title>Tax Guru-Ker$tetter Letter Wizard Animation


Tax Guru-Ker$tetter Letter
Thursday, August 31, 2006
Learning how to play the stock market...

Wednesday, August 30, 2006
Starting retirement saving a little too early?

Tweaking Quicken



 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?


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



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,



Medicare Means Testing



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.


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


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.





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


Tuesday, August 29, 2006
Can CPAs be funny?

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

See earlier.

Importing data from MS Money



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.


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


Thank you very much.



Who make the most money from investors?

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)

Sunday, August 27, 2006
Eliminating the middlemen.

Unreported Income



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.



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


Most Effective Donations



Subject: Donated Goods


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.



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



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,

User fees or taxes?

Dividend Income?



Subject: question about S vs C corps


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,


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


New IRS Tax Collector?

Friday, August 25, 2006

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..



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.   


Thursday, August 24, 2006
Political Parodies

I received the following interesting email a few days ago:

Subject: RE: Seadog Bytes images


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)...

The originals of those two images...

...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:

 - Brian

I wrote back:


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:


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.


 - Brian

My Reply:


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.



Not what you want to hear...

IRS Outsourcing Scams

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

Wednesday, August 23, 2006
Residence Sale After Death



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.



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


Working With Corporations


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


Hopeful Headline

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

Expensive Compliment?

Tuesday, August 22, 2006
2006 Calif Tax Rates


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



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. 



Something RINOs no longer care about:

Monday, August 21, 2006


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



Donating Used Items

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:

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.

Sunday, August 20, 2006
Residence Converted From Rental



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


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.



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


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.


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


Thank you for all your advise and information.


Hybrid Vehicles



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.


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:




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.


Residence Sales, Estimated Taxes



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?



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




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.


DemonRat Holidays

Both are usually celebrated on April 15.

Courtesy of Worth1000

Saturday, August 19, 2006

Who's Blocking the Taxpayer Accountability Bill?

Same-sex couples hail pension overhaul

IRS Enlists Help in Collecting Delinquent Taxes

Catching Up On Tax Returns



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,


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


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.

Timing of Sec. 179 Deduction


Subject: Sect 179 Question

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?



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


Keep QuickBooks Up To Date






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



Thursday, August 17, 2006
Kinder & gentler tax collectors?

(Click on image for full size)

Some people love the Death Tax

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.

I wrote back:

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

(Click on image for full size)

IRS zombie mascots courtesy of E-Zombie.
Wednesday, August 16, 2006

State Tax Increases Smaller, More Targeted, Study Shows



Popularity of 1031 Exchanges Surges With Market Decline



Tuesday, August 15, 2006

Consider the Other Estate Taxes When Deciding Where to Retire – Which state you are residing in when you pass away can have big tax ramifications.


Gifts vs. Inheritances



Subject: death tax article
Dear Tax Guru - great summary on death and gift taxes.
As you stated, the recipient of a gift does not need to pay taxes.
What in case of a death/inheritance? Does the recipient need to pay federal taxes?


Gifts and inheritances are very similar in regard to taxability.  Most items received are not subject to tax on the recipient.  There are a few exceptions to this; most commonly pre-tax retirement accounts, which are classified as Income In Respect of a Decedent (IRD) and taxable to the recipient.  The timing of the actual tax liability is flexible  and was addressed in a recent Q&A that I posted.

The biggest difference between receiving items as a gift versus as an inheritance has to do with the cost basis for the recipient.  In most cases, the cost basis of assets received as a gift is the lower of the giver's cost basis or its fair market value at the time of the gift.  For highly appreciated assets, this literally means that the recipient is accepting the tax liability on any future sale.

For most assets received as an inheritance, the cost basis for the recipient is adjusted (stepped-up) to its fair market value as of the date of death.  For highly appreciated assets, this means the capital gain is erased before the heir receives it and s/he will only be responsible for future appreciation.

This is a very concise and limited explanation of gifting and inheritances.  Any such strategy that you and others are contemplating should be reviewed by an experienced tax pro before setting it into motion.

Good luck.  I hope this helps.

Kerry Kerstetter


Hi Kerry -
Thank you very much for the detailed answer!


Virginia Tax Blogger


From Ryan Ellis:

Subject: Bloglines Account Addition

I hope you consider also adding my blog, www.taxplaya.com.  I update it with a (hopefully helpful) tax question every business day.  I also have a list of 2006 inflation adjusted tax items, a tax reading list, and a feed to Tax Prof Blog.
My reply:


I'm glad to add your blog to my Bloglines subscriptions.

