [Hospital coverage which is free] & Part B [Medical coverage which in 2006 cost $88.50/month]. One is automatically opted in to both parts of Medicare; it is necessary to affirmatively opt out of Part B. Not surprising calls to both the SSA & Medicare received little or no knowledge of the upcoming Part B means test. I urge all SS recipients to take a hard look at the forecasted Part B premiums & seriously consider opting out.

A:

You are correct.  This is one more in a long line of attacks on the "evil rich," using tax return info as the trigger. 

FYI: SSA has always had access to tax return data directly from IRS.  That is what they use to determine income and SE taxes for those of us who are self employed and don't receive W-2s.  What has actually long been frustrating is that SSA only seems to want to work with original tax returns.  They don’t adjust for subsequent changes in those returns, either through voluntary amendments or by IRS audit adjustments.

I'm not sure of the higher Medicare premiums will be enough on their own; but along with all of the other penalties for having a high AGI, this should motivate more people to use C corporations and other techniques to reduce the income that shows up on their 1040s.

Thanks for sharing this info.

Kerry Kerstetter

Follow-Up:

Thanks for the response & info. My income consists exclusively of the "unearned" type - mainly dividends & interest [mostly exempt]. I haven't paid any SE taxes for over 30 years [I worked the minimum 40 quarters & out]. Here's a few more facts about the upcoming rise in Medicare part B premiums:

 

Below is reproduced the table for estimated increase in Medicare Part B premiums. Note that there is a particularly vicious nature to the break points between income levels not found in the familiar X, Y & Z 1040 Tax Rate Schedules. One dollar of income over an income break point can cost anywhere from $154.80 (12x[113.40-$100.40]) to $930.00 (12x[$413.40-$335.90) in additional yearly premiums. That's confiscatory taxation parading as an insurance premium. Because premiums are based on Modified AGI, shifting deductions from one year to another is of no help; one must work on the gross income side of the equation with such strategies as realizing capital losses or purchasing bonds with accumulated accrued interest wherein the coupon is not paid until the following year. Even such common practices as dollar rounding on tax returns can have a costly effect if the rounding, on balance, goes the wrong way (i.e. up). The closer one gets to December 31st, the more important it is to run an accurate as possible 1040-ES if you are a Part B participant & near an income break point.

 

Estimated Medicare Part B Premiums
[From http://tscl.org/NewContent/102589.asp]           

 

Assuming the Medicare Part B premium continues to rise at the same average rate that is has for the past five years (about 13.4%), the following chart illustrates 

what estimated premiums may look like for 2007 through 2009.                                   

                                        

          Income [MAGI]*                                               Monthly Premium is                       

Individuals          Married Couples                    2006          2007              2008      2009

Under $80,000       Under $160,000               $88.50       $100.40      $113.90      $129.20
$80,000-$100,000    $160,000-$200,000      $88.50       $113.30      $141.30      $180.90
$100,000-$150,000   $200,000-$300,000      $88.50       $133.30     $190.00      $258.40
$150,000-$200,000   $300,000-$400,000      $88.50       $153.30      $235.50      $335.90
Above $200,000  Above $400,000                  $88.50       $173.30      $281.10        $413.40

    * Modified AGI [includes Tax Exempt Interest, Series EE savings bond interest used for educational expenses & any excluded foreign earned income]

NOTE: The premium for 2007 is based on the Modified AGI for 2005.
      The premium for 2008 is based on the Modified AGI for 2006.
      The premium for 2009 is based on the Modified AGI for 2007.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/30/2006 03:37:00 PM Send this post:

Tax Break for Wealthy IRA Owners – Gail Buckner looks at the new tax law.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/30/2006 12:11:00 AM Send this post:

This is the second recent comic by this cartoonist dissing our profession.

See earlier.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/29/2006 11:38:00 PM Send this post:

Q:

Subject: Importing data from Money to Quick Books

Dear Sir,

 

Thank you for your very helpful website tips.  It is very generous of you to share your experience.

 

If I am not imposing too much on your good will, may I ask:  am I able to import data from the Money program into Quick Books 6?  The person I am doing this for had kept all his info on Money and now wants to change to Quick Books and I would like to avoid reentering all his information from the first of this year.

 

Thank you.

A:

You should check out the conversion tools available from Big Red Consulting.

Specifically, they claim that the QIF to Excel to IIF Converter can 
   “ Convert part or all of a Quicken or MS Money file to a new or existing QuickBooks company file.”

I hope this helps.  Good luck.

