Archived Tax Ideas:

Feb 08, Sept 07, June 07, May 07, April 07, Nov 06, Sept 06, June 06, Mar 06, Jan/Feb 06, Dec 05, Oct, Sep, August, July, June, May, Apr, Mar, Feb, Jan, Dec 04 , Nov 04

Feb 08 Bean Counter Tax Ideas

• Section 162 - Employee Benefit Program:
• Section 1091- IRA Wash Sale Losses of Stock or Securities
• Common Mistakes of the S Corp & their shareholders
  

   Section 162   Employee Benefit Program:
A married couple is entitled to deduct payments for health insurance and medical payments that are made under an employee benefit program. T.C. Memo. 2007-351

Ralph owns a sole proprietor business and he had one employee, his wife Erika. Erika performed actual business duties (key factor) for the family business. During the year Ralph obtained a health insurance policy that covered his employee(s).  During the year, Ralph paid wages of $3,000.00 subject to Social Security and Medicare taxes to Erika.

Erika paid the insurance premiums from her own checking account as well as cancer insurance plus unreimbursed medical expenses. At a later date, Erika submitted invoices to her employer for repayment. The Schedule C business deducted the cost as an employee benefit program cost. Upon examination, the IRS rejected the deduction and billed for the additional tax liability.

The married couple argued that the items were paid as a reimbursement to Erika. Her policy covered Ralph as a spouse with Erika being the primary insured. The Tax Court held that the deduction is correct. Erika paid the medical items from her own bank account. Likewise, her spouse is allowed to be covered.  Ralph’s business had a valid medical reimbursement plan which was allowed as an ordinary and necessary business expense.

If Ralph lost this one, he would have been allowed to deduct the family’s medical cost that exceeded   7 1/2% of their adjusted gross income.  With proper planning a sole proprietor business can be very handy.

Section 1091- IRA Wash Sale Losses of Stock or Securities.
Rev Rule 2008-5 has addressed the deductibility of an individual IRA loss resulting from a Wash Sale.  Here are the facts: An individual owned 100 shares of ABC Corporation in his IRA. The stock has a basis of $1,500.00. The stock was sold on December 17 for $700.00 resulting  in a loss of $800.00. No problem so far, but watch what happens next.

Our investor purchased the same company stock in his Roth account on December 26. His Roth Account is for his benefit, same as the selling IRA account. The individual executed the sale and repurchase with a different retirement account. ( Also the individual is a not a dealer in the stock position. )

Code section 1091 (a) provides that any loss claimed to have been sustained from a sale cannot be repurchased within a 30 day period.  A “substantially identical stock or securities” will result in any loss not being recognized for tax purposes.

The IRS ruled that the loss on the sale of stock is disallowed under section 1091. Because both accounts, IRA and Roth, benefit  the same individual and beneficiaries, each account will not stand alone for Wash Sale purposes. The accounts are considered as being the same. The tax exempt or non exempt status does not apply.  Therefore, our investor has a basis problem.

Common mistakes of the S Corporations and their shareholders

The IRS has identified several mistakes that are commonly made by S Corporations and their shareholders. The most common are as follows:

1. Accrual of expenses due a shareholder – Pursuant to code section 267, an accrual corporation cannot  accrue and deduct expenses payable to a shareholder until cash moves between the entity and taxpayer. The shareholder is 99% of the time a cash basis taxpayer. That is, expenses and income are recognized when actually received by the taxpayer. Therefore, the corporation cannot deduct a rent expense until actually paid.
2. Fringe Benefits – Certain fringe benefits paid by the S Corporation on behalf of a shareholder, who owns more than 2% of the corporation (including family members), are taxable to the individual. Examples include health, accident and life insurance premiums, meals and lodging, and certain cafeteria plan benefits.
3. Compensation to Shareholders – If the shareholder is a performing  an earned income type service for the corporation’s benefit, do not improperly classify the service as rent or distribution. This mistake will be reclassified upon examination as wage subject to the employment taxes. Penalties etc would be added to the tax bill.
4. Losses in excess of basis- Pursuant to code section 1366, a shareholder in a S Corporation, can deduct any pass thru losses up to the stock basis amount. Therefore, it is important to compute the annual stock basis for each shareholder. Any loans to the corporation by a shareholder will add to that individual’s basis.

Sept 07 Bean Counter Tax Ideas

• Donating a Life Insurance Policy to Charity
• New Tax Law Benefits Small Business Owners
• Retirement Savings Contributions for 2007
  

Donating a Life Insurance Policy to Charity
A number of charities now ask their donors to consider donating life insurance policies rather than, or in addition to, cash, in order to make substantially larger gifts than would otherwise be possible. The advantage to donors is that they can make a sizable gift with relatively little up-front cash or even no cash if an existing policy is donated. The fact that a charity may have to wait many years before receiving a payoff from the gift is typically not a problem, because charities normally earmark such gifts for their endowment or long-term building funds.

If handled correctly, a life insurance policy donation can net the donor a charitable deduction. A charitable deduction is also available for any cash contributed in future years to continue paying the premiums on a policy that was not fully paid up when it was donated. However, if handled incorrectly, no deduction is allowed.

New Tax Law Benefits Small Business Owners
Congress recently passed and the President has signed yet another new tax law. This latest effort is called the Small Business and Work Opportunity Tax Act of 2007 (the1 Act). The stated purpose of the legislation was to provide small business owners with tax relief to help offset the cost of the newly increased federal minimum wage. Below some major provisions of the new law are listed.

Section 179 Rules. The Section 179 rules allow small business owners to immediately expense business equipment purchases versus -- depreciating them over several years. The Act extends the current taxpayer-friendly Section 179 deduction rules for one more year— through tax years beginning in 2010—and also makes them even more generous starting with tax years beginning in 2007. For 2007, the maximum Section 179 deduction is generally increased to $125,000 (from $112,000 before the Act). For 2008 through 2010, the $125,000 amount will be indexed for inflation.

Prior to the Act, the Section 179 benefit began phasing out on a dollar-for-dollar basis when eligible equipment purchased reached $450,000. For 2007, the Section 179 deduction phase-out threshold is generally increased to $500,000 of qualifying property. For 2008 through 2010, the $500,000 amount will be indexed for inflation.

In addition, the current rule allowing Section 179 deductions for the cost of off-the-shelf software is extended through tax years beginning in 2010. The current rule allowing Section 179 elections to be changed or revoked on amended returns is also extended through tax years beginning in 2010.

Spousal Joint Ventures Taxed as Partnerships.
A husband-wife joint venture that is treated as a partnership for federal tax purposes generally must file an annual Form 1065 (U.S. Return of Partnership Income) and issue each spouse a separate Schedule K-l (Partner's Share of income, Deductions, Credits, etc.) each year. This requirement can present a tax reporting hardship.

For tax years beginning after December 31, 2006, the Act allows some husband-wife joint ventures to “elect out" of the partnership rules for federal tax purposes when in compliance with specific requirements. After electing out, each spouse will report his or her share of the federal income tax items from the venture on the appropriate IRS form, Similarly, each spouse will report his or her share of net self-employment income from the venture and will receive credit for that income for Social Security benefit eligibility purposes.

While electing out won't change a married couple's total federal income tax liability or total self-employment tax liability, it will eliminate the need to prepare and file Form 1065 and the related Schedules K-l.

Work Opportunity Tax Credit (WOTC).
The WOTC is available to employers of persons who fall into one of the designated targeted groups (generally, economically or physically disadvantaged persons). Under exceedingly complicated rules, the WOTC provides employers with a federal income tax incentive to hire members of certain targeted groups. Before the Act, the WOTC was scheduled to expire for wages paid to employees who begin work after 2007. The Act extends the WOTC to cover wages paid to qualified employees who begin work before September 1, 2011. In addition, the Act expands the list of targeted groups and makes other favorable changes for wages paid to affected employees who begin work after May 25, 2007.

Retirement Savings Contributions for 2007
There is still ample time to plan for your 2007 retirement savings contributions. You can contribute up to $4,000 ($5,000 if you are age 50 or older by year-end) to your IRA in 2007 if certain conditions are met. For married couples, the combined contribution limites are $8,000 ($4,000 each) and $10,000 ($5,000 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income. Keep in mind that contributions to traditional IRAs may be tax-deductible subject to specific limitations.

When you establish and contribute to a Roth IRA, withdrawals are tax-free if specific requirements are satisfied. In addition, there are no mandatory distributions rules at age 70 1/2 if you meet the earned income requirement.

The 2007 annual deferral limit for qualified retirement plans is $15,500. If you are at least age 50 by year-end, you can contribute an additional $5,000 to 401(k), 403(b), and 457 plans in 2007. These contributions will generally decrease your taxable income.

June 07 Bean Counter Tax Ideas

• Increases in Medicare Part B Premiums
• Potential Double Benefit from a Tax Deduction
• Basics of the Dependent Care Credit
  

Medicare Part B Premiums Increase
As individuals age 65 and older may already know, Medicare Part B (Part B) premiums have gone up. Part B covers doctor bills, lab tests, and other outpatient services. Prior to 2007, the Federal government paid 75% of the monthly Part B premium ($374 in 2007) and the covered individual paid the remaining 25% ($93.50 in 2007). However, starting this year, premiums are based on your income—higher income equals higher premiums.

Taxpayers at the higher income levels, starting with modified adjusted gross income of $80,000 for single filers and $160,000 for joint filers, will now have less of their premiums subsidized by the government. Since your 2006 income tax information was not available in January, the Federal government used your 2005 tax information to compute your 2007 Part B premiums. So, higher income individuals have seen their premiums increase to one of four new levels (starting at $105.80 and ending at $161.40 per month or from 28% to 43% of the total monthly premium) in 2007.

This is the first year of a three-year program to increase Part B premiums for higher income individuals. In 2009, these taxpayers will be required to pay up to 80% of the monthly Part B premium. At the 2007 monthly Part B premium rate of $374, that's $299.20 per month compared to the standard 25% rate of $93.50 in 2007; and that's without adjusting for inflation.

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Potential Double Benefit from a Tax Deduction
For most taxpayers, the amount of federal income tax they pay each year often depends upon where they fall in the federal income tax brackets and on the breakdown of their taxable income between ordinary (e.g., wages) and capital gains from the sale of assets (e.g., common stock). Taxpayers eligible for the lower federal income tax brackets (those under 25%) on their ordinary income can generally expect to be taxed at a rate of only 5% (exceptions apply) on their long-term capital gains. Taxpayers finding themselves in the 25% or higher federal income tax brackets can generally expect to be taxed at a 15% rate (again, exceptions apply) on at least a portion of their long-term capital gains.

So, if it is inevitable that as our federal taxable income increases the rate of tax we pay on at least a portion of that income also increases, the converse should and does apply. That is, as our federal taxable income decreases the rate of tax we pay on at least a portion of that income will decrease. In addition, if a taxpayer has a long-term capital gain that, after considering ordinary income, is partially taxed at the 15% rate, any additional deduction that decreases ordinary income will simultaneously diminish the taxation of a comparable amount of long-term capital gain from the 15% bracket to the 5% bracket. This has the effect of producing a double benefit for that deduction.

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Basics of the Dependent Care Credit
Many taxpayers are eligible for the Dependent Care Tax Credit. This credit has been in an evolutionary state for more than two decades, being tweaked over the years by various pieces of legislation. So, we thought it might be a good time to review some of the basics of this beneficial credit.

Depending on the taxpayer's income, the credit ranges from 20% to 35% of the dependent care expenses (limitations apply) paid and incurred while the taxpayer and spouse, if married, are gainfully employed. The care must be for a qualifying individual.

As the taxpayer's income increases, the nonrefundable credit is gradually reduced from 35% to 20% of the lesser of the qualifying expenses or earned income of the taxpayer and spouse, if married. There is also an overall limitation of $3,000 for one qualifying person or $6,000 for two or more qualifying persons. A qualifying individual is either a qualifying child under age 13, or a dependent or spouse who is physically or mentally incapable of self-care and has the same principal place of abode as the taxpayer for at least half of the year. The credit is allowed to married taxpayers only if they file a joint return.

To claim the credit, child and dependent care expenses provided for the well-being and protection of a qualifying individual must be incurred to enable the taxpayer (and spouse, if married) to work. This means if the expenses were for household services, part of the services must have been for the care of a qualifying individual. Thus, expenses for ordinary household services (such as a housekeeper, maid, or cook) that are necessary to run the home qualify for the credit if part of the expenses relate to the care of a qualifying individual.

Examples:

Expenses for care outside the taxpayer's home qualify for the credit if incurred to allow the taxpayer(s) to work, and the main reasons for the expenses are the well-being and protection of the qualifying person.

The cost of a day camp or similar programs may be for the care of a qualifying individual and an employment-related expense, even if the day camp specializes in a particular activity.

One final point: a tax credit offsets your tax liability on a dollar-for-dollar basis. So, we want to ensure that you benefit from this and any other available credit. Please call us with any questions you might have on the Dependent Care Tax Credit or any other individual or business tax issue.

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May 07

May 07 Bean Counter Tax Ideas:

• New Charitable Contributions Rules
• Don’t Overlook Nondeductible IRAs
• Section 199 Revisted
  

New Charitable Contributions Rules
For cash contributions, it's not unusual to give small amounts without expecting a receipt. Previously, if these donations were less than $250, you could either keep cancelled checks or reliable records, such as a list showing the dates, amounts donated, and charity name as proof of the donation. Under the new rules effective this year, however, it's no longer sufficient to simply keep good records of these donations to claim them as charitable contributions. Instead, cash contributions of less than $250 given in a single donation are only deductible if you keep a bank record (most likely a cancelled check, wire transfer acknowledgement, or credit card record) or written acknowledgement from the charity showing the name of the charitable organization, the date of the contribution, and the amount of the contribution.

So, if you are likely to itemize deductions on your income tax return and typically make cash contributions of less than $250, you should make donations by check rather than cash, because that will easily satisfy the documentation requirements. Simply keeping good records of the donations will no longer be enough to claim the deduction.