Your layout is very impressive.  You've made very good use of the three-column format.

The section on the left with the Tax Changes For 2006 is a very nice touch.

Thanks for letting me know about your blog. It's great to see more tax pros utilizing this extremely effective communication tool.



No idea when I'll be accepting new clients


From the Left Coast:

Subject: Future Client Inquiry
Hi Kerry,
I understand that you aren't taking on any new clients at this time (and don't think you'd want me in my present state of disorganization anyway, but I'm working on it lol), but I wondered at what point in the future you might again?  Is there some way that I can get on a waiting list?
Thanks for providing such a valuable and entertaining resource.  I really admire the sense of control you appear to have over your life!
ps. My dad's janitorial business has been doing some work at your alma mater for the past 5 years.  Did you hear that Cal State Hayward changed it's name to Cal State East Bay sometime back in 2005?!?  I live about 20 minutes away.


My reply:

At this time, we're still in the cut-back phase of adjusting our client load to a size that I can handle in a timely manner.  My goal is to get it down to a point where I can easily turn around tax returns and other projects within a few weeks, rather than the several months it's now taking me.  I really have no idea when we will reach that goal. 

I have been keeping the emails I receive from prospective clients in a special folder.  When we reach the point that I can feel that adding a new client won't jeopardize my ability to service existing ones, we will be extremely selective in accepting any new ones, including the proper use of QuickBooks, one of the main criteria we have been using in deciding who to drop.

I did notice that CSUH changed its name.  I assumed that was due to growth in the satellite Contra Costa campus, something that was just getting started when I was going to the Hayward site.

Thanks for writing and good luck with your endeavors out there on the Left Coast.

Kerry Kerstetter


Canadian Tax Questions


From David Ingram:

Subject: US Canadian Tax services

In a recent Q & A you had a question about US / Canadian / Dubai and UK taxes.
You suggested googling to find such.
I would point out that googling
income tax help us canada dubai uk
will bring us up.
I have several clients in Dubai with holdings in the US, Spain, London, and Canada.
and a google of income tax expert without the countries brings us up in a favourable position on two different websites in the top ten (1 and 3 today).
Gary Gauvin who is number two under - income tax expert - today was my assistant, manager and then partner in my Ottawa office.
Have been in the business for 43 years and have never met half my clients because they live in another country.
Like your attitude about a lot of things.


My Reply:


Thanks for letting me know about your expertise with these specialized areas of taxation that are well outside my comfort zone.

I will pass that along, including links to your website.



Kerry Kerstetter


You are welcome. I think we are both doing this for the fun of it.  goodness knows, I don't need another client.

I decide to expand again this last January.  Hired 5 people and do not have one left.  None of them could do the cross border stuff even though they had 11 degrees and about 60 years of single country tax experience.

As you know it is hard to find someone who can regularly do two states without problems.


State Gift Tax Laws



Subject: Tax free gifts
Thanks for the info.
Are there any state tax implications for the recipient of a gift under the limit, or do you ignore it for your state return as well (NJ in particular)?


Most states piggy-back on the Federal rules; but a few of them have their own.

You should check with your personal professional tax advisor to see if there will be any state tax consequences in your particular state.  Or if you're feeling brave, you can check your state tax agency's website.  www.SisterStates.com will take you there.

Good luck.

Kerry Kerstetter


Monday, August 14, 2006
Buck Wild
I just finished listening to the podcast for today's Rush Limbaugh Show, with guest host Paul W. Smith interviewing the Cato Institute's Stephen Slivinski on his new book describing how the GOP has morphed into worse big government spenders than even drunken DemonRats.

It sounds excellent. I was only disappointed that, when callers asked where conservatives and other believers in limited government should turn now that the Republican leaders have thumbed their noses at us, he failed to mention the Libertarian Party.


When Your Landlord Is a Cat – Another story of creative estate planning, leaving property to dependents of the Feline-American variety.


Sunday, August 13, 2006
Inheriting IRA



Subject: inheritance tax question
Hi. You know my cousin … and she suggested I could try to ask you a question.When my mom dies all of her accounts have her 3 kids as beneficiaries. We should share almost 300,000. These are cd's, bank accounts, treasuries, mutual funds...some in an IRA account. Do we pay any tax? She has paid tax on all of the money except her IRA.
Thank you,



These are the kinds of things you need to work on with your own personal professional tax advisor.