Kerry Kerstetter

Follow-Up:

Thank you very much.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/29/2006 09:43:00 PM Send this post:

Seminar promoters with their top secret magic formulas for getting rich quick have no shortage of people willing to fork over their money.

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/29/2006 02:55:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2006 07:04:00 PM Send this post:

Q:

Subject: Interesting tax question

 

Good one for the blog.....

 

I am in the middle of an IRS audit.  I own a small company, real estate, invest in stocks and have a W-2 job.... they have been into all of these items, with no findings.  I try to be very organzied, use quicken for personal and quickbooks for business, I keep all my receipts.  The auditor was impressed.

 

The last item to be audited was my bank statements in which I had to explain "excess deposits".... I was easily able to do this, with one exception.... I found a deposit for a personal item I sold and I think I may have needed to report it.

 

Here is the twist, in 2004 I sold a diamond engagement ring for 10,000, I paid 9,000 for it and have the receipt and check I used to pay for it.  I purchased the ring in 2000.  In 2001 I started my company, a jewelry company (sole proprietor).  How do you think the IRS will handle this... capital gain, business income, or other?

 

Appreciate your opinion.

A:

What is a little strange about the way in which you describe your audit is the order of events.  It's been my experience that the auditors normally begin with an analysis of bank statement deposits and then branch out into other areas.

Either way, it appears that your auditor did find an unreported sale that does need to be added to your 1040.

If you weren't in the jewelry business, a good case could be made for treating the ring sale as a long term capital gain of $1,000, with the lower tax rates applicable for it.

However, since you have been in the jewelry sales business for a number of years, this one should be added to your Schedule C; $10,000 added to gross sales and $9,000 added to Cost of Goods Sold.  This will potentially increase your regular income tax plus SE tax.

While your Quicken and QuickBooks may have impressed the auditor, it should concern you that $10,000 slipped through the cracks and didn't show up in your yearly reports.  This flaw in your accounting needs to be corrected ASAP to avoid future such problems, which could just as easily go in the other direction; causing you to miss legitimate deductions. 

You may also have a sales tax issue to deal with if you didn't report that $10,000 sale to your state. One way to properly balance books and prepare tax returns is to reconcile gross revenues with what was shown on sales tax reports for the year.

From the way in which you described your books, I suspect there is a natural built-in flaw by using both Quicken and QuickBooks.  I'm assuming you are not incorporated; which means that you should have everything entered into one QuickBooks data file, with classes used to keep track of your different businesses and personal items.  Trying to keep track of things in two separate systems is a textbook recipe for items to slip through the cracks.  I have a lot of info on this on my website that you should check out.

My last comment has to do with professional assistance.  It sounds as if you are doing everything yourself without the aid of a professional accountant.  While this will obviously sound self-serving on behalf of my profession, that is a classic example of the "Penny Wise, Pound Foolish" maxim. Any good accountant should be able to help you reduce your taxes by several times as much as their fees, as well as help you stay out of trouble from such things as accidentally unreported income.

Good luck.  I hope this helps.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2006 07:02:00 PM Send this post:

Q:

Subject: Donated Goods

Kerry,

I attended a multi-street neighborhood garage sale last week.  It challenged my thinking.

 

If I spent a day selling all that I donate to Goodwill it would generate nontaxable cash that I could self-direct to individuals or groups that are in need or doing good things but not a 501(c)(3).

 

Ironically, I saw the garage sale being beneficial for the neighbors--they were out among each other being very neighborly.

A:

I'm not sure if there's a question in there or just your observations.

In regard to the observation, they do echo some points I have commented on several times over the years. 

First is the actual in-pocket dollar value of a deductible donation. It never ends up being as much as selling the item and keeping the cash because that would only be the case if one were in the 100% tax bracket.  With most people having an effective tax rate of around 33%, donating an item worth $200 would return them less than $67 in actual tax savings.  If they were to sell the item at a yard sale (assuming at below cost in a non-business manner), they would have $200 in their pocket.

The other point is where the donations go to.  I have long been a very vocal critic of huge national and international charities that spend more of their revenues on internal costs (salaries, benefits, other overhead) than on the actual programs they are supposed to be taking care of.  Whether any of your donations to such groups will every make their way to helping real people is always a mystery.  What is more effective is to either donate to locally run charities with small inexpensive overheads or to just give the money and items to the actual people who need them.  In those cases, you can be much more assured that some good will come out of the donations. 

This is a very common situation here in the Ozarks, where there is a lot of generous giving directly to people whose homes have been damaged by fires and tornadoes, as well as for those who have suffered from unexpected medical tragedies.  As a volunteer firefighter, I do see a lot of such cases.