Substantiation rules for larger contributions of cash or other property (those that are more than $250) were not changed by the new rules, but, as a reminder, they require a little more effort to substantiate. A written acknowledgement from the charity must be obtained, showing the description of the property or amount of cash donated and a statement as to whether the donor received any goods or services in return for the property donated. If goods or services were received, a good faith estimate of their value should be obtained. A cancelled check or other reliable records are not sufficient proof. (You can obtain one written acknowledgement for multiple gifts of $250 or more to the same charity.) The acknowledgement must be received contemporaneously; that is, it must be obtained no later than the due date (or extended due date, if applicable) of the tax return for the year the contribution was made.

If you typically donate used clothing or household items to charities, such as Goodwill, the items must be in "good condition or better" unless the items were worth more than $500 and a qualified appraisal report is attached to your tax return. The IRS has not yet defined what is meant by "good condition or better." Thus, you might consider keeping a detailed list and photos of contributed items (unless the property is appraised). No new documentation is required, but to protect yourself in case of an IRS audit, you should, at a minimum, document that the donations were in good condition.

For any amount (even if it's less than $250) of contributions made by payroll withholding, you're now required to keep an official pledge card from the charity and documents from your employer (for example, a pay stub or Form W-2) showing the amount donated.

If you're planning to contribute property (other than publicly traded securities) for which a deduction of more than $5,000 will be claimed ($10,000 for closely held stock), please discuss these plans with us as soon as possible. Although the rules for substantiating this type of property haven't changed, there are now stricter rules for what is considered a "qualified appraisal" and who is considered a "qualified appraiser." You must have the appraisal done not earlier than 60 days before the donation and received by the due date (including extensions) of your tax return.

We hope this information is helpful as you plan for your charitable contributions. It's important to follow these recordkeeping requirements if you hope to claim the deduction for your donations because the IRS can and will disallow charitable deductions if these requirements aren't met. If you would like more details about these or any other aspect of the new rules, please don't hesitate to call us.

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Don't Overlook Nondeductible IRAs
The chances are good that if you participate in an employer-sponsored retirement plan, you may not qualify to make tax deductible contributions to an individual retirement account (IRA). Although you can always make a contribution to a nondeductible IRA (assuming that you or your spouse have earned income at least equal to the contribution), most people don't bother doing this. Such a contribution doesn't yield a tax deduction and although the earnings inside the account build up tax deferred, they're fully taxable as ordinary income when they're distributed.

Instead, people who want to maximize their retirement savings beyond what they're saving at work typically use a Roth IRA account if they qualify (the Roth IRA doesn't provide an upfront deduction, either, but it does allow earnings to build up tax-free, rather than tax-deferred) or invest in a taxable account such as a tax-efficient mutual fund that will yield mostly lightly taxed capital gain income.

Based on a recent law change, the use of a nondeductible IRA now looks more appealing for taxpayers who can't qualify to make a Roth IRA contribution (because their income is too high). The new provision allows taxpayers, beginning in 2010, to convert traditional IRAs (such as a nondeductible IRA) to a Roth IRA regardless of the taxpayer's income level. Currently only taxpayers with modified adjusted gross income of no more than $100,000 can convert a traditional IRA to a Roth IRA. At the time of the conversion, ordinary income tax is due on the income portion of the IRA, but future earnings accrue tax-free. In addition, for conversions in 2010, the new law allows the resulting tax to be paid over two years—2011 and 2012.

Why are we bringing this to your attention more than two years before 2010? Because, if you're not yet age 70½ and want to maximize the funds that can go in a Roth IRA in 2010 or later, you should be funding nondeductible IRAs now—up to the lesser of your earned income or $4,000 (or $5,000, if you are age 50 or older by the end of the year for which you're making the contribution). It's not too early to fund for 2007 provided you know you'll have at least $4,000 (or $5,000) of earned income for the year.

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Section 199 Revisited
When you hear the term Section 199, one of several things might come to mind: an area of a department store near the back of the building, a new perfume or cologne, a portion of the latest cookbook, or a section of the Internal Revenue Code. In this case, you would be correct if you picked "a section of the Internal Revenue Code."

Section 199 was established by the American Jobs Creation Act of 2004 and gave us the Domestic Production Activities Deduction, also known as the "Producer Deduction." The Producer Deduction is just that, a business tax deduction based on income attributable to certain manufacturing and production activities conducted in the U.S.

We are revisiting this topic because the Producer Deduction doubles for tax years beginning in 2007 when compared with 2005 and 2006. For 2007 tax years, the deduction is 6% of qualified domestic production activities, or a 100% increase from the 3% allowed in 2005 and 2006. So, if you qualified for this deduction in prior years, your federal tax bill should decrease a little in 2007 if you continue to qualify. If you did not qualify in prior years or you did qualify, but the benefit was minimal, you might want to reanalyze your financials in light of the increased deduction available. Incidentally, the producer deduction rate will increase once again to 9% for tax years beginning in 2010.

The definition of qualified production activities is very broad. These activities include, but are not limited to, traditional manufacturing of tangible personal property; domestic construction, civil engineering and architectural services for U.S. projects; production of electricity, gas, and potable water; software production; film and videotape production and licensing; growing of agricultural products and food (farming); and processing agricultural products for food.

This Producer Deduction is available to individual business owners as well as C corporations, S corporations, and partnerships, among other entities.

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Apr 07

April 07 Bean Counter Tax Ideas:

• Social Security Number Verification Process
• New 401(k) Investment Option
• Failure to make an Election Results in Inclusion of IRA into Estate
• Want to Swap Something? Code Section 1031 & 1035
• Donating IRA Distributions to Charity
• Examining the Unexpected Consequences with Employer Retirement Plan Loans
  

Social Security Number Verification Process
The Social Security Number Verification Service (SSNVS), set up by the Social Security Administration, allows employers to use the internet to match their records of employee names and social security numbers with the Government’s data file before submitting   W-2 Forms. You can access the SSNVS at www.socialsecurity.gov/bso/bsowelcome.html. this is faster and easier method to use than the submitting request to SSA by other means, including the telephone verification option.
Verification of data is important for both the employer and its employees. Correct names and numbers are critical to successful processing of wage reports, and unmatched records can cause additional processing cost for the employer. From the employees’ standpoint, verified names and numbers allow Government to properly credit employees’ earnings records. Any uncredited earnings can adversely affect future eligibility for Social Security retirement, disability, and survivors programs.

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New 401(k) Investment Option
As of January 1, 2006, employers are able to offer a new retirement savings program entitled the Roth 401(k).  The new account will follow the features of a Roth IRA to be incorporated into the setting of a 401(k) account. But there are no income restrictions as with the Roth IRA. Contributions can be made with after-tax dollars, but the account will grow tax free. Withdrawals can also be tax free, providing the owner is over 591/2 years old.
Key Point: The plan must be inexistence or held for 5 years.
Roth 401(k) accounts will be subject to the same contribution limits as regular 401(k) plans. In 2006, this means a contribution limit of $15,000 or $20,000 for individuals age 50 and over. The contribution limits apply to regular and Roth 401(k) plans combined. That is, an individual could not put $15,000 into a regular 401(k) and a Roth 401(k) plan. Only one total $15,000 (or $20,000) as the case maybe. Still the opportunity is there to put money into a plan that will have tax-free withdrawal ability. In 2006, the contribution limit for a regular Roth IRA is $4,000 or $5,000 if 50 and older. If the employer matches the employee’s contribution to a Roth 401(k), the match will be made with pre-tax dollars in a regular 401(k) account. Withdrawals will be as ordinary income

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Failure to make an Election Results in Inclusion of IRA into Estate.
An IRA from which a decedent received payments until his death, became includable in his estate because an irrevocable election was not completed. Here are the facts:
Walter M. retired and he opted to receive a lump-sum settlement from his retirement plan. The funds were transferred into an IRA-Rollover account. From January 1983 until his April 1999 death, the IRA paid out $1,000.00 per month to Walter.  The IRA agreement did not indicate Walter’s election to receive the monthly annuity on an irrevocable basis. As such the agreement stated that Walter was to reserve to himself sole management of the custodial account.

Walter’s Estate Tax Return initially included the IRA and paid to the IRS $33,632. The executrix later filed an amended return excluding the IRA and asked for the $33,632 to be refunded.  The IRS denied the request saying the IRA was created from a rollover of funds from a pension plan and does not qualify for exclusion from the estate. This dispute moved into the court system.

The estate put forth the position that the annuity value receivable is excluded from the estate. In addition, the estate argued that it was Congress’s intent to treat everyone fairly by enacting the tax Reform Acts of 1984 and 1986. The IRS position said that if Walter had retained the funds in a qualified plan, the funds would then be excluded; however, the funds were rolled into a IRA.

The Court held the funds were includable within the estate. The Court also said the TRA 86 transition rule applied only to qualified plans and not to a IRA. For the benefit not to be includible within the estate, Walter had to make an irrevocable election to the form of the benefit. The election was not done; therefore, it is part of the estate.
Sherrill v. United States, No. 2:04-CV-509

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Want to Swap Something: Code Section 1031 & 1035
Question, How can you sell something and not encounter any immediate capital gains tax? Section 1031 will allow taxpayers to use net proceeds from the sale of business property to buy like-kind property of equal or greater value. The deferred recognition of tax is pushed off further down stream. The deferment will not work for the sale of your personal residence or vacation home. But the swap would work for other real or personal property like rental houses, farm land, commercial property, jet planes plus many more. Keep in mind, that real property may not be exchanged for personal property. There needs to be similar kind relationship between the types of property. All property has to be for business or investment purpose. Stocks and bonds are not included.

The most common kind of exchange is called a delayed exchange. You sell your property and temporarily give the proceeds to a qualified intermediary, generally called an accommodator. The accommodator, who works for a fee, will set up and handle both sides of the exchange. If you want to do the complete transaction on your on, be aware of the rules and do not make a mistake. Any error will turn the deferment into a current tax collection situation. You have 45 days of selling your property to identify in writing the like-kind asset you intend to buy. Then you have 135 days to complete the transaction. No tax is due until you either sell the replacement property or do another 1031 exchange. Just remember, the IRS will carefully count the days to upset your transaction. Here is how it works:

Facts:   You own vacant land with a cost basis of $200,000 and have received a sale offer for $500,000.

          Sale Price       $500,000
          Cost                -200,000
          Selling Cost    - 30,000
          Taxable Gain   270,000

          15% Fed Tax    40,500
          7%  State Tax   18,900
          Total Tax          59,400

A 1031 Exchange will defer the tax and allow you to push the tax downstream.

How about a 1035 Exchange of insurance policies? With proper planning, selected policies can likewise be utilized to push tax burdens into another time frame.

Here is what the Tax Code has to say in general terms: (You really need to have a tax consultant working with you!)
Internal Revenue Code: Section 1031 Exchange of Property Held for Productive Use or Investment

Donating IRA Distributions to Charity
Under the Pension Protection Act of 2006 a favorable provision related to IRA distributions has been established. Under the new rule, qualified taxpayers can donate up to 5100,000 per year to an eligible charity without first being taxed on the distributions. However, unless Congress extends this provision, it will expire at the end of 2007. In addition, any unused portion of 2006's $100,000 limitation does not carry over to 2007. So, there's an incentive to take advantage of the new rule before year-end.

This new provision is available to taxpayers age 70 ½ or older who have one or more IRAs and a desire to make charitable contributions. It allows eligible taxpayers to make charitable contributions directly from their IRAs for up to $100,000 for each year (2006 and 2007) to an eligible charity. These direct charitable distributions, which can replace otherwise re­quired minimum distributions, are tax-free to the IRA owner.
Although these distributions can't be deducted as charitable contributions, they potentially provide the following benefits to taxpayers:

• For taxpayers who don't itemize their deductions (their itemized deductions are less than the standard deduction), making charitable contributions directly from an IRA effectively provides an indirect charitable deduction (because the distribution is excluded from income).

• The negative impact of the phase-out of deductions for personal exemptions and itemized deductions for higher-income taxpayers may be reduced if what would otherwise be taxable IRA distributions are replaced with the IRA contributions to charity.

• The overall limitation on deducting charitable contributions can be ignored for these distributions due to this new provision

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Examining the Unexpected Consequences with Employer Retirement Plan Loans
It's not unusual for retirement plan participants to have the opportunity to borrow a portion of their vested balance from the plan. That can be a plus because it gives plan participants access to a source of funds in the event of a financial emergency or perhaps to use as a down payment on a home purchase. However, there's also at least one downside to borrowing from a retirement plan. When you retire or otherwise leave your employer, most plans require that any outstanding plan loan must be immediately paid back in full. How you accomplish the loan payoff can have an Impact on your tax liability for the year.

The most tax efficient way to pay off the loan is to use funds from another source and simply pay off the loan. If you do that, the payoff doesn't have any tax consequences. Assuming you don't have available funds for a direct payoff, the other option for immediately paying back the loan is to allow the plan administrator to net the loan against your vested account balance. This has a much less favorable tax result because the amount of the loan is treated as a taxable distribution to you (subject to regular income tax, 20% withholding, and, if you're under age 59%, potentially a 10% penalty).

What if you want to pay off the loan with other available funds when you retire or leave but the plan administrator automatically nets the loan against your vested balance? There is still a way to avoid the adverse tax consequences if you use funds equal to the amount of the loan from another source. You use those funds to set up a rollover IRA account within 60 days of when the loan netting occurred, which will allow you to avoid having to pay tax currently on the loan payoff.

The following example illustrates some unexpected consequences of employer plan loans:

Lisa, age 53, is planning early retirement and wants to roll over her entire 401(k) plan proceeds to a traditional IRA in a tax-free lump sum distribution. Her 40l(k) balance is $60,000 and she has a $20,000 plan loan. Here are two options available to Lisa.

The preferable way to facilitate the rollover is to repay the $20,000 loan before the distribution. Lisa can then request a direct rollover of the entire $60,000 to an IRA- Here, no taxes will be due and she will avoid the 10% early withdrawal penalty. However, this option does require that Lisa have $20,000 available from a source other than her 401(k) plan to repay her loan. But this is better than option two. Lisa can also accomplish a tax-deferred rollover without first repaying the loan, but this procedure is more cumbersome. Here, her employer will offset the $20,000 loan and deduct $4,000 for federal income tax withholding from her $60,000 vested account balance. This will leave $36,000 in the account, which Lisa can have directly rolled over to an IRA. If this ($36,000) is all that Lisa rolls over, she will have to include $24,000 ($20,000 loan and $4,000 withholding) in her taxable gross income. In addition, she will be assessed a 10% early withdrawal penalty of $2,400 ($24,000 x 10%) since she is under age 59 ½ (unless an exception applies).