Basically, in most cases inheritances are tax free to the heirs.  The most common exception to this is with pre-tax retirement accounts, such as conventional IRA accounts.  If the account was a conventional IRA, where your mom claimed deductions for the deposits, or a rollover from another pre-tax account, the balances passed on to the heirs will be taxable on their 1040s.

If the IRA was a different kind, such as a Roth or non-deductible, part or all of its balance could be tax free.  You will need to work with the account's custodian, as well as your mom's professional tax advisor

If the account is of the fully taxable type, you have a variety of different options as to when you will report it on your 1040 and pay the taxes.  You can do it all at once in the first year.  You can take it out in increments, completing the withdrawals by the fifth year following death.   There are also some different rules depending on whether your mother had already begun a withdrawal program before she died.

As you can see, there is no quick and easy answer.

Good luck.

Kerry Kerstetter


Setting Up QB Classes



Subject: QB classes
I read an article you wrote about classes, and I'm starting a new business and just setting up QB and trying to decide the best way to do it.
I don't know if you have time, but I'll try anyway.
This business is to be an employer agent, and will handle the payroll & taxes for people who are medicaid recipients. This allows a consumer to be the employer of record and to hire/fire their own homehealthcare workers. My company will get paid an amount per month per person to do this, the company will file electronically to the state for both the fee and the $ to pay the clients employees, and we'll pay the employees every 2 weeks, and print a report showing how much has been paid YTD and whats left in each persons yearly budget.
I'm trying to decide the best way to set this up. I was told once that each Client/Customer should be setup as a separate class within Quickbooks, and there are some bookkeeping and accounting entries that need to be made to adjust for this type of set-up, but I haven't figured out how to do it.
Do you have an idea as to how best to set this up that you might share with me?



There are several ways in which you can set up your QB for your business.  There are too many options to consider for me to be able to advise which specific one would be the most practical for your unique situation; so you need to work with a professional accounting advisor.

I can make a few observations that may help you focus in on the best format for you.  One mistake I often see is when people set up a class for each customer.  This frequently makes the Class list too large and unwieldy to be practical, especially when you run a P&L with columns by Class.  I have normally found it more appropriate to have classes by type of business or tax return schedule (C, E, F, etc) and then make sure each income & expense entry is coded with the Customer or Project name.  That will enable you to produce plenty of different reports for each customer or project. 

Good luck.

Kerry Kerstetter


Saturday, August 12, 2006
The tax game goes on forever and ever...

IRS Hymn?

Friday, August 11, 2006
The Growing Tax Blogosphere

From a new Tax Blogger:

Subject: Enjoy Your Tax Blog



I’m a long-time reader of your tax blog and more recently a subscriber via bloglines. As always, I find your content very insightful and humorous, especially regarding politicians and lobbyist. Yes, our representatives (if you want to call them that) in Washington have never met a spending bill they didn’t like. We all know that if our federal government was a private enterprise that it would be bankrupt. Oh well, I’ll get off my soapbox. I’m a CPA in Atlanta with nearly 20 years experience in both public and industry. Presently, I’m in industry. However, over the past six years, I’ve gradually established a part time tax practice of mostly individuals and a few corporate returns. I’m getting to the point of possibly making the jump to establish my practice on a dedicated full time basis. At the present, much of my development is via referrals and via my website and blog. The website is http://www.brianbrowncpa.com/ and the blog is at www.brianbrowncpa.com/blog/ I would invite you to subscribe to my feed. My posts mainly focus on tax issues with a mix of personal finance and other small business issues.


Some of my post that you may find insightful are as follows:


Who does Uncle Sam audit?


Organized Tax and Other Financial Records - A Guaranteed Return on Investment!!!


You, Inc. - Run it like a business


Also, I would welcome any insight into starting and growing a practice. Thanks and keep you the great service.


P.S. I can see that you are a Neal Boortz fan as well. As a resident of his home city, I do find him both insightful and entertaining. Glad to see that he has fans all over the country.


Thanks, Brian

My reply:


Thanks for the note and the info on your new blog. I checked it out and am very impressed. I did add it to my Bloglines account so that I can pick up each of your entries as they come out.