While there is obviously no income tax deduction for such direct donations, that is the last thing donors care about.  Another point I have been making for decades is that, contrary to popular belief, people do not make charitable donations because of the income tax benefits. They do so because they want to help out a certain cause.  I used to ask that very question in many of my seminars over the years (How many of you make donations because of the tax deductions?) and nobody ever raised their hand.  This is why I don't trust those who claim that eliminating the estate tax will harm charities.  It's a bogus argument that has no basis in reality, and anyone making such claims has no credibility on such matters.

A bit of a long rant on this point.  I hope I addressed your points.

Kerry Kerstetter

 

Follow-Up:

Kerry,

 

Thanks for your insights re donated good.  I plan to hang onto my goodwill pile until next garage sale season and will enjoy letting those proceeds go to those needing help in my community.

 

Regarding established charities, I had an experience that made me rethink my charitable giving.  I support the following 501(c)(3) charities:

 

Operation Blessing continues to truly help LA and MI with hurricane cleanup as well as supports its general purpose in foreign countries.  I saw the former Presidents in LA asking you to send money to them while they stood in front of an Operation Blessing truck.

 

Wounded Warrior Project supports the injured soldiers with clothing and articles after coming off a battle field with nothing to making modifications to homes to accommodate injuries to providing ski trips and other events to help the soldier reacclimate.

 

Feed the Children helps from poor USA neighborhoods to children all over the world.  I was most impressed when they were able to convert their general concept to being on the scene within hours of the incidents with support supplies and people to help with the OK City Bombing and World Trade Center and LA/MI.  They had some internal control problems in TN a year back but was very quick to fix.  *Their administrative costs were up last year when they did a lot of TV ads but otherwise is minimal.

 

Taproot Theatre (Seattle) provides touring road shows to Seattle area schools on handling bullying, personal behavior, substance abuse, diet/exercise, as well as provides an acting studio for kids, and has awesome clean, thought-provoking plays on their mainstage.

 

NW Medical Teams

 

The above charities provided me their 990s and the executives receive little compensation and their administrative cost* is very minimal. 

 

I also found Wall Watchers a good source for information.  http://www.ministrywatch.com/mw2.1/H_Home.asp 

 

Thanks for listening to my rant and providing your wise counsel. I think our charitable giving needs to be considered wisely like any other expenditure or investment.

Warm Regards,

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2006 06:45:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2006 06:45:00 PM Send this post:

Q:

Subject: question about S vs C corps

Kerry,

I have a question based on what you said in your S vs C Corps topic.

“My philosophy is to look at the overall tax picture for individuals and their companies by smoothing income over the personal (1040) and corporate (1120) tax returns.  For 2000, a married couple's 15% tax bracket ends at $43,850 of taxable income.  It then jumps to 28%, almost double the rate.  However, if you consider that the couple's C corporation has its own $50,000 15% bracket, their overall combined 15% bracket has more than doubled to $93,850.  That alone can save several thousands of dollars per year in income taxes.”

Wouldn’t the couple also have to pay an additional 15% dividend tax on whatever $ they took out of the corp’s $50,000 net income? I am not well-versed in taxation – please explain.

 Thank you,

A:

There are a couple of basic concepts that apply here.

I tell my C corp clients to avoid the term "Dividends" because we only want to take money out as a deductible expense for the corp that will avoid double taxation.

Corporations have potentially eternal life; so there is no need to zero out their bank accounts.

You should work with an experienced tax pro to see how these would apply to your particular situation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2006 06:33:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/27/2006 02:34:00 PM Send this post:

The IRS Goes to Church – With a reminder that political preaching is a big no-no for any group wanting to maintain its tax exempt status..

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/25/2006 03:47:00 PM Send this post:

States attack property taxes – My opinions of property taxes are well known.  This quote from the article pretty well sums up why.

The property tax is a fantastic tax for things that are purely local because, under those circumstances, it does not function like a tax. It's more like a user fee.

In other words, you have to pay the local government a fee in order to use your own property, or else you have to forfeit that property to the government. This concept should anger anyone who believes in the sanctity of private property ownership, the foundation of capitalism.   

