Monday, November 30, 2009

Throw Grandma under the bus?

For those of you who haven’t been following this stuff, Federal tax law as currently written provides for an inheritance tax on decedent’s estates that exceed $3.5 mil. Currently if you die with a net worth over that amount, your estate (actually your heirs) will be taxed at a 45% rate on the excess value.

That is scheduled to change January 1, 2010. For one year only, the inheritance tax is scheduled to go away for decedents dying between January 1, 2010 and December 31, 2010. After that, the “death tax” as it’s fondly referred to, is scheduled to return with a smaller exemption amount of $1mil in 2011 and a higher tax rate of 55%. This has given rise to some speculation that there may be an increase in accidental deaths of wealthy seniors beginning next year! The word is that many oldsters have been drafting plans to disappear on extended vacations and otherwise avoid contact with relatives for about a year. Sort of like what deer do during hunting season.

But before you start planning scuba and sky diving lessons for Grandma, be forewarned that the House is scheduled to reevaluate this issue starting next week. The Senate should follow shortly. There are good reasons both pro and con as to whether or not we should tax estates, but I think the easy explanation is that our leaders do not want to appear as if they are trying to cut a tax break for the wealthy and their heirs. I expect that they will extend the current rules for at least a year, possibly indefinitely.

Heaven forbid somebody should pass away and escape taxation as a last act of defiance…

Tuesday, November 24, 2009

Please define the term “Voluntary”

The IRS just announced new proposed regulations that will explain how to implement a new tax code section that requires credit card, debit card, and third party payments such as Paypal to be reported to IRS starting in 2011. Institutions will be required to disclose amounts paid to recipients. What this means is that when you pay a bill or buy something over the internet with a credit or debit card, the bank clearing the transaction will tell IRS how much was received by the payee.

The reason for this rule, as announced in the IRS press release, is “to improve voluntary tax compliance by business taxpayers and help IRS determine whether their tax returns are correct and complete”.

It seems that Congress thinks some of you business owners haven’t been quite as "voluntary" as you should be…

So, if you run a business and accept credit card, debit card, or Paypal type payments, IRS will be looking to match up your reported gross receipts with what will be reported to them by the banks. Since this data by itself will be worthless for the purpose of trying to match up with total reported gross receipts, look for another round of reporting requirements on businesses that will eventually require all businesses to separately state on tax returns how much they received via electronic payments and how much they received via cash and checks. And woe be to the small business that doesn’t get it to agree with the bank’s records! Helloooo audit!

The good news: It will take the government years to figure out that the program is ineffective without additional reporting requirements. Since this is starting in 2011 it will be some time before it affects anyone other than the reporting institutions.

The bad news: Someone will have to pay for all the accounting and reporting costs. Guess who that will be?

Monday, November 16, 2009

One time chance to put $20k into a Roth?

Usually I don’t like to use words like “tax loophole” or “tax shelter”, but their exists right now a situation where the sun, moon, and Internal Revenue Code have aligned perfectly to create an opportunity to create a permanent tax shelter by way of Roth IRA account(s). See if this applies to you:

Currently many people are precluded from contributing to a Roth IRA because of income limits or they are covered by another plan. Further, regular IRA conversions to a Roth IRA have also been restricted to people below certain income levels. The restrictions on conversions lapse on 12/31/2009. Anyone will be able to convert an existing IRA account to a Roth IRA account in 2010.

So here’s what you might do: Make a NONDEDUCTIBLE IRA contribution of $5,000 for 2009 to a traditional IRA (not a Roth) account before December 31. In January, convert the $5,000 traditional (nondeductible) IRA to a Roth, and make a nondeductible $5,000 Roth contribution for 2010 at the same time. Keeping score? You now have $10,000 in a Roth account. More good news: Your spouse can do the same thing. If you do, you could sock away $20k between the two of you in a matter of weeks and set it aside to grow completely tax free! If you are over 50, the annual limit is $6,000.

But there are caveats. The conversion will be a taxable event, so any gain on the traditional to Roth conversion will create a tax. In my hypothetical scenario a few days appreciation may not amount to anything. Also this assumes you do not already have existing IRA accounts. If you do, the first $5,000 contributions in my example will be aggregated with the value of all your IRA’s and you may not want to do the conversion piece of this plan. Also, the income limits for Roth contributions are still in place, so you may not be able to do the extra $5k in January depending on your income and marital status. As always, you MUST run your specific scenario past a tax professional who can run the numbers and determine if this works for you. The rules are complex. Don’t trust this one to the brother-in-law with turbotax!

Now, where can I find $20K?

Tuesday, November 10, 2009

Welcome to California. Now lend us money!

Just last week you may have felt the presence of Arnold and the State legislature rummaging around in your wallet. Effective Nov 1 withholding rates and estimated tax payment requirements increased by 10%. This is not a tax increase they tell us, only a temporary loan from us to them for tax monies that the state will ultimately have to refund to you.

Hopefully they will actually refund the excess taxes they are taking, instead of issuing a warrant that the banks will not honor, or simply parking on your refund for an extra month or so, both of which FTB has done recently. Better still, you will be earning a whopping 0% (that’s zero) rate of interest on your “loan” to the state. So, not only are you now a lender, but you aren’t making any money at it either. Does this qualify all of us as failing banks? Perhaps Federal bailout money will soon follow…

Here’s what you need to do to limit the damage. First, be sure you pay in JUST ENOUGH tax to be penalty proof under the rules, regardless of what you may owe in April. This 10% increase is actually voluntary, and you can adjust your withholding to have the correct amount taken out of your paycheck. Second, after you have penalty proofed yourself, STOP. Arrange your taxes so that you owe the state in April, not the other way around. This will limit your exposure to getting a warrant or waiting for a delayed refund to arrive. Note that this new increased withholding level is set to continue indefinitely.

This strategy may have Federal tax consequences, so before embarking on it you should contact us or do the math to see if it works for you.

Sidebar: The LA Times reports that the very same elected officials that brought us to this point because of their inability to balance the budget or live within their means are currently trying to exempt themselves from pay cuts that they implemented for all state employees. I’d be OK with that if we had the ability to reduce their pay to zero under a pay-for-performance plan.

Wednesday, November 4, 2009

Your Tax dollars at work

You should all be familiar with the new tax incentive available for first time home buyers that is set to expire this November 30. The incentive provides for up to an $8,000 tax credit, (that’s real money), for qualifying first time home buyers, and was intended to stimulate the real estate market.

Recently the IRS came out and said that they had uncovered a significant amount of fraud by those claiming the credit (I’m shocked, absolutely shocked!). In one case the credit was claimed by a four year old who allegedly had bought his first home…what an enterprising young tyke! Before long we will probably see him on cable TV doing infomercials on how to buy real estate with nothing down and money from the government. Helps him pay for his pampers….In response the IRS has announced that they will be approaching an audit rate of nearly 100% on tax returns claiming this credit.

Faced with reports of fraud and abuse, what does Congress do? Expand the program, of course! Yup, the Senate is expected to pass a bill this week to extend the credit into 2010 and expand it to more people beyond first time home buyers.

I’d have a punch line inserted here but I don’t think its necessary