I also noticed that Kay Bell included one of your articles in her most recent Tax Carnival. That should definitely jump-start awareness of your blog and help your readership grow.

I am a big fan of fellow Libertarian Neal Boortz and hope you've been able to participate in his push for the FairTax. If so, you may want to write about it. I find people very skeptical that there are a lot of us CPAs around the country who would love to eliminate the IRS and reduce our income accordingly.

Thanks for writing and welcome to the tax blogosphere. I wish you continued success with it.

Kerry Kerstetter



Thanks for adding my blog to your bloglines account. In fact, I took you up on the recommendation to write a blog entry regarding the FairTax. It takes a little more momentum day by day.

 Again, I enjoy your blog and related commentary.


Brian Brown



I noticed that yesterday and wondered if it was a coincidence.

Keep up the good work.



Wednesday, August 09, 2006

Pension Bill Will Bring Big Changes to 401(k)s – From the WSJ.


Congress Props Up Pension Plans – From Gail Buckner


Is Your College Student a “Dependent?' It Depends! – From Gail Buckner



Quicken or QuickBooks?



Subject: Can you recommend a traning guide for Quicken 2006
Dear Kerry,
Can you recommend a training guide/book for beginning users that do not have an accounting background.  I just loaded Quicken Premier Home & Business 2006, but have no idea how to best set it up.  I will be using it for personal finance, my real estate/business brokerage business, and my wife's Avon business.  Neither, my wife or I, have employees now, but we may have one or two in the future.



Before you get too far along down the wrong path, you need to dump the Quicken program and buy a copy of the lest expensive version of QuickBooks that you can find. 

I have a lot of info on my website as to why QB is far superior to Quicken, and I say this as someone who had been a huge supporter of Quicken for small businesses for several years, before that program veered too far away from true double entry accounting and QB became much easier to work with.  With the multiple business you are running, there is no way I would feel comfortable trusting the books to Quicken.

In regard to setting up the QB data file in the most efficient manner, the best thing would be to have your personal professional tax advisor assist in configuring things so as to provide what would work best to coordinate your QB data with the tax returns s/he will be preparing from it, especially in regard to the Classes to use. 

If you don't have a professional tax advisor, you can't be serious about running your businesses and you need to find one ASAP.  Your self admitted lack of accounting knowledge is a cry for help from an accounting pro.  Trying to teach yourself to develop those skills would be futile and take you away from the more important use of your time, selling real estate.

Good luck.  I know this isn't the answer you were expecting; but it is the only response I can feel comfortable in providing.

Kerry Kerstetter


Thank you, thank you, thank you, very much.  I am so grateful.  You have saved me from making a big mistake and from spending a great deal of time
unproductively.  I will dump Quicken for QB, and hire a tax professional forthwith.
I found the least expensive version of QB to be Simple Start 2006, but based on information from your website, I should stay away from it.  Should I go
with QB Pro 2006 or QB Basic 2005.
Please let me know.
Thanks again,


It is actually a bit of false advertising for the Simple Start program to be referred to as a version of QuickBooks.  It is nothing more than a Mickey Mouse too basic bookkeeping program that should be avoided as much as Quicken.

I've written a few times in my blog about the problems I and other users have had with QB 2005 freezing up; so I would stay away from it.  Up until a few months ago, I would have said it was okay to start out with QB 2004 Basic.  However, after having used the QB 2006 programs quite a bit in the past few months, for both our own and several clients' books, I now believe it would be best to start out with the QB 2006 Pro.  Besides being very reliable, it will give you a full three years of supported use before Intuit abandons it.

You can buy the program from several vendors.  The lowest prices I have seen have been from sellers on eBay and from the big warehouse stores, such as Costco and Sam's Club.

Good luck.  I hope this helps.



Two More Months On Extensions

I was working on extensions for corporate clients with fiscal years ended May 31 and realized that, normally at this time of year – in the weeks preceding August 15 – I would be busting my butt working on preparing about 100 extensions for our 1040 clients. It’s different this year, as the 4868s we sent in back in April were for six months, giving us until Monday, October 16. 

I’m sure, in spite of the sticker I added to all of our 4868s, there will still be a lot of panicky clients calling over the next few days, wondering about their second extensions.


Tuesday, August 08, 2006
This shouldn't have a long line.