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/25/2006 11:59:00 AM Send this post:

I received the following interesting email a few days ago:

Subject: RE: Seadog Bytes images

Kerry:

I ran across your blog today, and was pleased to see that you had apparently liked a few of my images (...which I'd sent to Art G. to put up StrangeCosmos)...
e.g.:
http://www.taxguru.net/comix/deathtaxgraverobbingbyirs.jpg
http://www.taxguru.net/comix/votersbewareemptyheads.jpg

The originals of those two images...
http://www.seadogbytes.com/sbimages/GraveRobbingIRS.jpg
http://www.seadogbytes.com/sbimages/ProsperityTaxed-1.jpg

...and a 'few' more (mostly conservative/political, as you might suspect) are up at our website: http://www.seadogbytes.com

(Access to most of the images is via the "Recent SeadogBytes" link near the center of the main page ...you may find other SeadogBytes images there, or at StrangeCosmos, which you'd like to use from time to time.)

We're certainly not in this for the money, but a reciprocal link back to http://www.seadogbytes.com, or a listing on your blog roll would certainly be appreciated, if you could manage to do that as a courtesy.

A text link would be absolutely fine, but if you need a logo graphic, one of the below images would also be all right to use (...or, if those don't work for you, you could email to tell me what size you need and I could send you something back in relatively short order.)

Logos here:
http://www.seadogbytes.com/sbimages/dogS1asm.gif
http://www.seadogbytes.com/sbimages/dogS1aTiny.gif
http://www.seadogbytes.com/SeaRing50.gif

Thanks,
 - Brian

I wrote back:

Brian:

Thanks for writing and identifying yourself as the source of those pics I found on StrangeCosmos.  It's often hard to know where the StrangeCosmos folks obtain their pics, especially when they add their name to the pic itself.

I also appreciate the link to your site and have added it to my blogroll and group of daily sites I will be visiting.  It's great to know of another source of political parody photos, especially since the demise of Sacred Cow Burgers.

I will look over your other recent photos and appreciate your offer to allow me to post ones that my readers will like. 

I will also be posting this note and hope it results in more direct visitors to your website.

Thanks again for writing and keep up the excellent work.

Kerry Kerstetter

Follow-up from Brian:

Kerry:

Thank you very much! 

I have also, subject to your approval, added links to taxguru.net and taxguru.org to the main page at http://www.seadogbytes.com (middle of page, left column).

Also, if you are looking for other sources of 'political art', and have not yet seen them, you might like some of the things...

...at Linda Eddy's http://www.iowapresidentialwatch.com/

...and Rich's http://www.registeredmedia.com/gallery/

...both of whose images, in my experience, are uniformly excellent.

Regards,

 - Brian

My Reply:

Brian:

Thanks for the listing on your page and for the heads-up on those two other sites.  There are some very funny political comics there.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/24/2006 09:39:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/24/2006 09:13:00 PM Send this post:

As anyone could have predicted, the IRS plan to outsource some of their tax collections to private companies (gangs, families,et al) was ripe for even more screw-ups than are normal for IRS. IRS has even issued press releases warning people about the potential for scams, especially with real life free-lancers (aka scam artists) pretending to be tax collectors.

Simple Steps Can Prevent Tax Scams as Private Debt Collection Begins

IRS Outlines Taxpayer Protections in Private Debt Collection Program

The regular press is even picking up on this story:

IRS Warns Against Phony Debt Collectors

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/24/2006 07:10:00 PM Send this post:

Q:

Subject: Section 121after death

 

If a parent dies (other spouse had already died a number of years ago) and leaves their primary residence to the children and they sell it 5 months after date of death can they claim the section 121, $250,000 exclusion on the 1041?  The house was in the parent's living trust when the parent was alive.  Thank you for your help.

A:

This is the exact kind of issue that you must work on with a professional tax advisor.

There  are a number of issues to be resolved.

The Section 121 exclusion will only apply if one of the heirs has been living in the home after receiving title to it.  Even so, I doubt if there will be any gain to even worry about.

With a living (aka revocable) trust, ownership of the decedent's assets generally transfers immediately to the  beneficiaries (heirs); so I doubt if the property sale would be reported by the estate on a 1041.  That is normally the case for property sales where title hadn't been changed.

When your parent passed away, the cost basis for the heirs for all of her property is stepped up to its fair market value as of the date of death.   There are also provisions in the tax law to use an alternate date, usually six months later.   If the home is being sold shortly after death, as in your case, there wouldn't be any gain because the sale price would be the estate value.  In fact, after accounting for selling costs, there is more likely to be a capital loss.

If the gross value of your parent's estate exceeds the exclusion for the year in which she died, you must file an Estate Tax Return (Form 706) listing everything. This is sometimes even a good idea with smaller estates in order to document values and prevent any future accusations of tax evasion by IRS or the State.  This is a decision that your legal and tax advisors can assist with.