To accomplish a totally tax-free rollover in the second scenario, Lisa must transfer S60,000 (her total vested balance) to her IRA. Therefore, she will have to obtain $24,000 ($60,000-$36,000) from a source other than her 401(k) plan. (In option one she only had to come up with $20,000.) The transfer will be totally tax-free if Lisa transfers the additional $24,000 to her IRA within 60 days of the original $36,000 transfer, but, Lisa will still have to wait until she files her tax return to get back the $4,000 in withholding taxes.

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November 06 Bean Counter Tax Ideas:

• End of Year Business Planning
• Exposure to Alternative Minimum Tax
• Charitable Donationation Strategies
• Energy Efficient Purchases - Tax Savings
• Year End Investment Planning
• AGI Planning
• Income Deferment & Deduction Acceleration
• Changing Federal Income Tax Withholding
  

End of Year Business Planning
In 2006 businesses should use Section 179 Deduction to maximize tax savings. Under Section 179 business can deduct up to $108,000 of equipment, furniture and other tangible property, subject to a phase-out rule when qualified property purchases exceed $430,000. Business owners can claim this deduction for property placed in service anytime during the tax year, including Dec. 31, 2006.

Exposure to Alternative Minimum Tax
An important part of tax planning is to see if you will be subject to AMT this year. In order to meet the IRS requirements, taxpayers must calculate taxes under both the regular tax and AMT rules and then pay the greater of the two. This year higher AMT exemptions were granted for 2006, but AMT can greatly complicate tax planning as certain strategies that work in regular tax situaitons have adverse consequences for AMT. Certain items can increase your risk of AMT such as recognizing substantial long-term capital gains, exercising incentive stock options, and deducting a significant amount of state and local taxes or miscellaneous itemized deductions (ie., unreimbursed employee business expenses). If you are unsure about your exposure to the AMT see your tax advisor.

Charitable Donationation Strategies
2006 offers some changes to the common year-end planning strategy to increase charitable donations. Taxpayerss who are age 70 1/2 or older may temporarily (in 2006 & 2007) be able to claim tax-free treament for otherwise taxable distributions from traditional IRAs, when the IRA money is paid out directly to a tax-exempt charity. This new 'qualified charitable distribution' is subject to a $100,000 annual cap. Since the qualified charitable distribution is Federal-income-tax-free, there are not any Federal income tax deductions for the contribution. The income exclusion is definitely better than a deduction for seniors who might not otherwise itemize deductions. For donations of used clothing and household items including furniture and furnishings, electronics, appliances, linens, and similar items made after 8/17/2006 must be in 'good' or better condition to be deductible. We suggest keeping a list and a photo of the donated items. You can deduct individual items that appraise for more than $500 even if they are not in 'good condition' but you must attach a qualified written appraisal with your tax return.

Energy Efficient Purchases - Tax Savings
There are 2 new tax credits for 2006 and 2007 available for energy efficient improvements made to your home:

A. Residential Energy Efficient Property Credit. Credit is equal to 30% of expenditures for specific types of equipment: 1. qualified electricity generating solar photo voltaic property (max credit $2,000); 2. qualified fuel cell property (max credit of $500 for each .5 kilowatt of capacity); 3. qualfied solar water heating equipment (limited to a max credit of $2,000). The equipment must be used in a U.S. residence and cannot be used to heat a swimming pool or hot tub. Fuel cells can only be used with a principal residence, but solar credits can be used in any residence.

B. Nonbusiness Energy Property Credit. Usually limited to a $500 lifetime credit as well as other limits. The credit is equal to (1.) 10% of what you pay for qualified energy efficiency improvements, plus (2.) 100% of what you pay for qualified residential energy property (such as efficient heat pumps, hot water heaters, boilers and advanced main air circulating fans) on your principal residence.

Year End Investment Planning
A. Capital Losses. Review your financial portfolio to see whether you have any losers you should sell in order to offset captial gains recognized during the year or to take advantage of the $3,000 limit on deductible net losses against ordinary income.

B. Lower Tax Rates on Capital Gains. For taxpayers in a regular tax bracket of 25% or higher long-term capital gains and qualifying divident income are subject to a tax rate of only 15%, while is is only 5% for taxpayer in the lower regular tax brackets. Given tax rates as high as 35% for other types of income, this a a considerable break. In order to be eligible for the lower 15% (or 5%) capital gain rate, assets must be held for more than a year. Consider deferring the sale of capital assetss so you can meet the greater than one year period.

AGI Planning
Tax breaks are often only available to taxpayers with AGI below certain levels. Common AGI based tax breaks include the child tax credit (phase-out begins at $110,000 for married couples and $75,000 for heads-of-households), the $25,000 rental real estate passive loss allowance (phase-out range of $100,000-$150,000 for most taxpayers), and the exclusion of social security benefits ($32,000 threshold for married filers; $25,000 for other filers). In addition, taxpayers with 2006 AGI in excess of $150,500 begin losing part of their itemized deductions, to the extent of 3% fo the excess. Strategies that lower your income or increasse ccertain deductions might not only reduce your taxable income, but also help increase some of your other tax deductions and credits.

Income Deferment & Deduction Acceleration
Postpone income into 2007 or accelerate deductions from future years into 2006. Cash-basis proprietors should consider delaying year-end billings or accelerating business expenditures. If you itemize your deductions consider paying charitable donations, state and local taxes, and medical expenses in 2006 rather than 2007, to the extent possible.

Changing Federal Income Tax Withholding
Consider bumping up the Federal income taxes (FIT) withheld from your paychecks now through the end of 2006 if you think you are going to owe income taxes for 2006. Try increasing your total tax payments (estimated payments plus withholdings) equal at least 90% of your estimated 2006 liability or, if smaller, 100% of last year's liability (110% if your 2005 AGI exceeded $150,000). On April 16, 2007, you will still have to pay the taxes due less the amount paid in, but you won't owe any interest or penalties.

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September 06 Bean Counter Tax Ideas:

• Pension Protection Act of 2006
• TIPRA Tax Act Contains Breaks & New Changes

Pension Protection Act of 2006 - Tax Incentives to Boost Saving Now Permanent

Pension reform legislation that was the subject of several debates and nearly wrecked by partisan bickering was signed into law on August 17th by President Bush.

The bill, The Pension Protection Act of 2006, H.R. 4, tightens the rules governing how companies fund their pension plans and is designed to keep taxpayers from bailing out of the nation’s pension insurer. Under the legislation, companies would have to fully fund their pension plans within seven years. Companies with pension shortfalls would have to move more quickly. Airlines in bankruptcy proceedings that have frozen their pension plans have an extra 10 years to meet their funding obligations.

Entire Pension Bill H.R. 4 - PDF
Joint Committee on Taxation's Bill Explanation - PDF

Of note on tax issues, the bill allows for direct payment of refunds to individual retirement plans. The proposal requires the IRS to make available a form for a taxpayer to file with the IRS directing the agency to send the refund directly to the taxpayer’s IRA. The proposal requires the IRS to provide the form for taxable years beginning after 2006.

The Act also expands the use of Tax Court practice fees for pro se taxpayers. The Tax Court is authorized to charge practitioners a fee of up to $30 per year and to use these fees to pursue disciplinary matters. The proposal expands the use of these fees to provide services to pro se taxpayers that will assist such taxpayers in controversies before the court. For example, fees could be used for programs to educate pro se taxpayers on the procedural requirements for contesting a tax deficiency before the court. The proposal is effective as of August 17, 2006.

The legislation also makes permanent several tax provisions from the 2001 tax bill. Namely, it makes permanent the higher contribution limit for individual retirement accounts (IRAs). Under current law, the limit increases to $5,000 in 2008. Today’s Act makes this permanent and indexes the income limits for inflation.

"Catch-up contributions" that allow people age 50 and over to make additional $1,000 contributions to IRAs each year and up to $5,000 contributions each year to 401(k) plans to boost their nest eggs were also made permanent. Contributions for a year must be made by April 15th of the following year. The Act also allows individuals who worked for a bankrupt employer whose officers were indicted and whose employer had a least a 50 percent match in the form of employer stock in its 401(k) plan to make an additional IRA catch-up contribution (three times the otherwise applicable catch-up amount). The contributions can be made for each of 2007, 2008, and 2009.

Contribution limits on 401(k) plans will rise to a maximum $15,000 in 2006 and are indexed thereafter. Further, newly created Roth 401(k)s are made permanent. These accounts were originally available only until 2010.

Incentives to encourage automatic savings mechanisms by 401(k) plan sponsors are included in the Act. They include legal protections, known as a "safe harbors," to encourage companies sponsoring plans to implement automatic savings mechanisms for defined contribution plans.

The Act also makes permanent the saver’s tax credit designed to encourage savings for lower income taxpayers and indexes the amount of the credit for inflation. The credit was set to expire in 2006.

Other tax measures that became law include:

• Allowing families to make tax-free withdrawals from their state-sponsored college savings plans for college expenses. This measure is permanent.
• Increased flexibility and favorable tax treatment to allow individuals with annuity and life insurance contracts with a long-term care insurance option to use the cash value of their annuities to pay for long-term care insurance. This will give individuals more options to pay for their long-term care needs and make long-term care insurance more affordable for them.
• The ability to roll over after-tax amounts in 403(b) annuity contracts to a qualified plan, effective for tax years beginning after 2006.
• Allowing direct rollovers from retirement plans to Roth IRAs. Individuals with an AGI of less than $100,000 may roll over money from a traditional IRA to a Roth IRA. The money is subject to tax, but it is exempt from the 10 percent early withdrawal tax. Taxpayers who want to do such a rollover from a qualified plan, 403(b) annuity, or Code Section 457 plan must first roll the money to a traditional IRA, and then do a second rollover to the Roth IRA. The Act allows such direct rollovers effective for distributions after 2007.
• Penalty-free withdrawals from retirement plans for individuals called to active duty for at least 179 days. The Code section 72(t) 10 percent premature distribution tax applies to distributions from plans and IRAs before age 59-1/2, subject to specified exceptions. The proposal creates a new exception from the premature distribution tax for distributions to a reservist (called up between September 11, 2001 and before December 31, 2007 for more than 179 days). The proposal applies to distributions after September 11, 2001, and allows for the money to be paid back within the later of two years after the end of active service or August 17, 2006.
• A waiver of the 10 percent early withdrawal penalty tax on certain distributions of pension plans for public safety employees. Generally, there is a 10 percent premature distribution tax for distributions before age 59-1/2. There are several exceptions, including distributions on separation after age 55. The proposal allows public safety officers to avoid the early distribution penalty for distributions based on separation from service if the officer is at least 50 (rather than 55). The proposal is effective for distributions after August 17, 2006.
• Allowing rollovers by non-spouse beneficiaries of certain retirement plan distributions. Generally, participants and surviving spouses may roll over amounts from qualified plans, 403(b) annuities, and IRAs to another plan or IRA. Non-spouse beneficiaries may not roll over inherited amounts. The proposal allows non-spouse beneficiaries to roll over to an IRA or other plan structured for that purpose amounts inherited as a designated beneficiary. Thus, if the non-spouse beneficiary is required by the plan to take an immediate distribution, the non-spouse beneficiary can delay immediate taxation through the rollover. The rules governing minimum distributions at age 70-1/2 for non-spouse beneficiaries are unchanged. The proposal is effective for distributions after 2006.

Also becoming law are measures aimed at curbing donation abuse. Perhaps the most notable addition for preparers of individual tax returns is the provision that modifies recordkeeping and substantiation requirements for certain charitable contributions. According to the new law, “regardless of the amount, applicable recordkeeping requirements are satisfied only if the donor maintains as a record of the contribution a bank record or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution. The recordkeeping requirements may not be satisfied by maintaining other written records.”

To curb abuse, the new law also limits charitable deductions for contributions of clothing and household items. It also expands penalties for nefarious appraisals of donated property.

This portion of the Act also allows:

• Tax-free distributions from individual retirement plans for charitable purposes.
• A charitable deduction for contributions of food inventory.
• A charitable deduction for contributions of book inventory.

During the signing ceremony, Bush alluded to the fact that the pension reform was partly in response to the coming shortfall associated with Social Security. Another stab at reforming the Trust Fund is expected to begin after the mid term election.

“We must also prepare for the impact of the baby boomer generation’s retirement, and what that impact will have on federal entitlement programs like Social Security and Medicare,” he said. “Entitlement programs are projected to grow faster than the economy, faster than the population and faster than the rate of inflation. If we fail to act, spending on Social Security and Medicare and Medicaid will be almost 60 percent of the entire federal budget in the year 2030. And that’s going to leave future generations with impossible choices: staggering tax increases, immense deficits or deep cuts in benefits.

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TIPRA Tax Act Contains Tax Breaks; Adds Revenue Raisers

The new Tax Increase Prevention and Reconciliation Act (TIPRA) retroactively ex­tends a number of popular tax breaks adds several new lax breaks, and includes a number of revenue raisers. Individual taxpayers and business owners should pay attention to the significant provisions of TIPRA.

• TIPRA increases the alternative minimum tax (AMT) exemption amounts.
• TIPRA lowers capital gains and dividend rates.
• TIPRA modifies the Kiddie Tax.
• TIPRA modifies the MAGI ceiling for Roth IRA conversions.
• TIPRA enhances equipment expensing election.
• TIPRA affects domestic production activities deduction/ W-2 wage limitation.
• TIPRA impacts college saving strategies.

TIPRA increases the alternative minimum tax (AMT) exemption amounts. The AMI first appeared in 1970 as a way to ensure that wealthy individuals paid at least sum amount of federal tax on their income and affected ap­proximately 19,000 taxpayers that year. The AMI exemption allows many middle and lower income taxpayers to escape the AMT, but the exemption amounts were scheduled to be reduced in 2006. Without Congressional action to continue the AMT exemption amounts at the levels effective in 2005, it was estimated that up to 15 million additional taxpayers, includ­ing many middle-class individuals, could have been subjected to the AMT in 2006. TIPRA ac­tually increased the AMT exemption amounts for 2006 to provide real, although temporary, tax relief because the increased exemption amounts are only effective for 2006.