Monday, August 07, 2006
Locating A Tax Advisor



Subject: tax preparer referral
Hi,, Simply need a referral for a tax person who also understands or can help with US and International strategies.  Would you be willing or know of anyone who I can engage with?
I have just formed an LLC.
I live in New Jersey and work in NY with property in London/Dubai and Canada.  Thanks


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


Kerry, Thanks for reply...I did reach out to after I read this.  But one question, are there any organizations, such as Trade, or associations that you know of that cpa's are usually a member of indicating some minimal standard? and thus credibility.  So far I have found
-Accountants World
-National Society of Accountants.
Do you think this is enough?
Thanks much.

My Reply:

Basically, to belong to any of the accounting organizations, including the AICPA and the state CPA societies, it just requires that the person be current with their CPA license.  To renew our CPA licenses, we are required to have a certain number of continuing education hours, usually 40 hours per year.  Those hours can be in a wide range of subjects, so they don't indicate any kind of specialization. 

If there is a certain expertise you require, such as working with clients who have businesses in multiple countries, you should either ask other folks you know who are working in similar business conditions or work with the internet search engines to see if you can locate suitable professional advisors.

Good luck.

Kerry Kerstetter

Sunday, August 06, 2006
Settling With IRS For A Discount


From a client who had a large capital gains tax bill:


WHAT ABOUT "AMERICAN TAX RELIEF" 1-800-TAXHELP and those types of TV/websites??


My reply:

Those companies that advertise an ability to settle IRS debts for pennies on the dollar are scam artists.  They charge advance fees and then do nothing.  Do an internet search and you will find a never ending list of people with complaints about these companies.

What they are pretending they can do is utilize the IRS's Offer In Compromise program.  This is an actual IRS program, which I have used in past years for some clients.  However, it was always very difficult to have an offer accepted and has been tightened up even more in the past few years.  In fact, IRS just instituted a new policy a few weeks ago that it knows will discourage OICs.  They are requiring a nonrefundable 20% down payment with each offer.  Until now, there was never a requirement to submit any actual money with the offer.

OICs are generally most appropriate in cases where the outstanding tax debt is so large that, given the taxpayer's net worth and earnings potential, it would literally be impossible to pay it off in the person's lifetime.  By proving severe financial hardship and low expectations of future income, such as with health issues, IRS will occasionally allow an account to be settled for less than full value.  I don't see that as appropriate in your case because IRS would demand a full listing off all of your assets and debts, and if there is a positive net worth, they will expect at least that much to be offered.

Let me know if you have any other questions.



The Infamous Willie Nelson Defense

Reminder From Uncle Sam


A reminder from our good friends at the IRS that, while murder and racketeering may be perfectly acceptable in our society, they draw the line at tax evasion. Just ask Al Capone which crimes will get a person into the most hot water with the Feds.

Saturday, August 05, 2006
Critical To Ascertain Proper Cost basis



Subject: Capital Gains Tax for Elderly

I don’t know if you answer random questions but I thought I’d try.  My mom is 71, in declining health and needs to sell her house.  She’s been there about 35 years.  The house is in CA which means a huge sale price, and an anticipated profit of approximately $350K.  If I understand correctly she’ll be taxed on the amount of $$ she makes over $250K? Is that correct?

Thanks in advance.


This is the exact kind of issue that you and your mom need to be working on with an experienced professional tax advisor.

Having handled hundreds of cases similar to your mother's, my guess is that the profit won't be as high as you think it is because you are most likely not properly calculating her cost basis in the house.  You are probably comparing the current value to what she originally paid for it 35 years ago. 

I am just guessing here, but if she has been there 35 years, odds are that she is a widow.  When her husband passed away, her new cost basis for the entire house was stepped up to its fair market value at the time of the death.  This means that it no longer matters one iota what she originally paid for the house.  If no estate tax return or other probate documents were prepared when her husband passed away, it is still possible to work with a Realtor who knows the neighborhood to reconstruct what it was worth back then.

That gives the starting point for her cost basis.  She can then add in the cost of any capital improvements made after her husband's death, plus the cost of any furnishings and fixtures that she will be leaving with the house. 

Starting with the sales price, deducting selling expenses and the proper cost basis, I am willing to bet that the net profit won't be as high as you think.  If the net profit does turn out to be more than $250,000, you are correct that the excess will be taxed at the special low Long term Capital Gains rates, which can be as low as five percent for IRS purposes.  There will also be California tax to pay.