As you can see, there are a lot of details that need to be addressed with the assistance of competent tax and legal advisors.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/23/2006 10:06:00 PM Send this post:

From a reader:

Subject: Thank You

Thank You for your site.  You have shown me that being a C Corp may not be as bad as everyone says.  I am using a June 30 FY because of your opinion (and I'm working with a local CPA to keep me straight).

My reply:

I'm glad you found my info useful.  However, it is never to be relied on in lieu of the services of a competent professional tax advisor who can better assess your situation.

You should also keep an open mind in regard to avoiding the all or nothing approach to running a business.  As your company and personal wealth grow, you and your advisor could very easily see the need for another entity in addition to your C corp.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/23/2006 09:59:00 PM Send this post:

It's just too bad that he doesn't have the guts to do anything as forceful as this; just like his father.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/23/2006 09:29:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/23/2006 08:40:00 PM Send this post:

Spidell has posted a copy of the California 2006 income tax rates for individuals.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/22/2006 09:10:00 PM Send this post:

When to Use Portable Company Files in QuickBooks 2006 – It’s taken a while, but more and more clients are finally learning to use this new smaller file format instead of  the old QBB they have been used to for the past several years. 

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/22/2006 04:08:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/22/2006 04:03:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/21/2006 10:10:00 PM Send this post:

Understanding the New Tax Rules

Why Reselling a Time Share Can Be Anything but a Vacation – Another reminder of why timeshares are the absolute worst way to invest in real estate.

New Rollover Option for Inherited Accounts – From Gail Buckner

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/21/2006 10:04:00 PM Send this post:

A provision in the most recently enacted tax law tightens up on the condition of used items donated to charity for which a deduction may be claimed.

From QuickFinder's summary of the new law:

Charitable Donations of Clothing And Household Items. For contributions after the August 17, 2006, no deduction is allowed for contributions of clothing or household goods unless the items are in good used condition or better. This rule does not apply to donations of a single item valued at $500 or more, if a qualified appraisal is included with the return. (Note: The new law does not define “good used condition”.)

From F.R. Duplantier:

USED
For Bill Clinton, it just isn't fair
That donations be in good repair:
What to do with worn socks,
Dirty hankies and jocks,
And his raggedy old underwear?

Joe Kristan also covered this a few weeks back.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/21/2006 10:45:00 AM Send this post:

Q-1:

Subject: 1031/primary residence

 

Dear Mr Kerstetter,

I very much enjoy reading your information and I have a question about Primary/1031 combo.

We moved into one of our rentals just over one year ago (7/05) and now my husband has a job offer in TX.

My tax man says if we sell now we must recapture $27K and have a cap gains around $100K . Since we have not had the property for 5 years. Since we have not lived in it for 5 years the 2 year exemtion does not even come into play, not even a portion.

Is this your take on the IRS ruling?  If not what is the ruling?

More Info Please:

Was the former rental property that you are now living in acquired as a replacement property in a 1031 exchange? 

The answer to that will determine my response to your query.

Kerry Kerstetter

Q-2:

Mr. Kerstetter,

Yes we did a 1031 in 7/03 then moved into the house in 7/05.

I did read your information on resident/1031 and see that it agrees with our accounting that we need to keep it 5 years. So here is the final link to the question. Since we will be moving out before our 24 months in the property due to a new job in TX and this does fit into the exclusion. How long is the exclusion recognized. Can we move out before our 24 months under the exemption and then keep it until our 5 years is up and then sell it and use the exemption at that time? Or do we need to rent it and then 1031 into another rental.

A-2:

You are feeling the effect of the recent law limiting the use of the Section 121 exclusion for homes that were originally acquired as part of a 1031 exchange.  This means that the home you are currently occupying is statutorily ineligible for the tax free exclusion if it is sold any time before July 2008, five years after you acquired it.  This provision of the law does not allow for the pro-rated exclusion, which would be available to you if you had just purchased the home directly instead of as a part of a 1031.

As I'm sure your tax advisor showed you, a sale of this home before that date would not only subject the gain on this home to taxation, but all of the previously deferred gains from the earlier properties as well.  This will include the higher rate on depreciation recapture, as well as California state taxes.

There are some different options for you to consider.  Holding onto the house until July 2008 and then trying to use the Section 121 exclusion is a slight possibility; but not a completely safe one.  As you can see in IRS Pub 523,  most of the language describing qualifications for the reduced exclusion mention a job related sale and not a job related change in occupancy.  It's obviously a fine distinction, but one that could cause problems with a sale so long after you vacate the home.