TIPRA lowers capital gains and dividend rates. TIPRA extends for two years the 0%, 5%, and 15% tax rates on capital gains through tax years beginning before 2011. These capital gains rates were to expire at the end of 2008 and rates ranging from 8% to 20% were due to come into effect in 2009. TIPRA also extends for the same two-year pe­riod the treatment of qualified dividend income as capital gains.

TIPRA modifies the Kiddie Tax. The kiddie tax is intended to inhibit the sheltering of unearned income (e.g., divi­dends and interest) by transferring income-generating investments from parents to children. A child is subject to the kiddie tax at his or her parents' marginal lax rate on un­earned income over $1,700 (for 2006) if that tax rate is higher them the tax rate the child would otherwise pay on it. Under TIPRA, for tax years beginning after 2005, a child is subject to the kiddie tax if he or she has not attained the age of 18 (previously 14) before the close of the tax year; either parent of the child is alive at the end of the tax year; and the child does not file a joint return for the tax year. TIPRA also created on exception to the kiddie tax for distributions from certain quali­fied disability trusts. The opportunity to lower a family's overall tax bite by transferring cash or income-producing assets to children under 18 is inhibited by the kiddie tax. But, investing a child's funds in savings bonds, municipal bonds, growth stocks, and unimproved real estate can reduce the child's exposure to the kiddie tax. Note that earned income from a job is not subject to taxation under the kiddie tax provision.

TIPRA modifies the MAGI ceiling for Roth IRA conversions. For qualified individuals, Roth IRAs offer benefits like tax-free distributions and no minimum required distributions, features not available with a traditional IRA. Prior to TIPRA, a traditional IRA could be converted to a Roth IRA if, for that tax year, the taxpayer's modified adjusted gross income (MAGI) did not exceed $100,000 and the taxpayer was not a. married individual filing a separate return. The income resulting from the conversion (the transfer amount) was included in taxable income subject to the ap­propriate income tax. However, the 10% pre­mature distribution penalty provision does not apply. For tax years beginning after December 31, 2009, TIPRA eliminates the $100,000 MAGI limitation and permits married taxpayers filing a separate return to convert amounts in a traditional IRA into a Roth IRA. Thus, taxpayers can make such conversions beginning in 2010 without regard to their MAGI. In addition, for 2010 only, the taxes on the conversion amount will be paid 50% in each of the next two years, 2011 and 2012.

TIPRA enhances equipment expensing election. Business owners can elect to expense, rather than depreciate, the cost of certain new or used equipment placed in service within their business during the tax year. The maximum dollar amount that may be deducted annually is $100,000 ($108,000 in 2006 as adjusted for inflation). The maximum expensing amount is reduced on a dollar-for-dollar basis after business equipment purchases exceed $400,000 ($430,000 in 2006, as adjusted for inflation). Prior to TIPRA, the expensing and phase-out amounts were to drop to $25,000 and $200,000, respectively, for equipment placed in service in tax years beginning after 2007. TIPRA extends the $100,000 expense election and the $400,000 phase-out ceiling (as in­flation adjusted) for two additional years to tax years beginning before 2010.

Domestic production activities deduction/ W-2 wage limitation. For business owners, the domestic production activities deduction is generally limited to, among other limitations, 50% of the W-2 wages paid by the taxpayer for the year. Prior to TIPRA, there was nothing in the definition of W-2 wages that required those wages to be allocable or attributable to produc­tion activities. For tax years beginning after the enactment date (May 17, 2006), TIPRA provides that W-2 wages include only amounts that are properly allocable to a qualified production activity.

TIPRA impacts college saving strategies. Under the kiddie tax rules, a dependent child's, unearned income (e.g., interest, dividends, and capital gains) in excess of the applicable threshold, which is S1,700 for 2006, is taxed at the parent's marginal tax rate, not the usually lower child's rate. Before 2006, the kiddie tax rules only applied to a dependent child who had not reached age 14 by year end. Unfortunately, TIPRA changed the magic age to 18, starting with 2006. So if you have a dependent child who will be 17 or younger as of December 31, 2006, the child is a potential kiddie tax victim until the year he or she reaches 18. The unfavorable change requires immediate adjustments to at least two longstanding college saving strategies. Custodial accounts and Crummey trusts that were set up with age 14 as the targeted date for recognizing income should be reevaluated, and the investment policy altered, to defer recognition of income until age 18. To achieve the desired deferral in income recognition, many portfolios will need to be adjusted from an income focus to a growth objective. Traditionally stable investments such as bonds and dividend-paying blue chip stocks may need to be liquidated and replaced with more volatile (i.e., risky) growth stocks that pay little or no dividends and, instead, aim for capital appreciation. Alternatively, tax-efficient mutual funds and exchange-traded funds may be used. Custodial accounts and Crummey trusts have always had one significant drawback as col­lege savings vehicles: they are completed gifts and you lose control over your contributions. Other strategies, such as 529 plans and Educa­tion Savings Accounts, allow you to redirect the funds if circumstances change. Now, in light of the new kiddie tax age of 18, it's clear that custodial accounts and Crummey trusts are less than ideal for college savings plans. If these strategies are already in place, a shift in invest­ment policy to defer interest, dividends, and gains until age 18 may be the best alternative, For newly devised college savings plans, other strategies (e.g., 329 plans) should be pursued.

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June 06 Bean Counter Tax Ideas:

• Do Some Good Deeds and Receive a Tax Credit
• Pub. 15B. Employer's Tax Guide To Fringe Benefits
• Table 16-1. What Is Your Maximum Capital Gain Rate?
• Code Sec. 2010. Unified credit against estate tax.
• 2005 Tax Rate Schedules

Do Some Good Deeds and Receive a Tax Credit

Congress has given employers several tax credits and incentives to help employees. Here are three of the credits to think about:

1. Small employer pension plan start-up cost:
Certain employers (whose employees earn at least $5,000 in compensation) may be entitled to a credit against their federal income tax liability. Employers having 100 employees or less may qualify. The plan must have at least one employee who is not highly compensated (less than $100,000 per year). The credit equals one half of the start-up and administration costs paid during the first three years of the plan’s life. The credit is limited to $500 per year.

2. Childcare:
Employers can take a credit up to $150,000 per year for qualified childcare expenses incurred that benefit their employees. The credit is equal to 25% of the expenses for building a childcare facility, operating a childcare facility, or providing childcare services to employees under a contract with a childcare facility. Plus, employers can receive a credit for 10% of the expenses paid to provide childcare resources and referral services.

3. Disabled individuals:
If you make your business facilities accessible to disabled individuals, your company can receive a tax credit. To be eligible, a business must have gross receipts of one million dollars or less; or employ 30 or less full time employees. The disabled access credit equals 50% or qualified expenses between $250 and $10,250 incurred to remove barriers preventing access to disabled individuals. The expense will include tools, materials, and modifications for individuals with sight or hearing issues. The maximum credit is $5,000 in any one year.

Pub. 15B. Employer's Tax Guide To Fringe Benefits

RULES FOR VARIOUS TYPES OF FRINGE BENEFITS

Table 16-1. What Is Your Maximum Capital Gain Rate?

Code Sec. 2010. Unified credit against estate tax.

Please Note:  Congress is in the process of extending the tax credit until 2010. But until politicians get their act together, use the data below knowing a change may take place.

(c) APPLICABLE CREDIT AMOUNT

For purposes of this section, the applicable credit amount is the amount of the tentative tax which would be determined under the rate schedule set forth in section 2001(c) if the amount with respect to which such tentative tax is to be computed were the appliable exclusion amount determined in accordance with the following table:

(a) Tax Table

The tentative tax rate schedule applicable to taxable estates is set out in Code Section 2001(c)(1). The maximum tax rate for estates of decedents dying in 2001 and earlier years is 55 percent. This maximum rate is phased down starting in 2002, as follows:

2005 Tax Rate Schedules.

Caution! The tax rate schedules are shown so you can see the tax rate that applies to all levels of taxable income. Do not use them to figure your tax!

Schedule X - If your filing status is SINGLE

SCHEDULE Y-1 -- If your filing status is MARRIED FILING JOINTLY or QUALIFYING WIDOW(er)

Schedule Y-2 - If your filing status is MARRIED FILING SEPARATELY

Schedule Y-2 - If your filing status is HEAD OF HOUSEHOLD

March 06 Bean Counter Tax Ideas:

• How to Avoid Tax Time Problems
• Tax Swaps & Exchanges (Code Sec. 1031 & 1035)
• Irrevocable Election of IRAs (Code Sec. 2039)
• IRS Adds New Private Debt Collectors
• New 401(k) Investment Option
• Social Security Number Verification Process

How to Avoid Tax Time Problems (IRS Tax Tip 2006-50)

Are you looking for ways to avoid the last-minute rush for doing your taxes? Here are some stress relieving ideas to help you.

TAX SWAPS & EXCHANGES (Code 1031 & 1035)

WANT TO SWAP SOMETHING?

Question, How can you sell something and not encounter any immediate capital gains tax? Section 1031 will allow taxpayers to use net proceeds from the sale of business property to buy like-kind property of equal or greater value. The deferred recognition of tax is pushed off further down stream. The deferment will not work for the sale of your personal residence or vacation home. But the swap would work for other real or personal property like rental houses, farm land, commercial property, jet planes plus many more. Keep in mind, that real property may not be exchanged for personal property. There needs to be similar kind relationship between the types of property. All property has to be for business or investment purpose. Stocks and bonds are not included.

The most common kind of exchange is called a delayed exchange. You sell your property and temporarily give the proceeds to a qualified intermediary, generally called an accommodator. The accommodator, who works for a fee, will set up and handle both sides of the exchange. If you want to do the complete transaction on your on, be aware of the rules and do not make a mistake. Any error will turn the deferment into a current tax collection situation. You have 45 days of selling your property to identify in writing the like-kind asset you intend to buy. Then you have 135 days to complete the transaction. No tax is due until you either sell the replacement property or do another 1031 exchange. Just remember, the IRS will carefully count the days to upset your transaction.

Here is how it works:

Facts:   You own vacant land with a cost basis of $200,000 and have received a sale offer for $500,000.

          Sale Price       $500,000
          Cost               -200,000
          Selling Cost    - 30,000
          Taxable Gain   270,000

          15% Fed Tax    40,500
          7%  State Tax   18,900
          Total Tax          59,400

A 1031 Exchange will defer the tax and allow you to push the tax downstream.

How about a 1035 Exchange of insurance policies?
With proper planning, selected policies can likewise be utilized to push tax burdens into another time frame.

Here is what the Tax Code has to say in general terms:
(You really need to have a tax consultant working with you!)

Internal Revenue Code Sec. 1035.
Certain exchanges of insurance policies

(a) GENERAL RULES - No gain or loss shall be recognized on the exchange of--

(1) a contract of life insurance for another contract of life insurance or for an endowment or annuity contract; or

(2) a contract of endowment insurance (A) for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or (B) for an annuity contract; or

(3) an annuity contract for an annuity contract.

(b) DEFINITIONS - For the purpose of this section--

(1) ENDOWMENT CONTRACT: A contract of endowment insurance is a contract with an insurance company which depends in part on the life expectancy of the insured, but which may be payable in full in a single payment during his life.

(2) ANNUITY CONTRACT: An annuity contract is a contract to which paragraph (1) applies but which may be payable during the life of the annuitant only in installments.

(3) LIFE INSURANCE CONTRACT: A contract of life insurance is a contract to which paragraph (1) applies but which is not ordinarily payable in full during the life of the insured.

Irrevocable Election for IRAs (Code Sec. 2039)

Failure to make an Election Results in Inclusion of IRA into Estate:

An IRA from which a decedent received payments until his death, became includable in his estate because an irrevocable election was not completed.

Here are the facts: Walter M. retired and he opted to receive a lump-sum settlement from his retirement plan. The funds were transferred into an IRA-Rollover account. From January 1983 until his April 1999 death, the IRA paid out $1,000.00 per month to Walter.  The IRA agreement did not indicate Walter’s election to receive the monthly annuity on an irrevocable basis. As such the agreement stated that Walter was to reserve to himself sole management of the custodial account.

Walter’s Estate Tax Return initially included the IRA and paid to the IRS $33,632. The executrix later filed an amended return excluding the IRA and asked for the $33,632 to be refunded.  The IRS denied the request saying the IRA was created from a rollover of funds from a pension plan and does not qualify for exclusion from the estate. This dispute moved into the court system.

The estate put forth the position that the annuity value receivable is excluded from the estate. In addition, the estate argued that it was Congress’s intent to treat everyone fairly by enacting the tax Reform Acts of 1984 and 1986. The IRS position said that if Walter had retained the funds in a qualified plan, the funds would then be excluded; however, the funds were rolled into an IRA. The Court held the funds were includable within the estate. The Court also said the TRA 86 transition rule applied only to qualified plans and not to an IRA. For the benefit not to be includible within the estate, Walter had to make an irrevocable election to the form of the benefit. The election was not done; therefore, it is part of the estate.
Sherrill v. United States, No. 2:04-CV-509

New 401(k) Investment Option

As of January 1, 2006, employers are able to offer a new retirement savings program entitled the Roth 401(k).  The new account will follow the features of a Roth IRA to be incorporated into the setting of a 401(k) account. But there are no income restrictions as with the Roth IRA. Contributions can be made with after-tax dollars, but the account will grow tax free. Withdrawals can also be tax free, providing the owner is over 591/2 years old.

KEY POINT: The plan must be inexistence or held for 5 years.

Roth 401(k) accounts will be subject to the same contribution limits as regular 401(k) plans. In 2006, this means a contribution limit of $15,000 or $20,000 for individuals age 50 and over. The contribution limits apply to regular and Roth 401(k) plans combined. That is, an individual could not put $15,000 into a regular 401(k) and a Roth 401(k) plan. Only one total $15,000 (or $20,000) as the case maybe. Still the opportunity is there to put money into a plan that will have tax-free withdrawal ability. In 2006, the contribution limit for a regular Roth IRA is $4,000 or $5,000 if 50 and older. If the employer matches the employee’s contribution to a Roth 401(k), the match will be made with pre-tax dollars in a regular 401(k) account. Withdrawals will be as ordinary income.