Again, this isn't very difficult to work out, and any experienced tax professional should be able to crunch the numbers for you to see if your mom has anything to worry about.

If you haven't already checked out my website, I have some more detailed explanation on residence sales here and  some tips on finding a good tax advisor here.

Good luck.  I hope this helps.

Kerry Kerstetter


Importing QB Data Into Quicken



Subject: Quickbooks imported into Quicken


I read your page on http://taxguru.org/qb/qbvsquicken.htm and was hoping you could provide some guidance on this matter. I would like to export from quickbooks to quicken. Is it possible?



The programs themselves do not allow for QB to Quicken data transfer.

However, there are some after-market utilities available on the web that seem like they can make that conversion in a multi-step process via Excel, such as these offered by Big Red Consulting.

Good luck.  I hope this helps.

Kerry Kerstetter



Thank you very much.


1031 & Residence



Subject: 1031 as primary residence

I recently sold my rental as 1031 exchange.  I had separated from my spouse and was living in an apt. My husband did not want to reconcile the marriage.  since I have a chronic sickness, I can only work parttime as a substitute teacher.  thus I had to give up my apt and move into the 1031 as my primary residence 3 months after selling it.  I know I have to pay taxes to the state and Fed geovernment, but I do not have the money.  How do I ciontact the government and tell them about my situation?  Who and where do I contact them?  Will they allow me to pay on installment?  Please let me know. 



There are far too many issues to go over for me to be able to cover everything that needs to be addressed; so you should be working with an experienced tax professional.

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.

Your email is a bit confusing in regard to the actual chain of events.  It can be interpreted in different ways.  if you did a 1031 exchange and then moved into the replacement property, effectively converting it into your primary residence, that event doesn't constitute a taxable event.  If you then sold that property, there would be some taxes to worry about; but if you still own it, there would be no taxes at stake.

If you were in the middle of a 1031 exchange and cancelled it because of your marital problems, that would create a taxable event.

A good tax pro can untangle what really happened and help calculate your taxes to be the lowest legally required.  If that result ends up with a balance owing to the IRS and/or State, they will accept installment payments (with interest added) until you are paid in full.  The absolute worst thing to do is not file an income tax return because you don't have the money to pay. 

Your email doesn't say in which year you sold the property; so I don't know whether this tax issue is a current one (sale in 2005 or earlier) or a future one (2006) that you will have plenty of time to prepare for since 2006 taxes aren't due until April 16, 2007

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

Kerry Kerstetter




Strategies for Political Giving – Some useful tips from the WSJ.


Friday, August 04, 2006
We all have dependents in DC.


Major Tax Issues on Hold Until After November – Same old story with our gut-less rulers; keep their heads buried in the sand.

…broader tax reform has been slow like molasses, say tax reform advocates.



What's the real federal deficit? – As many of us have long been pointing out, there is no company (even Enron or WorldCom) that uses more dishonest accounting techniques than those used every day by our imperial rulers in DC.  And are any of them ever punished for their crooked accounting?  Of course not.   



2006 State Sales Tax Holidays – The items included are different for each of the states that have this kind of program.


SUV Trades & Sec 179 Recapture


From a Reader:

Subject: suv
I have spent 2 days trying to nail down the answer with my accountant and on the internet.  You have a question posted on your website that’s similar to my question-but of course not quite.  I think this is a problem that a lot of people are going to be coming up with because of gas prices.
I have an SUV, over 6000 lbs purchased in 2003 for $50,000 using the section 179 SUV 6000lb deduction.  I now would like to trade it in for another SUV that does not weigh 6000+lbs.  If I trade the car in, it will be traded in for about $30,000 and the new SUV will be purchased for $22,000 with the left over trade in value (after p/o of loan) going towards the $22,000.  Will I have to pay recapture on the full $30,000 (trade in value), or just on the difference between the $22,000 and the trade in value?


I need a little more clarification before I can provide an answer.  You have Section 1031 issues here, as well as possible Section 179.

What is the current loan balance on your 2003 SUV?

What is the total purchase price of the new SUV - $22,000 or $52,000?

What will be the total of the loan you assume on the new SUV?

What percentage of the miles you drive the new SUV this year will be for business?

Kerry Kerstetter


Thanks for replying.  I filled in the answers below.