Depending on how much your gain is, the pro-rated exclusion maximum may not be enough to shelter all of the profit.  However, if the Texas gig doesn't last long and you move back into the Calif home, you have a potential to meet the 2 out of 5 year rule for real.

You would also still have some depreciation recapture to pay taxes on.  You also need to decide what you will do with the Cal home while you wait out the time until July 2008.  If you rent it out, you will add to the depreciation recapture, plus make the property's character more positively appear as rental than personal.  For example, if you were to sell it in late 2008, looking back five years previously, most of the time would have it used as rental, with a small percentage as your primary residence.

If, on the other hand, you leave it empty as a personal second home, you may have a cash flow problem if there are mortgage payments to make.

While there is obviously no perfect answer to this quandary, you may want to give serious consideration to converting your home back to rental and then disposing of it via a 1031 exchange into rental property or properties in Texas, which will be easier for you to manage.

Anyway, those are the thoughts that came to me as I reviewed your emails.  I hope they help you work out a suitable strategy.  Good luck.

Kerry Kerstetter

Q-3:

Good Morning Mr. Kerstetter,

My husband and I are amazed at how simply and complete you have made the explanation so we can understand our options. Thank you.

Now maybe I have one other option. The house is free and clear! I am a real estate broker here in CA, so I list the property but it does 

not sell for 1.8 years. As you know our market is very slow. In my neighborhood we have only had one closed escrow this year.So before we move I list the property and rent it to a tenant with the understanding that it is on the market for sale. But do to the market the house does not close escrow until July or Aug of 2008. Would that show our intent to sell the house upon acceptance of the job but market trend did not allow us to sell. Would that show intent to keep the use of Section 121?

Even if the job in TX does not last we intend to keep TX as our primary do to no State Tax we are both 58 and our $$ is in bank accts. and not all our rentals have been 1031 into TX. We will come back and buy a condo in CA for a 2nd home in a few years when the market settles.

PS. Are you sure you don't have room for one more client. My tax man says I am always coming up with situations that challenge him.

A-3:

You can try that approach; but you had better maintain extra tight documentation of the fact that you were honestly trying to sell the home for a reasonable price for the area.  As you should know, the burden of proof that you are entitled to use the reduced Sec. 121 exclusion rests completely with you; so you need to feel very confident that you have plenty of documentation to support your case.  Your tax advisor should be able to help you compile that documentation so that it is sufficient to provide him/her with the confidence to be able to claim the exclusion.

You should clarify with your current tax pro the meaning behind his comment.  A good tax advisor should welcome challenging issues such as yours.   They are what help us learn and grow as tax practitioners.  I learn new things about the tax laws every single day, from work with my clients, as well as from emails from readers.  If your current advisor is telling you that because he doesn't want to have to deal with anything new, it is time to find a new tax pro.  If he is saying that to point out that you are making him stretch his brain, that's not a reason to be concerned.  I say that a lot to some of my clients whose transactions force me to delve into new and interesting areas of taxation that I would never otherwise be involved with.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for all your advise and information.

 

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2006 10:04:00 PM Send this post:

Q:

Subject: Car

 

I have just purchased a 2006 Toyota Prius and am now told there is a tax credit. I have purchased through my company. Do you know about this. Please advise. Thanks.

A:

The Toyota Prius is one of the alternative fuel vehicles that qualify for the special Federal tax credit.

Texas writer Kay Bell has been posting a lot about this in her blog, such as at:

http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2006/08/time_running_ou.html

http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2006/07/pace_accelerati.html

http://www.bankrate.com/brm/news/auto/fuel-efficient/20060809a1.asp

I'm surprised the Toyota dealer didn't have info on this as well since it is one of the big selling points for the Prius.

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2006 09:43:00 PM Send this post:

Q:

Subject: Capital gains on sale of residence for surviving spouse?

Two questions:

I have read that a surviving spouse can retain the $500,000 capital gain exclusion on the sale of their primary residence if the house is sold in the same year of death.  Is it not within one year of death?  If not, a spouse could die in late December, making it practically impossible to qualify for the $500,000 exclusion.  I am aware of the stepped-up basis that will occur for the deceased spouse's portion of the home, but with substantial appreciation in some states, that extra $250,000 in exclusion can make a big difference for some taxpayers.

I exercised ISO's in January of this year, which will trigger AMT.  I might sale those shares before year-end, triggering a disqualifying disposition but eliminating tax preference on the ISO exercise.  Do I need to make estimated tax payments on the possible AMT tax that might occur if I do not do a disqualifying disposition?