Social Security Number Verification Process

The Social Security Number Verification Service (SSNVS), set up by the Social Security Administration, allows employers to use the internet to match their records of employee names and social security numbers with the Government’s data file before submitting W-@ Forms.

You can access the SSNVS at:
www.socialsecurity.gov/bso/bsowelcome.html
This is faster and easier method to use than the submitting request to SSA by other means, including the telephone verification option.

Verification of data is important for both the employer and its employees. Correct names and numbers are critical to successful processing of wage reports, and unmatched records can cause additional processing cost for the employer. From the employees’ standpoint, verified names and numbers allow Government to properly credit employees’ earnings records. Any uncredited earnings can adversely affect future eligibility for Social Security retirement, disability, and survivors programs.

New Debt Collection Action by the IRS equals new players in the "pond"

IRS Selects Three Firms to Take Part in Delinquent Tax Collection Effort

IR-2006-42, March 9, 2006
WASHINGTON — The Internal Revenue Service today awarded contracts to three firms to participate in the first phase of its private debt collection initiative.
The firms are:

• The CBE Group Inc., Waterloo, Iowa.
• Linebarger Goggan Blair & Sampson, LLP, Austin, Texas.
• Pioneer Credit Recovery, Inc., Arcade, N.Y.

A total of 33 firms took part in the competitive bidding process that resulted in today’s contract awards.

“The vast majority of states use private firms to help collect delinquent taxes. The new authority that Congress gave to the federal government allows us to use private firms as well,” said IRS Commissioner Mark W. Everson. “We have carefully considered all of the concerns expressed about this project, which involves work traditionally done by the government. As a result, we are putting tough safeguards in place to protect taxpayer rights and privacy. We will be closely monitoring contractor performance to make sure they’re following the law as well as our own internal standards.”

To assist the IRS in its collection of back taxes, the 2004 American Jobs Creation Act authorizes the IRS to hire private firms to collect federal tax debts. This particular portion of the law was carefully crafted and includes several limitations to ensure the private firms will be subject to the same stringent taxpayer protection and privacy rules that IRS employees work under. In addition, private firms cannot subcontract the work. The IRS expects to assign uncollected liabilities to the firms beginning this summer.

The IRS has also developed its own guidelines for the private firms, including background checks on all private firm personnel associated with the project as well as a mandatory, IRS-directed training program for company personnel.

Private firms will not be authorized to take enforcement actions such as liens, levies or seizures.  In addition, private firms will not be authorized to work on technical issues such as offers in compromise, bankruptcies, hardship issues or litigation.  Rather, the IRS will assign to the private firms cases in which the taxpayer has not disputed the liability. The private firms will contact taxpayers to make payment arrangements. “Redirecting relatively simple cases to private firms will permit the IRS to focus its existing collection and enforcement personnel on more complex tax issues,” Everson said.

In the second phase of the private debt collection project, scheduled for 2008, the IRS intends to contract with up to 10 firms. Over the course of 10 years, the IRS expects the private firms to help it collect an additional $1.4 billion in outstanding taxes.

IRS Fact Sheet 2006-18: (url link below)
Safeguards Included in Private Debt Collection Initiative

Jan/Feb Bean Counter Tax Ideas:

• Tax Notes for 2005 and 2006
• Profit Motive - Code Section 162
• IRS Filing Address Changes for 2005 Return
• Home Office Expense Deductions

TAX NOTES for 2005 and 2006

FEDERAL HOLIDAY (IRS CLOSED) SCHEDULE:

IRA CONTRIBUTIONS:

Contributions for '05 and '06 for those under 50 is $4,000.

Age 50 and over the additional contribution for 2005 is $500; however, this will increase $1,000 in 2006.

IRS MILEAGE RATES:

Business:

Charitable Volunteers:

Medical and Moving Expenses:

PROFIT MOTIVE - Code Section 162
When you start up a new business, your operation model must include a profit motive. Here is an example when you plan incorrectly.

Walter worked for a west coast company as a field supervisor. He was in charge of all aspects of the on-site job management. The employer did not have a formal written vehicle expense policy. Their plan was only a verbal one that paid $25.00 a day for expenses. Walter wanted more and decided to rent his vehicle to his employer. Walter filed 2 years tax returns including the "rental business" on Schedule C as a Sole-Proprietor. He reported business income (the flat fee times number of days worked) and business expenses on the Schedule C and it generated business losses.
Upon examination, the IRS denied all of his business losses. Walter argued that he was in business of leasing his truck to his employer and his resulting losses were includable in his return.

The Tax Court held that Walter's vehicle expenses were unreimbursed employee business expenses that should be reported on Schedule A and these expenses are subject to the 2% floor limitation. The court focused on whether he entered into a contract with the intent to earn a profit or not. It also noted the Walter's business did not lease any other vehicles or have any other customers. The Court concluded that Walter did not demonstrate or have the necessary profit motive when he used his personal vehicle in furtherance of the employer's business. [Alley v. Commissioner, T.C. Summary 2006-4]

FILING ADDRESS CHANGES FOR 2005 RETURNS
The IRS announced that as taxpayers begin to prepare their tax returns, some taxpayers may be sending their returns to a different service center than last year. The IRS said that, for taxpayers who received an instruction booklet from the IRS in the mail and use the labels included in the booklet, the return will go to the correct address.

For tax year 2005, the mailing changes will affect returns with or without payments, from the District of Columbia and eleven states. They are: Colorado, Delaware, Kansas, Maryland, Mississippi, Nebraska, New Mexico, Ohio, South Dakota, Virginia, and West Virginia. Taxpayers should send:

1. Returns from Delaware and Virginia to the IRS Service Center in Atlanta, Georgia;
   
   
2. Returns from the District of Columbia and Maryland to the IRS Service Center in Andover, Massachusetts;
   
   
3. Returns from Ohio to the IRS Service Center in Kansas City, Missouri;
   
   
4. Returns from Kansas, Mississippi, and West Virginia to the IRS Service Center in Austin, Texas;
   
   
5. Returns from Colorado, Nebraska, New Mexico, and South Dakota to the IRS Service Center in Fresno, California.

IRS IR-2006-16

DEDUCTING EXPENSES FOR HOME OFFICES:
Expenses of a home office are usually deductible if the office meets certain criteria. Costs associated with maintaining a home office (for example, rent, utilities, insurance, repairs, and depreciation) may be deductible. However, the deduction can be lost if an office space is also used for personal uses. Nonetheless, qualifying mortgage interest and property tax expenses are deductible no matter whether the home office qualifies for other deductions.

In order for a self-employed taxpayer to deduct the costs of maintaining a home office the home office must be used regularly and exclusively as a place of principal business. The home office can also be a place to meet or deal with clients and customers in the normal course of business. The home office can also be used in connection with a business if the space is in a separate structure apart from the residence such as a detached garage or mother-in-law apartment. In summary, any separately identifiable area can serve as an office even if the home office does not need to be a separate room or permanently partitioned portion of a room.

To meet the definition of regular and exclusive use the home office must be used on a continuing basis and the space only can be used for business purposes. In order for a space to be deductible both regular and exclusive use of the home office must occur. Be careful because personal use, even after business hours, causes the costs of maintaining the office to become nondeductible. Of course there are two exceptions to the exclusive use rule. The first exception is the storage of inventory such as product samples and the second exception relates to certain daycare facilities. When space in the home is used for these two purposes then the space can also be used for personal purposes.

Home office deductions can also be claimed by employees. The business use of the home must be for the employer's convenience and the space must be used exclusively and regularly for job-related activities. Often employees find it hard to pass these tests.

Structuring the business so that the home qualifies as a principal place of business may also yield additional deductible transportation expenses, since the cost of commuting from the principal place of business (including a home) to other workplaces is deductible.

December Bean Counter Tax Ideas:

• 2005 Year End Tax Planning
• IRA Deduction Expanded
• 2006 IRA Contributions
• Car Donations
• 2005 Energy Act Includes Business Incentives

2005 Year End Tax Planning

A. Extensions
Tax Extensions for the late filers have been streamlined. The IRS will now allow individuals and non-corporate entities up to a 6 month time extension. The current 2 step process will be eliminated. This change will apply to returns filed after December 31, 2005. All one will have to do is mail in a form to receive the automatic 6 month extension. Make sure that all taxes are paid by April 15th however. Otherwise interest and penalty cost could or will be charged. Taxpayers will continue to use form 4868 and drop the second request form 2688.

B. Donations
Last minute donations to your favorite charities need to be completed by December 31st. The Katrina Emergency Relief Tax Act will allow you to increase your tax donations for this year only. Beginning August 28 and continuing thru December 31, 2005, your donations to a qualified charity will qualify for certain limitation relief. For individuals and partners, the distributive share of qualified contributions are not limited by either the 50 percent adjusted gross income limitation nor the limitation on itemized deductions. You can now donate away your adjusted gross income (computed without regard to any net loss carry back) exceeds the deduction for charitable contributions.

C. Timing
Will you client be in a lower tax bracket next year? Slow down this year's income or speed up this year's deductions. Sound simple? See your tax consultant!!

IRA Deduction Expanded
The IRA deduction is increased from $3,000 to $4,000 ($4,500 is age 50 or older at the end of 2005). A taxpayer may now deduct an IRA, if covered by a retirement plan provided their modified adjusted gross income is lass than $60,000 for a single person or $80,000 for a married couple.

2006 IRA Contributions
The catch up provision for those individuals over 50 will increase from $500 to $1,000. The Current IRA $4,000 limitation will remain for 2006.

Car Donations
The amount a taxpayer can deduct for an auto donation has changed. Up until now, one could deduct the fair market value of the car donated to a charity. From now on, if the charity sells the auto, the taxpayer is limited to the proceeds received by the charity. Should the charity not sell the auto and instead uses the auto with in it's chartiable operation, then the taxpayer may be able to deduct its fair market value. In short, the junk car loophole has been somewhat closed.

2005 Energy Act Includes Business Incentives
Tax incentives for builders of energy efficient homes, commerical building developers and manufacturers of applicances now exist as a result of the Energy Tax Incentive Act of 2005.

Qualified energy-saving improvements to commerical buildings in the US are now eligible for an immediate deduction. The maximum deduction is generally limited to $1.80/sq/ft on a lifetime basis. Improvements must consist as part of interior lighting systems; heating, coolling and ventilation systems; hot water systems; or the building envelope. To qualify, the improvements must meet a 50% reduced energy consumption standard. A reduced deduction amount of $.60/sq/ft may apply in some circumstances. The deduction is available for qualified energy-efficient commerical building property placed in service after 12/13/05 and before 2008.

Energy-efficient manufacturers of appliances are eligible for tax credits. A business tax credit to manufacturers of qualifying energy-efficient dishwashers, clothes washers, and refrigerators in the U.S. The credit is available for appliances manufactured after 12/31/05 and before 2008. this credit goes directly to the appliance manufacturers, and consumers will only benefit to the extent manufacturers pass along their tax savings.

October Bean Counter Tax Ideas:

• 2005 Business Planning - Year End Tax Planning
• Attorney Lost a Contested Liablity - Code Section 61
• Non-Qualified Deferred Compensation after 2004
• 1% 'Option Arm' Home Mortgage

2005 Year End Business Tax Planning

The year end tax planning cycle is now upon us. Whether you are an entity or individual, wise tax planning can save dollars - tax wise.

Asset purchase and their cost recovery:
Being able to recover some of your cost of newly acquired, non real estate, fixed assets is an important tool. When you purchase them and how you depreciate them can make a difference.

Watch your timing. The half year depreciation rule will allow a full one half depreciation on items purchased and placed into service within the last six months of the year. There are also special depreciation allowances that could add to the first year cost recovery. If the aggregate cost of assets placed into service during the last three months of your year exceeds 40% of the year's purchases, then they are treated as mid quarter purchases. Consult your advisor if there are questions.

Section 179 of the IRS Tax Code, will allow you to write off in 2005 up to $105,000, assuming the entity has sufficient income. You do not have to worry about when, time of the year, the purchases were made. Also, this does not apply to real estate property.

For example, you as the owner of ABC Company have been told by your accountant, that he expects your operation to earn $155,000 after taxes. This is unquestionably a nice earning. However, it is not your desire to pay the required tax on this income. You as the owner have decided that the company will need new computers and office equipment next year. Also it is a good time to acquire that very large desk that you have wanted.

Projected purchases:
Computers $35,000
Office Equipment 70,000
Desk 10,000
Total $115,000

If the purchase is pushed off until 2006, you will pay tax on the full amount of income for 2005. Tax savings: purchase the equipment now in 2005 and elect section 179 treatment. The projected taxable income will drop to $50,000. (155,000 - 105,000) ignoring any required depreciation adjustment.

Additional notes:
Under a recent tax law change, off-the-shelf computer software is eligible for section 179 treatment. But starting in 2008, the software will not be eligible. Keep in mind, the section 179 election is an annual election providing the entity has sufficient income.

TAX CREDITS:

Deductions and exemptions will lower your taxable income. A tax credit will usually reduce your tax dollar for dollar. Now is the time to start tax planning. For example, if you have a new child, make sure the child has a Social Security Number. Without a number, you will not be able to claim the child care credit and if applicable, credit for child care and dependent care expenses. To claim credit for child care or dependent care, you will need the name, address and taxpayer identification number of the care provider.

Paying college tuition for your child's first semester of 2006 in 2005 could increase this year's credit for higher education expenses (Hope Scholarship or Lifetime Learning credit).

Attorney Lost a Contested Liability- Code Section 61

When a person transfers a balance from one credit card to another, and acknowledges the amount transferred, the taxpayer is precluded from claiming a dispute when debt is forgiven or written off.

During 1996, an attorney carried a Visa with a balance in excess of $28,000. With the change in interest rates, the owed funds were transferred from his Visa card to a new MasterCard. The appropriate acknowledgements were issued by the card companies. The attorney never got around to paying off this account. Interest charges began to accrue. The balance outstanding grew to $32,566.00 the attorney contested all finance charges and refused to pay.

The credit card company settled the outstanding amount for $12,700. The attorney felt he achieved a good deal. In his mind he was ahead of the card company by $19,866.00. However, the card company issued a Form 1099-C, Cancellation of Debt, reporting the debt discharge to the IRS. When the appropriate Income Tax return was sent in, the 1099-C form was not included.