What is the current loan balance on your 2003 SUV? $24k

What is the total purchase price of the new SUV - $22,000 or $52,000? The new suv would be $22k

What will be the total of the loan you assume on the new SUV? I will receive $8k for the trade in and that will be put towards the new suv-making the loan amount $14k

What percentage of the miles you drive the new SUV this year will be for business? 100%  I have a second car that's used for personal miles

I read on the internet that you cannot trade in a 6000lb suv for one under 6000lb as a like kind exchange-is that true as well?


Thanks for the additional info. 

It sounds as if you are under the impression that there could be Section 179 recapture based on one or both of the following.

1.  Trading a vehicle that weighs more than 6,000 pounds for one that weighs less because the lighter one only qualifies for a much lower maximum Section 179 deduction.  That on its own would not trigger a recapture unless the new vehicle were to be used less than 50% for business.  What would happen is the zero rollover basis from the old SUV would leave very little to nothing available for future 179 or depreciation on the new one.

2.  Trading a vehicle that weighs more than 6,000 pounds for one that weighs less because they are not considered to be like kind for full Section 1031 deferred gain treatment.  This is also not true.  Vehicles less then and over 6,000 pounds are considered to be like kind by IRS.  Whoever told you otherwise was wrong.

However, from the figures you provided, there will be approximately $10,000 of Sec. 179 recapture because you are failing to meet the equal or higher cost requirement for your trade.  You are essentially selling your old SUV for $32,000 ($24,000 loan payoff + $8,000 equity) and reinvesting only $22,000.  The remaining $10,000 of unreinvested proceeds will be taxable as Section 179 recapture.  Looked at in a slightly different way, with the exact same results, your $24,000 relief of debt is $10,000 lower than the new debt you are taking on, triggering a taxable recapture.

I'm not sure how locked in you are to the $22,000 SUV.  While I am not an advocate of spending money just to increase deductions, it is a fact that many people in this situation would seriously consider buying a new vehicle that costs at least $32,000 so that there would be no taxable recapture to worry about.  You should have your personal tax advisor crunch some numbers to estimate how much Federal + State tax that $10,000 recapture will probably cost you.  The actual taxes will be based on your expected tax brackets.
I hope this helps.  Good luck.

Kerry Kerstetter


Hi Kerry,
Thank you so much!  I really appreciate your time to answer my question.  I feel a bit better-though disappointed I can't get the car I want.  To funny-
considering I'm going from a Volvo to a Honda element.  So basically I have to choose a car that costs more.  Who would've thought.  Anyway, I forwarded your info on to my accountant and will have him run numbers for me so I make the best decision.  One thing I did consider was buying 2 of the elements, but I'll talk to my accountant about that.  Thank you again and have a cool summer!


Fully tax free exchanges have always required acquiring replacement property costing at least as much as the net sales price of the old one.

There is no requirement to go from one vehicle to one.  You can exchange into multiple ones.  However, you have to be careful that each of the replacements is used more than 50% for business or else it will trigger some Sec. 179 recapture.

Good luck.



Do you do taxes for people in Maryland? 


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


Thank you Kerry,
And I will be sure and save you in the favorites!


Labels: ,

Thursday, August 03, 2006
Jersey Tax Machine

Also approved for use in the PRC.

(Click image for full size pic)

School for IRS employees?


The estate-tax total-repeal movement ain’t what it used to be. – The gut-less and worthless RINOs strike again and continue the morphing of the GOP into just another branch of the DemonRats when they can’t even muster enough votes to repeal a plank of the Communist Manifesto.


Retroactive Exchange?



Subject: Exchange Question
Do you know whether a 1031 exchange can be made retroactively,  assuming both parties agree?  I have searched and cannot find 
anything specific to this issue.  It appears as though it is likely  to be ok, as long as the relinquishment of property has not yet occured.

My Reply:

You need to be a little more specific with the situation you are trying to describe.

If a property was already sold and the seller received the proceeds, then it is impossible to go back and change that transaction to a 1031 exchange.

If the disposal transaction is still in escrow and title hasn't passed yet, the deal can be converted into a 1031 exchange.

Let me know if neither of those situations cover what you are faced with.

Kerry Kerstetter


Thank you for the quick reply.  The property has not bee sold and is  not in escrow currently.  Basically my company and the seller would 
like to back date (for lack of a better explanation) the transaction,  as if the 1031 took place earlier this year.  I'm not aware of any  other details.  It sounds to me like this is reasonable, as long as  both parties agree to "backdating" within the requirements of 1031 &  reg 1.1031(k)-1(b).


You obviously must have some reason for wanting to do this. However, pretending that a transaction took place before it actually did sounds too much like fraud to me to be able to accept it as proper.  Just because both parties agree to it doesn't make it any more legitimate. I can't see the IRS ever accepting this as valid either.

You would be best to do the swap now and use the current date.

Good luck.

Kerry Kerstetter



Wednesday, August 02, 2006

Getting the Right Info Out of a Franchise Seller – And if you don’t have an accounting pro look over the books before buying a business, you’re nuts.  I have long advised including in any business purchase contract an escape clause that says “subject to approval by buyer’s legal and financial advisors.”  Frequently, before spending any time analyzing a company's books, I just ask my clients if they are still interested in buying it. Rather than waste any more time crunching numbers, I just advise the clients to tell the seller that I do not approve the purchase.  The escape clause doesn’t specify any particular reasons the buyer’s advisors must have for nixing a deal, so buyer remorse is a valid enough reason for me to okay them backing out.  


Phone tax refund proving difficult to get from IRS – This is surprising to whom?  As if anything could be simple with IRS.


Another Basic Investment Tip

Working With QB Classes


From a Client:

I am almost ready to send our personal tax info but I have one question. I never know how to classify what items are corporation and which are personal classifications.  I guess I don't really understand the classification purpose. Can you help me out so I have it right when I send it to you?

My Reply:

The reason the use of Classes is important is for you to be sure to properly identify the deductible business type expenses from the non-deductible personal ones.  Ideally, I like to run a P&L report with the columns sorted by Class and then reconcile each column to its schedule on the tax return.  In your case, there would be a Class for each of the Schedule E columns on your tax return, Corporate Royalties and Asset Leases.  Any other Schedule C, E or F business would also have its own class.  Income received from each of these operations would be coded with that Class, as would any expenses applicable to them.

It's fine to leave the class off and let it show up in the report in the  Unclassified column.  The problem with this is that I don't have the time to hunt through all of those entries searching for deductible things that should belong in one of the business classes.  I rely on you to do that kind of sorting & identification.   

I hope this helps you understand this issue a little better.  I have more info on  this on my website.

Let me know if you have any other questions.



Tuesday, August 01, 2006
Fun With Dyslexia

This would be perfect for Kay Bell's blog on taxes from Texas.

Selling For Cash

Be Wary of Signs and Ads Offering To Pay Cash for Your Home

This reminds me of a consultation I had last week with a client who was considering selling her house. First, she was worried about her taxable gain because she couldn’t recall how much she had paid for the property seven years earlier. When I discovered that she was looking at selling for only $80,000, I explained that her cost basis was irrelevant, since she qualified for up to $250,000 of tax free gain.

Then, she explained the second area of concern. The buyer was going to pay her with a check for $40,000 and the other $40,000 in actual cash. He had stipulated that a condition of the sale was that she could not deposit the cash into her bank account. She claimed that he was a prominent local business owner, and that the source of the money was legitimate, and that was how he always did business. After more questioning, she explained that the offer was $9,000 under the most recent appraisal and she wasn’t desperate to sell.

While she wasn’t in the business of selling real estate, so that filing Form 8300 (Report of Cash Payments Over $10,000 Received In a Trade or Business) with IRS for the cash received wouldn’t technically be mandatory, the situation struck me as having potential to fall under the following from the 8300’s instructions.

Voluntary use of Form 8300. Form 8300 may be filed voluntarily for any suspicious transaction (see Definitions) for use by the IRS, even if the total amount does not exceed $10,000.

Suspicious transaction. A transaction in which it appears that a person is attempting to cause Form 8300 not to be filed, or to file a false or incomplete form. The term also includes any transaction in which there is an indication of possible illegal activity.

When I explained that the potential penalty for not filing the 8300 could be the full amount of the cash received ($40,000), my client decided it would be best to stay away from a sale under these suspicious conditions. While the $40,000 cash the buyer was offering could very well be perfectly legitimate, the fact that he wanted it kept secret sends up red flags with any normal person.

Cure for wealth?


When a Partnership Is Right for You – The extremely dangerous general partnership format has been becoming less popular each year, especially as the more protective LLC format has grown in prevalence.


Intuit's next strategy to force upgrades:

Fat Chance

Powered by Blogger