Thanks,

A:

The maximum exclusion under Section 121 is $250,000 per person.  This means that in order to claim a $500,000 exclusion, there have to be two names on the 1040.  This is the case for the year a spouse dies, but not for the subsequent year.  If the surviving spouse does remarry and file a joint return for the year after the first spouse died, that new spouse won't be able to claim the $250,000 exclusion for the half of the home that was owned by the deceased spouse.

As you hopefully know, the preceding discussion is only important with people living in non-community property states, where only half of the accumulated gain on the residence is wiped out at death.  In community property states, all of the gain is erased.

In regard to estimated tax requirements, you should be working with your professional tax advisor to make sure you have paid in at least enough by 1/15/07 to avoid any penalty.  If your 2005 AGI was low enough, this usually means that you only have to pay in as much as your 2005 taxes were, even if your 2006 taxes turn out to be much higher.  There is no benefit to paying in more than the minimum to avoid the penalty, as long as you pay the rest by 4/16/07.

If you want to check out the rules yourself, get Form 2210 and its instructions.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thanks!

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2006 09:36:00 PM Send this post:

Companies May Convert To 'Cash Balance' Pension Plans

Three Red Flags to Consider When Screening New Tenants – I would add asking about the potential tenant’s favorite movies.  If Pacific Heights is near the top, definitely stay away from that person.  We’re still scared to death to have any tenants after our experiences with a psycho who used that movie as his game plan against us 16 years ago.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2006 06:41:00 PM Send this post:

Both are usually celebrated on April 15.

Courtesy of Worth1000

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/20/2006 06:07:00 PM Send this post:

Who's Blocking the Taxpayer Accountability Bill?

Same-sex couples hail pension overhaul

IRS Enlists Help in Collecting Delinquent Taxes

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/19/2006 10:12:00 PM Send this post:

Q:

Subject: need to file back taxes

 

Dear Mr. Kerstetter,

My husband and I have not filed taxes for several years and are being counseled to file the last five years tax returns.

We have lived the entire time in Tulsa, Ok and have participated in numerous home-based (network marketing) businesses during these years. Mostly just breaking even but a couple of good years. I am currently sorting all my receipts and documents by years.  We need someone to prepare our tax returns.  I like your philosophy and wonder

• if you are available for hire,
• what is your rate,
•  are you familiar with clients who want to "get back in the system",
• what steps I am to take to  get our paperwork in order for your prepartion?

Thank you,

A:

You are definitely making the right move in trying to get caught up with your income tax returns.  It sounds as if you might have fallen for one of the very common misconceptions people have; that if they didn't have a net profit in their business, they aren't required to file a tax return. That is dangerously wrong, because if IRS were to check on you, they would assume every penny of gross revenue you received was pure profit if you failed to file a tax return disclosing your operating expenses.

In addition, even if you are overpaid for the past years, IRS has a penalty for procrastinators and will refuse to refund anything for any tax return more than three years delinquent.  However, if you owe money for any year, even five years ago, IRS will demand payment of that tax, along with substantial interest and penalty charges.  It's a double standard that IRS is very fond of.

Working on five years worth of info is a large undertaking.  Since you are obviously familiar with computers, you would be well advised to use QuickBooks to organize your data for the past years, as well as the current and future ones.  Having your data on QB will make it much more efficient for you to submit that data to your tax preparer.  I have tons of info on using QuickBooks on my website.
 
In regard to my being able to prepare your tax returns, I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don't have anyone to whom we could refer you. If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.

I wish I could be of more assistance; but I wish you the best of luck.  

Kerry Kerstetter

Follow-Up:

Thanks for your response!

We're awfully close to Arkansas...are you sure you dont know anyone over this way...starts with a _ ends with a _?

=)  An acquaintance recommended Charlie Chung then when we went to find him and found out he had been indicted for tax fraud!! Yikes.

Anyway, sure appreciate the info and the so very helpful website of yours.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/19/2006 12:50:00 PM Send this post:

Q:

Subject: Sect 179 Question

Kerry,
I love your site. Very informative. I had another question on Sect 179. I am looking at purchasing an automation piece of equipment for my pharmacy. While I need the asset now, I don't need the Sect 179 deduction until 2007. The company has offered to install now and rent it to me until 2007 where I can convert it to a capital lease. Would this allow me to take the Section 179 deduction in 2007?

Thanks,

A:

As always, this is the kind of decision process that you should be working on with your own professional tax advisor.

However, as an illustrative example, I can address your situation in general.