Some time later, the IRS issued various collection letters. The case entered to the court system. Generally, under Code Section 61(a)(12), income includes discharge of indebtedness income. There are certain exceptions to this rule. For example, a discharged debt is not treated as income if the taxpayer contests the debt.

Out attorney argued that he did not have any additional income because the debt was settled with the card company. Likewise, it was settled because of a dispute.

The Tax Court ruled with the IRS. The Tenth Circuit affirmed the Tax Court and held that taxpayer must pay. The Court's reasoning, the debt was not a contested liability because the taxpayer acknowledged his debt upon transfer between credit cards. Further, no creditable evidence showing a dispute was presented to the Court. Be careful how you use your credit cards!

Non-Qualified Deferred Compensation - Not What It Used to be After the American Jobs Creation Act of 2004

Executive Benefits Basics
Companies have long known that in order to attract talented executives to their businesses, competition required the offering of specialized retirement benefits. Once on board, these benefits are used to motivate, reward and retain the key employees of the company. Companies have gravitated to "traditional" NQDC arrangements because such plans offer a flexible design, allowing a enough variability within a single plan to meet the needs of a number of individuals while at the same time provide a selective fringe benefit - that is, management may single-out specific executives and treat them uniquely.

Traditional NQDC plans are funded with corporate-owned life insurance. Life insurance has become the vehicle of choice because the earnings on the cash value within the life insurance policy are not subject to current tax and thus grow on a pre-tax compounded basis. In addition, the cash value may be accessed on a tax-free cash flow basis by borrowing against the policy in future years to fund the retirement obligation of the company. Moreover, in the event of an early death of the participant, the policy provides a current death benefit to allow the company to meet its obligation and potentially recover its costs for the plan.

Traditional NQDC arrangements have a number of drawbacks. From a company's perspective, a traditional NQDC arrangement is quite expensive. While it is a certainty that the company, as the owner of the life insurance policy, will eventually receive the death benefit at some future date when the key employee dies; the company still has to fund the NQDC plan in a non-tax deductible manner and then wait sometimes more than 30+ years for a key employee to die before being repaid.

If the company is funding $100,000 a year into a traditional NQDC plan, each year the company loses $35,000 in the 35% corporate tax bracket due to the inability to deduct the premium payment into the NQDC life insurance policy owned by the company. Notwithstanding the drawbacks to traditional NQDC arrangements, they have been hugely successful principally due to the lack of meaningful alternatives.

American Jobs Creation Act of 2004

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (P.L. 108-357). This new law makes dramatic changes to the tax rules impacting virtually all NQDC arrangements for all amounts deferred there under on or after January 1, 2005. The Act created a new tax code section, IRC §409A. In sweeping fashion, the new law provides that all current and prior deferrals of compensation of any sort by anyone will be taxed if the terms of such plan under which the deferrals were made do not comply with the terms of the new rules. In particular, the new law creates limitations on payout elections, as well as creates greater restrictions on events of death, disability, termination and hardship. Significantly, the new law prohibits the ability to accelerate benefits as follows: No "haircut" or penalty provision permitting early withdrawal; No petitions for early distributions; No contract renegotiations or benefits restructures; No plan terminations or liquidations.

The new law affects NQDC in a number of other ways, including the timing of deferral elections, the rules impacting changes in the time and form of payout, elimination of offshore trusts, elimination of financial/health triggers and, of course, an increase in IRS reporting requirements.

On December 20, 2004, the Treasury Department and the IRS issued Notice 2005-1 (the "Notice") providing guidance to companies with respect to the transition of existing NQDC plans, including the "freezing" or termination of such plans. Although the new legislation generally is effective for contributions made on or after January 1, 2005, the Notice extends the deferred compensation compliance deadline to December 31, 2005 to bring existing NQDC plans into compliance.

Significantly, the Notice provides that an employer has until December 31, 2005 to terminate an existing plan without inadvertently triggering the penalties otherwise prescribed by the Act. The extension set forth in the Notice provides a great opportunity for executive benefits advisors to assist clients in evaluating their deferred compensation options through the end of 2005.

Reaction to the Act

Companies that currently provide traditional NQDC arrangements are struggling to determine the appropriate course of action in light of the new law. While the new legislation contemplates an ability to "grandfather" and existing plan, doing such will generally require "freezing" the current plan thus prohibiting the making of any future contributions. Under such circumstance, a company is faced with either not offering a plan going forward or developing a new plan that complies with the new legislation. Alternatively, a company may choose to terminate an existing plan, choose not to form a new plan and instead leave retirement planning up the key employees or find an alternative plan that does not come with the limitations, restrictions and costs associated with NQDC.

Looking for Alternatives

§162 Double Bonus Plan

The first alternative is the so-called §162 Double Bonus Plan. The plan is liked by employers because the funding of the plan is deductible to the employer as a §162 business deduction. A §162 plan is very simple. The employer will pay as a §162 deductible bonus to the key employee. The employee will take that bonus and invest the money into a cash building life insurance policy that will serve as a supplemental retirement vehicle for the employee (tax free loans from the policy). Because the employee takes the bonus as income, the company will give the employee a second (double) bonus to cover the costs of the income taxes on the first bonus.

With the double bonus plan the employee is not the owner of the policy. Therefore, the company will typically tie the double bonuses to the future employment of the key employee. By having an agreement to repay the bonus in the event a key employee does not fulfill the employment contract, the employer can protect against funding a double bonus plan and then having a key employee quit shortly thereafter.

The appeal of a §162 Double Bonus Plan is its simplicity and deductibility. Because the participant is paying taxes on the bonus, the plan operates outside the rules and regulations otherwise applicable to traditional NQDC and, in particular, the Act.

The primary drawback for use of the §162 Double Bonus Plan is the cash flow cost for the employer. Because the employer is expected to "gross up" the bonus to cover taxes, the plan is expensive and inefficient, from a tax perspective.

For this reason, many employers have preferred historically to establish a traditional NQDC arrangement or provide no plan at all. Passage of the Act has caused companies to give the §162 Double Bonus Plan another look.

§162 Leveraged Bonus Plan (the new alternative the traditional NQDC and the §162
double bonus plan)

A §162 Leveraged Bonus Plan ("LBP") has been around for only a short period of time and was created to fill the huge void in the NQDC world due to the passage of the 2004 Jobs Creation Act.

A LBP still has the employer making the initial "bonus" directly to the employee (like the double bonus plan), except instead of having the employer make another large bonus to pay for the income taxes of the employee on the first bonus, the employer make a bonus to cover the interest on a loan that is taken out by the employee to pay the taxes due on the initial bonus. So, the employee does pay income taxes on the first large bonus, but instead of looking to the employer to pay the taxes, the employee goes out and borrows the money to pay the taxes on the first bonus. The employer's second bonus covers just the interest payment on the borrowed money. The loan is a non-recourse loan to the employee and is secured with a life insurance policy that will pay back the loan at the employee's death.

LBP is essentially an individually owned executive benefits program that is funded with universal life insurance. A portion of the premium is funded through a loan made by a third party finance company. Employers like LBP over traditional NQDC because LBP is not subject to deferred compensation-related regulation or the Act. Consequently, LBP allows an employer to maintain a flexible and selective fringe benefit for key executives without the administrative burden and long-term liability.

Most importantly, LBP is deductible to companies currently while substantially reducing the overall cash flow cost to the company. Employees like LBP because they own the retirement plan outright and are no longer subject to the general credit risk of the company for their future retirement cash flow. Moreover, unlike traditional NQDC, the future retirement benefits are paid tax-free if the policy is held until death. Lastly, LBP-type plans provide a current death benefit and may be designed to provide asset protection and/or estate tax planning flexibility.

A participant should expect to be offered a written commitment from the finance company to make a minimum of 5 annual loans. Typically, the loan term is 10 years with automatic annual renewals and repayment is expected at the end of the 10th year from the cash value buildup within the policy. (The lender will likely only lend on a universal life ("UL") insurance policy. A UL policy has a guaranteed minimum crediting rate and a higher "current crediting rate". Since the policy has a positive crediting rate and the employer is carrying the interest cost of the loan, it is generally not possible for a participant to lose value in the retirement plan due to market conditions or interest rate fluctuations).

Summary on NQDC and LBP

The American Jobs Creation Act of 2004 established a new set of rules and regulations governing the operation of every deferred compensation arrangement in the United States. The early consequence of the Act has been to take the "wind out of the sail" of traditional NQDC, created a problem for any employer that has a traditional NQDC plan and created a tremendous marketing opportunity for those who are familiar with the best new alternative, i.e. the Leverage Bonus Plan.

This article was written by Roccy DeFrancesco JD, CWPP™, author of The Doctor's Wealth Preservation Guide, and Founder of The Wealth Preservation Institute, home to the Certified Wealth Preservation Planner certification program. (www.thewpi.org, roccy@thewpi.org, 269-469-0537). For a longer 15 page summary of this topic and the LBP, please feel free to email roccy@thewpi.org

Why Advisors Should Know and Use the 1% 'Option Arm' Home Mortgage

Would you like to have a 1% mortgage on your home? Do you think your clients would like one too? If you are saying to yourself a 1% program is too good to be true, you are partially correct and this is explained in detail below. The 1% option arm is designed for clients who would like to minimize their current monthly home mortgage payments while at the same time invest the saved money for future retirement savings. This program is not designed for home owners who are looking to reduce their monthly mortgage payments with an eye on paying off their home mortgage in the standard time frame 15-30 years.

The 1% option arm is a five year arm where the "payments" of the arm increase at the rate of 7.5% a year (see the following chart for an example). At the end of the 5th year (or any time after the third year without a penalty), the client can re-finance the loan back into a 1% arm (or the client can keep the going interest rate on the loan or completely re-finance with any other loan program).

The numbers speak for themselves.

For the following example, assume a client (male, age 42) has a $400,000 mortgage on a home with a fair market value (FMV) of $500,000. The first chart shows what will happen to the client's home mortgage payments with a 1% arm vs. a 6% 30 year conventional loan. The amortization with the 1% arm is 40 years (yes the program can amortize over 40 years).

With the 1% arm, the client freed up $73,395 of cash flow over the five year window.

Good financial planners will show their clients how to invest that money (typically in indexed annuities, life insurance or tax free bonds). If the saved money from lowering the payments returned 8%, the client would have $93,993 built up at the end of the fifth year. This assumes the client invested the money in an income tax deferred indexed annuity.

If the client let the money grow until age 63 and started taking money out of the indexed annuity, he would be able to take out $28,000 each year for 20 years ($18,450 a year after tax).

If the client took the money saved from the first five years and invested it into an equity indexed life insurance policy earning 7.9% a year, the client could take out of his life insurance policy $22,000 a year income tax free from age 63-82.

Remember the numbers above are simply from the savings on payments from the first five years. Also remember that the client is writing off the interest on the loan.

Equity Stripping

Would a client refinance a property if he could have payments on a 1% loan and invest the borrowed money in a tax favorable environment? Many would say YES.

Example: assume a client has a $1,000,000 home with no debt or very little debt. Assume the client decides to sell the home and buy a new home. In that process, assume that he removed $600,000 of equity from the sale of the home and invested it for retirement income later. Assume the client used the 1% option arm and is in the 40% tax bracket.

The client cost to the client on average over the first five years after deducting the interest payment in the 40% income tax bracket would be $12,689 a year.

If the client took the $600,000 and invested it returning 8% in an indexed annuity, the client would have $881,597 in the account.

If the money continued to grow at 8% until the client reached age 63, he could take out $296,000 each year for 20 years ($159,000 after tax each year).

Life Insurance - If the client invested the $600,000 into an equity indexed life insurance policy earning 7.9%, the client could take out of the life insurance policy $191,000 income tax free for 20 years starting at age 63 (assuming the client was healthy).

So again, the question is, would you or your clients like to use a 1% arm to build wealth for retirement? Most clients with equity in their houses will say yes.

I started the article out by asking if the 1% option arm was too good to be true. The answer is no and here is the explanation. The 1% rate is a "starting" rate. The payments as illustrated above increase at 7.5% a year for five years. At the end of the fifth year there is the potential for a "deferred interest payment." Why? Because the ultimate interest that can be charged to the client is linked to a measuring index such as LIBOR or MTA. In addition, there is a "margin" charged to the client. This creates a situation where there can be a "deferred interest payment" due at the end of the 5th year.

If we took the $400,000 refinance example and we assumed LIBOR is at 3% and a "margin" of 2.45%, the client in the first year has still has a "minimum" payment of $1,011 a month. However the "fully indexed" rate equals the margin plus LIBOR (2.45%+3% = 5.45%). Therefore, the amount of interest that would be accruing in year one would be $1,247 month ($2,258 which is the actual payment minus $1,011 the minimum payment).

Remember that the client's payments are increasing each of the first five years and that increased payment will be allocated against any deferred interest charge.

At the end of the fifth year, the client can choose to pay the deferred interest or the client can choose to roll that interest into a new 1% option arm, refinance into a conventional 15-30 year loan, or accept the interest rate on the current loan.

What did we accomplish for the client with the 1% arm? Exactly what we setout to do: e.g. raise capital for investing. If clients invest wisely, they will have the money and much more to pay back the deferred interest. Most clients with property that appreciates at between 3.5-10% a year will continue to refinance the deferred interest payment into a 1% arm so the maximum amount of money can be invested for retirement. Also, remember the client is able to write off the interest on the loan while the maximum amount of extra cash flow is invested in a tax favorable environment (bond, annuities, life insurance).

What's the alternative for the client? Have a 30 year conventional mortgage with an interest payment of approximately $2,400 per month on a 6% loan (without taxes and insurance).

While there is not space in this article, if you sit down and do multiple calculations, you will find that the 1% option arm is a terrific way for clients to build wealth in a tax favorable manner. If you have clients that simply do not like debt, they are not candidates for this program. The companies that have 1% option arms indicate that about 80% of their mortgage clients choose the 1% option arm over the more traditional 15-30 year fixed programs.

What was accomplished for the advisor? The advisor showed a client how to reduce current costs and build wealth in a tax favorable manner. In addition, the advisor also helped many clients fund annuities or life insurance as an investment. Finally, the advisor was able to generate significant ancillary income from the sale of the mortgage itself (and the closing costs on 1% arm mortgages are similar to 15-30 year fixed mortgages).

In summary, the 1% option arm is a great "hook" topic to get clients interested in a topic they otherwise will not see and a way to show a client how to build a tax favorable retirement nest egg as while generating significant ancillary income for the advisor.

This article was written by Roccy DeFrancesco JD, CWPP™, author of The Doctor's Wealth Preservation Guide, and Founder of The Wealth Preservation Institute, home to the Certified Wealth Preservation Planner certification program. (www.thewpi.org, roccy@thewpi.org, 269-469-0537). For a list of names of the mortgage companies that offer the 1% option arm, please feel free to email roccy@thewpi.org

September Bean Counter Tax Ideas:

• The Prudent Trustee Rule
• Vehicle Donation Rules Have Changed
• News Flash - Standard Mileage Rate Change
• Taxable Guidelines Proceeds from Disability Insurance

The Prudent Trustee Rule:

Want to be or are a Trustee, you need to read this. While this is a CPA column, the legal exposure is worth while talking about. We are asked many times to be a trustee. New Legislation has raised the standard of care bar to a new height for Trustees of Irrevocable Life Insurance Trusts. (ILITs). Under the old rules, the trustee did not have to meet the "Prudent Man Rule". Just keep a good set of records and you were ok.

The new "Prudent Trustee Rule" now requires the ILIT trustee to be much more careful. The trustee will now be required to investigate, effectively monitor what goes on, and reduce costs for the trust beneficiaries. In other words, the trustee must now minimize cost and exposure plus maximize benefits.

It is incumbent upon the trustee to document, document, and document! Proper documentation will include a written investment policy, and issue periodic reports to all parties concerned. The evaluations reports will need to compare the investment results against peer group results.

Failure to investigate and monitor the appropriateness of ILIT investments can become expensive to the trustee. The "Prudent Trustee Rule" requires a high level of expertise in managing the ILIT assets. A claim has been allowed in New York against a trustee for the profits the ILIT would have earned had the investments tracked to a major stock market index performance. The trustee could be liable for the difference between death benefits received as compared to what it could have received by tracking major stock market index performance level.

A note to the wise: If you are a trustee, consult your attorney.

Vehicle Donation Rules Have Changed.

Going to donate an auto to charity? New IRS rules have been published. The 2004 American Jobs Creation Act (2004 Act) has changed the charitable vehicle deduction. No longer will a person be able to use their own estimate when setting the vehicle's fair market value. Now, if you want to use a value of more than $500, the dollar amount will be dependent upon how the charity uses your old auto.

Should the charity sell the vehicle without any significant improvements made to it, the deduction will be limited to the proceeds received from the vehicle sale. Likewise if the charity does not "significantly use" the vehicle between receipt of the auto and its disposition, then the deduction is limited to the charity's sale proceeds. Therefore, fair market value will NOT apply.

Significant usage by the charity or major improvements to the vehicle will allow the donation to be valued using a reasonable method. (ie. higher deduction). Now the donor and the charity will need to communicate with each other after the vehicle's disposition.

Exceptions:

1) The charity makes a "significant use" of the vehicle. Translated, it means the charity will drive the vehicle for its exempt purpose. For example, used in the "Meals on Wheels" program. Plus the vehicle should be driven more than 10,000 miles over a one year period.

2) The vehicle receives a major overhaul that significantly increases the vehicle's value. Cleaning and repainting does not qualify.

3) The charity gives or sells the vehicle significantly below market value to one of its clients. The vehicle sale needs to further the charities purpose.

Meet one of the three exceptions; use FMV for your deduction. FMV is further defined as the difference between dealer retail and private-party price. Abuse of this rule can be an open item for discussion between you and the IRS. Care should be exercised when donating a vehicle.

NEWS FLASH - Standard Mileage Rate Change

Drive your own car for work? Then this new information will help you.

Standard mileage allowances (cents per mile).
Revised and effective 9/1/2005:

• Business: 48.5 cents
• Charity Work: 14 cents
• Medical/Moving: 22 cents

Taxable Proceeds from Disability Insurance:

Disability insurance can protect individuals and families from the loss of earnings in the event the policyholder becomes unable to work. A question that usually arises from disability insurance is whether the benefits paid under the policy are taxable? However, the answer is dependent on these factors:

• Type of Policy
• Who Pays the Premiums
• Whether Premiums are Paid with Pre-Tax Dollars

This means that the benefits paid under a disability insurance policy can be 100% tax-free to the recipient; totally taxable to the recipient; or partially taxable to the recipient.

Premiums paid for a disability insurance policy are NOT deductible if they are paid by the owner/employee directly to the insurance company or the premiums are paid with after-tax dollars through a payroll deduction. Although the premiums are not tax deductible, any benefit payments received under the policy are 'tax-free.' However, if the disability policy premium is paid with pre-tax dollars, such as through a cafeteria plan, the benefit payments are 'taxable.'

Employees are not taxed on premiums for payments made by employers for disability insurance. But employees must pay 'full taxes' on any policy benefits received from the disability insurance policy that are paid by the employer. Benefits received by employees under an individual or group policy where the premiums are split by the employer and employees are tax-free when the premiums were paid by the employee.

August Bean Counter Tax Ideas:

• Tax Holes to Watch For
• QTIP Trust Info
• Beneficiaries of Traditional IRAs
  

Tax Holes to Watch For
Code Section 72:
A taxpayer pledged his 403(b) retirement plan as security for alimony payments due to his former wife. Later on, the taxpayer stopped making the required alimony payments. The former wife sued to collect and the taxpayer entered bankruptcy. The bankruptcy court held that the pledged amount (entire remaining amount within the plan) was no longer part of a qualified plan. Thereby, the entire proceeds became subject to the bankruptcy estate. The Fifth Circuit affirmed the lower court and held the assignment/pledge constituted a loan. The loan thus became a distribution and non-exempt asset for bankruptcy purposes. (See Coppola Nos. 04-20311, 04-21013 (5th Cir 7/25/05))

Code section 2036:
A transfer of a decedent's interest in certain Family Limited partnerships (FLP) to her children was not a bona fide sale. The full and adequate consideration test was not met. Therefore, the estate had to include the gross values of the transferred interest. In short, Mom set up 3 income producing properties into 3 FLPs. The original plan wanted to get the FLPs out of Mom's estate. Mom was made the general and limited partner while the children became limited partners. Income from the FLPs was to be used for Mom's care. The children began to purchase Mom's interest in the FLPs from her but at a discounted value. After mom died, the estate valued the FLPs at a discounted value by applying discounts for minority interest and lack of marketability on the estate return. The long and short is this. Full and adequate consideration had not paid and Mom retained an interest in the assets. These two points allowed the IRS to win and thereby issue and collect a $1.125 million deficiency notice. (Abraham v. Commissioner, No. 04-1886 (1st Cir 5/26/05)).

QTIP Trust Info
Due to the unlimited marital deduction, assets that are transferred to a surviving spouse are free from estate tax. Usually individuals will transfer specific income-generating assets to their surviving spouse on an interim basis. The earnings from the asset can provide lifetime support those same assets, or the residue thereof, can be transferred to their children or other beneficiaries upon the death of their spouse. The problem is that transferring outright ownership of significant assets to one's spouse may be undesirable.

A more desirable approach involves transferring qualified terminable interest property (QTIP) to a trust (known as a QTIP trust). This QTIP trust allows the decedent to transfer assets for the surviving spouse's benefit, free of estate tax. These are the requirements for setting up a QTIP trust:

• All trust income must be payable to the surviving spouse, at least annually for life.

• Trust assets cannot be appointed or distributed during the surviving spouse's life to any person other than the surviving spouse.

• The trust may hold assets that do not- generate income only if the trust document requires or permits the surviving spouse to require the trustee to either make the property productive or convert it to productive properly.

• The decedent's executor must elect on a timely filed estate tax return to have some or all of the trust property qualify for the marital deduction.

The benefits of a QTIP trust are that the surviving spouse gets an income stream while the decedent controls (through his or her will) the property's ultimate disposition when the survivor dies. The QTIP trust allows the trustee to make discretionary principal distributions to the surviving spouse but no one else. The property owner (decedent) will name the individual or organization that will receive any remaining trust property at the survivor's death. This will insure that individuals with children from a previous marriage (or other beneficiaries) will receive the assets at the spouse's death after they have provided an income stream for their spouse. This is a better solution than an outright property transfer to the surviving spouse because it will provide the assurance of controlling the disposition of the assets after the surviving spouse dies. Another complication with an outright property transfer is that surviving spouses often remarry and any property they own outright can be subject to an ownership claim by the new spouse. Assets held in a QTIP trust for the surviving spouse's benefit generally will not be subject to claims by that person's future spouse. Additionally, assets in a QTIP trust cannot be assigned to avoid having any organizations or individuals from preying on grieving spouses.

In summary, to insure that assets provide income to the surviving spouse and ownership of the assets passes to the individual named by the decedent a QTIP trust should be used. Added benefits of a QTIP trust include removing the assets from the taxable estate of the first to die. But remember, if the assets are not consumed or gifted away during the survivor's life, it is subject to estate tax when the surviving spouse dies. A will can be drafted to reduce the estate tax at the first death to the lowest possible amount by transferring all assets that would otherwise be taxed to the QTIP trust and electing to claim the marital deduction. Or, the will can give the executor flexibility to decide the amount of property for which the QTIP election is made based on the couple's circumstances when the first spouse dies. Thus by establishing a QTIP trust one can meet both tax and non-tax goals your estate.

Beneficiaries of Traditional IRAs
Beneficiaries can inherit some portion of traditional IRA accounts. These IRA accounts maintain strict distribution guidelines that take effect after death. To help facilitate the transition - beneficiaries should be sent an informative letter that indicates the location of IRA beneficiary forms, required decisions beneficiaries need to make within nine months of the IRA holder's death, any additional distribution information, and most importantly - how beneficiaries can ease the transition and help save on taxes and penalties by initiating distributions during the year of the IRA holder's death.

July Bean Counter Tax Ideas:

• Annuity Basics (part 1)
• Return of Premium Term Life info
  

Annuity Basics - part 1:
Over the next few months, this column will be discussing various annuity plan tax issues. In order to have everyone on the same page; we will begin with the basics.

What is an annuity? An annuity is a series of payments under a contract that are made regularly for more than one full year or more. These payments generally are referred to as "amounts received as an annuity." In general, annuity payments must be included in gross income.

Code Section 61(a)(9). Under Code section 72, however, a taxpayer can recover the cost of the annuity over the period the taxpayer is to receive the payments. The amount of each payment that is more than the part that represents the taxpayer's cost is taxable income.

Code section 72(b): Should an individual contribute all or part toward the annuity cost, then part of the funds received within the year will be income and part will be tax free. The rub comes when computing this split. Basically, if there are several payments within the year, the total received less the cost equals taxable income.

Code section 72(b)(2): The portion of any annuity that is excluded under the exclusion ratio cannot be more than the investment cost not paid back in the contract just before each payment. This introduces the exclusion ratio. The exclusion ratio is computed by dividing the insured's investment (cost) in the contract by the expected return generated over the life of the contract at the annuity starting date. But it is not that easy. Which ratio rule to use will be covered next month.

Return of Premium Term Life info:
Download ROP Info: ROP Term Advantages
Taxes are generally not the main reason or force behind an individual's decision to purchase life insurance. However; potential tax benefits can be significant. Death benefits payable by way of a policy contract are tax free. However, an exception does exist. If the policy owner received valuable consideration, then the benefits are taxable. For example, a policy given to me in exchange for writing this paragraph. The policy payments become taxable income to me.

Another benefit concerns dividends paid by the policy. They are tax free until the amount exceeds the cumulative premiums paid. Keep in mind that all policies do not offer all of these benefits. Benefits are limited if the policy is designed to be a tax-sheltered investment vehicle.

A policy that supports a return of premium seems to be the best answer. Buy coverage, earn inside profits and ask for your money back. The following chart attachment underscores what is being said.
Download ROP advantage chart

June Bean Counter Tax Ideas:

• Dust Off The ROTH IRA Plan
• Long-Term Care Tax Planning

Dust Off The ROTH IRA Plan:
Starting in 2006, a Section 401(k) plan elective deferral can be placed into a Roth Plan. The plan participant may elect to place his 401 (k) contributions into his Roth account. The account must be set up within the 401(k) plan and it is treated as a Roth contribution. The new limitation of contribution is limited to $15,000 in 2006 with an over 50 age contribution of $5,000.

The hook is still in place! The deferrals into the Roth are still taxable income going in. However, the distributions and earning out of the plan will generally be tax free. The law change will allow client to push more dollars into the plan. A fully qualified individual over 50 years old could presumably end up in 2006 with a $25,000 account! That is $15,000 plus $5,000 from above plus the normal $4,000 plus $1,000 Roth contribution.

For tax planning purposes, contributions could be deferred or not. The client/participant will need to spell out their desires at the appropriate time. The employer must adopt this new provision into the plan structure.

Only employee elective deferrals are eligible to be in a Roth account. Any employer matching funds will be deemed to be a non-Roth pretax match. A subsequent rollover of Roth funds must go either into another Roth account within a 401(k) plan; or, into a regular new Roth IRA account.

This can be a complex area. Therefore, review each situation with the client's tax advisors.

Long-Term Care Planning:
A person, who has been certified by a licensed health practitioner and within the last 12 months, could be deemed to be chronically ill with chronic illnesses or disabilities. Such a person can benefit greatly from Long Term Care Insurance (LTC). The individual's medical and non-medical care cost could be offset by the LTC policy payments. Keep in mind that there are tax implications that should not be forgotten.

An employed individual can receive a tax free benefit (LTC) from his employer. The policy cost can be paid for by the employer. This will become a tax deduction to the company. Keep in mind, there needs to be a "services rendered" element and it is part of the total compensation package. Naturally, the compensation must pass the "reasonableness" test. (Section 1.162-10(a))

An S corporation employee is treated the same as an employee. The rub comes if your client is a 2-percent shareholder or more. This individual will be taxed on the cost of the policy. The S Corporation will obtain a tax deduction however. The shareholder accounts for the income as a guaranteed payment from the S Corporation. In another words, the shareholder- employee receives income from the premium cost paid for his benefit. (Rev Rule 91-26). The shareholder- employee may deduct the premium cost as part of his regular medical deduction on Schedule A of Form 1040 under code section 162 (1).

A self-employed person may deduct the cost of LTC as part of the medical insurance cost. BUT, the tax law from 2003 forward allows the same person to deduct 100% of the cost against gross income. This deduction is not allowed to reduce self-employment earning. TIP: Hire your spouse and provide coverage thru her. A bona fide employee spouse insurance will be a deduction and reduce self-employment earning.
(Rev Rule 71-588)

Quick Personal Finance Tips:

HSA Accounts, 21st Check Clearing, ID Theft Protection

May Bean Counter Tax Ideas:

• Business Mileage
• Mutual Fund Tax Planning Notes
• Electronic Federal Tax Payment System (EFTPS)
  

Business Mileage:
The IRS rate for business mileage during 2005 is 40.5 cents per mile. Keep a record of your miles and be able to answer the questions: Who, What, When and Where. Your journal supports this deduction.

Mutual Fund Tax Planning Notes:
When we purchase mutual funds, one could forget about the impact of dividend and distribution reinvestment income. Remember, any reinvestment dollars will increase your cost basis. The complexity comes from each reinvestment. That is, you need to track each purchase dollar value and number of shares by date. The investor, who fails to keep good records, could end up overpaying their tax requirements. Many of the mutual funds are able to provide you with a detailed cost basis analysis. But not all companies can do this. Take the time now to find out if this information will be available at tax time.

Is life supposed to be easy - EFTPS?
The IRS has changes to Federal tax payment rules again. The Electronic Federal Tax Payment System (EFTPS), is now required for those business that deposit over $200,000 of payroll taxes. A business owner at this level should already know about this rule. But the smaller business, EFTPS can be a help. Use this system VOLUNTARY to make your tax payments rather than the paper coupon form 8109. The new system will save you or your employee time by not having to write a check, fill out the form and travel to the bank. Time is money. Who said that?

The IRS now has a one time reward system in place for those who volunteer to use EFTPS. To qualify for the reward, you the employer must:

1. use the EFTPS system for 12 months;
2. Make all 941 payments on time;
3. Have previously fully paid a penalty.

Here is the reward. The IRS will automatically refund the fully paid penalty. Any additional paperwork will not be needed.

One final note, for cash flow purposes frequent deposits can be made instead of waiting until you have too. I try to have my clients do their deposits when paychecks are released. Let the IRS handle frequent deposits.

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April Bean Counter Tax Ideas:

Dollar-cost averaging is a method of timing investment purchases. It requires that the investor purchase equal dollar amounts of a stock or mutual fund on a regular basis (weekly, monthly/ or quarterly). The success of a dollar-cost averaging strategy is based on the fact that the same amount of money will buy more shares when the share price is low and fewer shares when the price is high.

The principle of dollar-cost averaging can also be used to dispose of stock or mutual funds. Investors cannot be certain if they are selling at the right time. Using the principle of dollar-cost averaging involves selling a certain number of shares or a certain percentage of holdings of a specific security regularly and periodically. This allows you to get out of an investment without selling off all of the investment at one time-a time that could turn out to be the wrong time.

An example of dollar-cost averaging. Bob used dollar-cost averaging to buy the following shares in the Hot New Stock:

Bob bought 125 shares of Hot New Stock for $2,500 over a nine-month period. This resulted in an average share price of $20 ($2500/125) per share. The lower stock prices in the first and second quarters, Bob's average price per share is lower than the year-end price of $15.

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March Bean Counter Tax Ideas:

The mission of the Employee Benefits Research Institute (EBRI) at www.ebri. org is to contribute to, encourage, and enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI advocates advancing the public's, the media's, and policymakers' knowledge and understanding of employee benefits and their importance to our nation's economy.

The EBRI website offers free statistical information and research findings on topics such as employee tenure, health care and education, retirement income, defined contribution plans, and Social Security. The website's FAQ section answers questions on benefits in general plus more specific information on retirement issues and health spending and insurance issues.

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February Bean Counter Tax Ideas:

The Tax Benefits of Grandfather Provision for Some Older Annuities. Did you know that there is a little-known quirk in the tax law that could possibly save significant income taxes for individuals who inherit an annuity purchased prior to October 21, 1973.

A general rule for annuities is that the value of the annuity, less the amount paid for it, is taxed as ordinary income when it is paid out. If the funds were withdrawn during the original annuity holder's lifetime, this tax liability falls on that person. Otherwise, if there is any remaining value in the annuity after that person's death, the tax liability generally falls on whoever receives the funds.

However, there is a special grandfather provision that, in some instances, can protect heirs from this tax liability. If an annuity purchased prior to October 21,1979, has not reached its maturity date or has not paid out any annuity payments prior to the account holder's death, the heirs normally can cash in the annuity without owing any income tax.

If you or a relative have an annuity that might fit within this grandfather provision, a few traps exist that you will want to be aware of.

o If any investments were made in the annuity contract after October 21,1979, such investments must have been pursuant to a contract that was binding on this date. If part or all of the investments after this date were not subject to a binding contract, the income attributable to those investments is taxable even though the income attributable to pre-October 21,1979 investments can remain nontaxable.

o If the pre-October 21,1979 annuity was traded in a tax-free exchange for another annuity sometime after this date, the special grandfather provision does not apply to the new annuity.

o Finally, if prior to the original account holder's death, the annuity has reached maturity or if the account holder begins taking annuity payments, the grandfather provision does not apply.

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January Bean Counter Tax Ideas:

Start 2005 business year knowing these recent tax code changes.

Standard Mileage Rate Change:
Medical Deduction After Death:
IRA Contribution Change:
FICA Tax Rate Change:
Estate Tax Exemption Change:

Standard mileage Rate Change:
Standard mileage deduction rates have changed. For 2004 the current rate is 37.5 cents per business mile. In 2005 the rate increases to 40.5 cents per mile.(Rev.Proc 2004-64)
Be sure to keep a journal of your driving. You must be able to answer the following questions for each entry:

1) Who you were with
2) Where the event took place
3) When the event took place
4) Most Importantly - WHY - the business reason.

Remember, missing information listed above equals no or reduced deduction!

Medical deduction after death:
A deduction for medical expenses paid within one year of decedent's death could be taken on the final 1040 tax return. In order to do this, an election is attached to the final return. Do this, (1) a statement that such amount has not been allowed as a deduction under Code Section 2053
and (2) a waiver of the right to have such amount allowed at any time as a deduction under Code Section 2053. The statement and waiver must be filed with the taxpayer's return, amended return, or claim for credit or refund for any taxable year for which the amount is claimed as a deduction.

Sample Election to Deduct Medical Expenses Paid by Estate

[Deceased taxpayer's name]
[Deceased taxpayer's taxpayer identification number]

Pursuant to Code Section 213(c)(1), the taxpayer elects to claim medical expenses paid by [his] estate in the one-year period following [his] death in calculating the medical expenses deduction allowed on his income tax return. The applicable expenses in the amount of [amount] were paid to
[medical service provider] on [date]. The amount of the expenses has not been allowed as a deduction to the estate under Code Section 2053. The estate hereby waives the right to have such amount allowed at any time as a deduction to the estate under Code Section 2053.

[Signature of executor of estate]
[Date signed]

IRA Contribution Change:
The maximum amount that can be contributed to an IRA remains at $3,000 and the catch-up contribution for those over age 50 remains at $500. For the years 2005 thru 2007, the contribution limit increases to $4,000. The catch-up contribution will remain at $500. Code Section 219(b)(5)(A)

FICA Tax Rate Change:
The social security wage base for 2004 is $87,900. As in the past, each year this base increases. For 2005, the new wage base will be $90,000.(IRS Notice 2004-73)

Estate Tax Exemption Change:
The applicable exclusion amount for the estate tax (though not the gift tax) is scheduled to increase through 2009 (the year preceding repeal), as shown below: Code Section 2010(c), amended by Pub. L. 107-16, Economic Growth and Tax Relief Reconciliation Act of 2001, Section 521(a). 4

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December Bean Counter Tax Idea:

Sole Proprietorship plus Pension equals Tax Reduction
John F. Wolle, CPA

Current Conditions

• Individual wants to work for 5 more years
• Current age is 60 and in good health
• Currently schedule C annual income before pension contribution is $500,000
• 1.9 Million dollars in a retirement plan
• 1.4 Million dollars available in cash and securities
• $450,000 in long term capital losses

Plan

• Establish a 401k defined benefit plan for 5 years
• Contribute $250,000 per year to plan for a total contribution of $1,250,000
• Utilize the tax loss by selling profitable security positions

Result

Goal

• Five year projected tax savings (assuming no tax rate change): $537,500
• Pension contribution 5 year growth for $250,000 each year: $1,250,000
• Invest pension funds into a deferred annuity vehicle and earn 8-12%

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November Bean Counter Tax Ideas:

A) Social security disability benefits are NOT excludable from gross income: This case indicated how the courts include Social Security disability benefit payments as taxable gross revenue. Military personnel can still exclude pension resulting from injuries and sickness issues paid by the Department of Defense. [Reimels v. Commissioner, 123 T.C. No 23 (8/26/04)]

B) IRS cannot collect employment taxes from LLC members: If under state law, a LLC members are not personally liable for debts of the LLC, then they are not liable for unemployment taxes of the LLC. However, the IRS may assert a trust fund recovery penalty against a member who qualifies as a responsible person.

C) Self employed individuals and tax projections: If you are self employed, you should start to gather you financial
numbers together. If your current net income exceeds last year's income at this time, maybe you should make an appointment with your accountant. Don't forget, a self employed person has more than 150 tax deductions available.

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In 2003 federal legislation created Health Savings Accounts (HSAs) as a tax-favored framework to provide health care benefits. HSAs are targeted mainly at the self-employed, small business owners, and employees of small to medium sized companies. Funds set aside in HSAs can be used for ANY medical expense and excess funds in accounts can be used in the future or kept as private savings accounts.

Since HSAs are relatively new, many eligible participants have questions concerning their applicability and suitability. The links below are excellent resources for information about HSAs, available qualifying high-deductible health insurance coverage by state, and available HSA trustees and custodians (including their fees and investment options).

• HSA Resource Center
• HSA Pros
• First HSA, Inc

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Check Clearing for the 21st Century Act

BEAN COUNTER NOTES ON NEW BANK CHECK LAW CHANGE:

The Check Clearing for the 21st Century Act (Check 21) was signed into law on October 28,2003 and became effective on October 28,2004. Check 21 is designed to foster innovation in payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation. The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process checks information electronically, and to deliver substitute checks to banks that want to continue to receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the information obtained on the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks.

How does Check 21 affect you?

Because of Check 21 and other check system improvements, your checks may be processed faster, which means money may be deducted from your checking account faster. You may be one of the majority of consumers who do not receive their canceled checks with their account statements. Instead, you may receive "pictures" (known as digital images) of your checks, a list of your paid checks, or a combination of these items. Check 21 will have little or no effect on these practices.

On the other hand, if you do get your canceled checks back in your regular account statements, you may notice some changes under Check 21. For example your bank may start sending you a combination of original checks and substitute checks in your account statements. You may use a canceled substitute check as proof of payment just as you would use a canceled original check.

The account agreement you have with your bank governs whether you receive canceled checks with your account statements. If you currently get canceled checks with your account statements, you will continue to receive your checks unless your bank notifies you that it is changing your account agreement.

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IDENTITY THEFT IS THE MOST COMMON CRIME IN AMERICA. PROTECT YOURSELF

Read this and make a copy for your files in case you need to refer to it someday. This information will protect your identity from theft. And PLEASE share with your clients.

1. The next time you order checks have only your initials (instead of first name) and last name put on them. If someone takes your checkbook, they will not know if you sign your checks with just your initials or your first name, but your bank will know how you sign your checks.

2. When you are writing checks to pay on your credit card accounts, DO NOT put the complete account number on the "For" line. Instead, just put the last four numbers. The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through all the check processing channels won't have access to it.

3. Put your work phone # on your checks instead of your home phone. If you have a PO Box use that instead of your home address. If you do not have a PO Box, use your work address. Never have your SS# printed on your checks. You can add it if it is necessary. But if you have it printed, anyone can get it.

4. Place the contents of your wallet on a photocopy machine. Do both sides of each license, credit card, etc. You will know what you had in your wallet and all of the account numbers and phone numbers to call and cancel. Keep the photocopy in a safe place. I also carry a photocopy of my passport when I travel either here or abroad. We've all heard horror stories about fraud that's committed on us in stealing a name, address, Social Security number, credit cards. Unfortunately, I, an attorney, have firsthand knowledge because my wallet was stolen last month. Within a week, the thieve(s) ordered an expensive monthly cell phone package, applied for a VISA credit card, had a credit line approved to buy a Gateway computer, received a PIN number from DMV to change my driving record information online, and more. But here's some critical information to limit the damage in case this happens to you or someone you know:

1. We have been told we should cancel our credit cards immediately. But the key is having the toll free numbers and your card numbers handy so you know whom to call. Keep those where you can find them.

2. File a police report immediately in the jurisdiction where your credit cards, etc. were stolen. This proves to credit providers you were diligent, and this is a first step toward an investigation (if there ever is one).
But here's what is perhaps most important of all:

3. Call the 3 national credit reporting organizations immediately to place a fraud alert on your name and Social Security number. I had never heard of doing that until advised by a bank that called to tell me an application for credit was made over the Internet in my name. The alert means any company that checks your credit knows your information was stolen, and they have to contact you by phone to authorize new credit. By the time I was advised to do this, almost two weeks after the theft, all the damage had been done. There are records of all the credit checks initiated by the thieves' purchases, none of which I knew about before placing the alert. Since then, no additional damage has been done, and the thieves threw my wallet away. This weekend (someone turned it in) - it seems to have stopped them dead in their tracks.

Now, here are the numbers you always need to contact about your wallet, etc., has been stolen:

1. Equifax: 1-800-525-6285
2. Experian (formerly TRW): 1-888-397-3742
3. Trans Union: 1-800-680-7289
4. Social Security Administration (fraud): 1-800-269-0271

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For Agent Use Only, Not for General Public