First is the lease then buy scenario. That would not fly with IRS because the Sec. 179 is only available for the first year the asset is acquired and placed into service. In your case, you would be placing it into service in 2006 and buying it in 2007, making it eligible for the Sec. 179 in neither year.

Next is your assumption that you don't need to claim it in 2006. You are most likely being short-sighted with this conclusion.

If you already have plenty of deductions, and are thus going to show a low taxable income for 2006, a large Sec. 179 deduction wouldn't even be possible due to the taxable income limitations. However, if you were to buy the asset and start using it in 2006, you could claim the full maximum Sec. 179 on your 2006 4562. The excess above the deductible amount would be automatically carried over to your 2007 tax return, where it would be compared against your 2007 taxable income. It sounds as if this is what you are really after, so that might work out best for you without the need to play any short term leasing games.

Your personal tax pro should be able to run some pro-forma tax returns for 2006 and 2007 to show you how this scenario would work for you.

Good luck. I hope this helps.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/19/2006 12:32:00 PM Send this post:

Q:

Subject: BACKUP RESTORE PROBLEM

 

PLEASE CAN YOU HELP ME WITH THIS PROBLEM THAT I AM HAVING WITH MY BACK UP QBB FILE,I RECENTLY HAD TO DO A COMPLETE INSTALL OF MY OS  AND HAD TO INSTALL QBOOKS 2006 AGAIN NOW I CANT RESTORE MY BACKUP FILE IT SAYS UNABLE TO DERTERMINE VERSION ON QBB FILE AND WILL NOT RESTORE BACK UP PLEASE HELP THANK YOU

A:

It sounds as if you didn't run the "Update QuickBooks" function after you reinstalled the program.

If the QBB file had been made with an up to date version of QB 2006, it might not be accessible with an un-updated version.  Some of the changes they make during a version's year on the market are major enough to cause problems like the one you have.

After you have the program install all of its to-date updates, try to restore the QBB file and you should have better luck.

Let me know if this works for you.

Kerry Kerstetter

 

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/19/2006 12:22:00 PM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/17/2006 10:10:00 PM Send this post:

A recent email from the Left Coast:

From: "nicholas langhorne" <armyreject@hotmail.com>

Subject: Estate Taxes

I find in interesting that you would post a chart detailing the percentages that must be paid of a gross estate, when in the previous paragraph you said that the tax rate is essentially always near the maximum. You are spin doctor. I commend you on your efforts to try and portray the estate tax as something deceitful but i assure you it is not. I am quite sure that your comments reflect only how you feel about taxes that would have to be paid on your own estate which is likely over the minimum of 2 million.

I will leave you with one final question, how do you plan to substitute the income already derived from this tax? In my own state of Washington we have a state estate tax and it brings in over 100 million annually, Im sure it is much more when you take into account the higher percentage (ie. 19% WA, and 46% Federal) and higher population of the nation. Where will this money come from, taxing the already over taxed middle and lower classes? Save me the responses about small businesses and farming families who will have to liquidate to pay the tax, its a lie with deductions as they now sit.

Comrade Nicholas:

You are entitled to your misguided opinions; but you do need to get your facts right if you intend to make anything resembling an intelligent argument.

The estate tax rate schedule that I have on my website is not for gross estates. While probate and attorney charges are routinely calculated based on gross estate values, the estate tax is only assessed on the net taxable estate, which is the gross value reduced by such things as liabilities, charitable bequests and final medical and funeral costs.

Also, I can assure you that whether or not I or anyone in my family would have to pay estate tax is absolutely 100% irrelevant to my opposition to it. Confiscating a person's wealth after they die is extremely evil and immoral and is nothing less than grave robbery. It is just as wrong to do this to someone who has been financially successful in his lifetime as it is for those that don't have as much.

As I have pointed out ad infinitum, the estate tax is a key plank of Karl Marx's Communist Manifesto as a means of preventing too much private ownership of property and expanding the power and size of the almighty central government. No true believer in capitalism and the sanctity of private property rights can support the concept of wealth confiscation.

Justifying immoral actions for the sake of money is a slippery slope that we all should avoid. If it's okay to steal a big percentage of a person's estate just because the government needs the money, why can't other such actions be just as valid? For example, think of all of the money our government would save in Medicare and Social Security costs each year if we were to just euthanize everyone on their 65th birthday. Those savings would so dwarf the haul from estate taxes as to possibly make estate taxes inconsequential.

Thanks for writing and sharing your wisdom from out there on the Left Coast.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/17/2006 02:24:00 PM Send this post:

State Tax Increases Smaller, More Targeted, Study Shows

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 8/16/2006 10:02:00 PM Send this post: