Monthly Archives: August 2011

The Federal Deficit: Is there a Solution on the Horizon?

Posted on August 29, 2011 | Leave a comment

We all know that the federal deficit cannot be controlled through spending cuts alone.  Somehow the newly created Joint Select Committee on Deficit Reduction must reduce the deficit by $1.5 trillion on top of the initial $1 trillion already included in the Budget Control Act of 2011.  It’s going to be impossible to do that without additional revenue.  This committee is charged with figuring out exactly how that will look.  The Republicans have appointed members to the committee that they feel will make it impossible for the compromise legislation to include tax hikes, but there are back door methods of effectively increasing tax revenue without anyone voting to raise taxes.  There are many deductions and tax breaks that could be cut back or eliminated.

For businesses, some tax-saving opportunities that could end would be the current accelerated depreciation rules along with generous capital expenditure expensing elections and bonus depreciation options that have been available the past several years.  The LIFO (last-in, first-out) inventory accounting method, which is not allowed under IFRS (new international accounting standards), could be on the chopping block, also.  The domestic production activities deduction may be reduced or eliminated.  Alternatively, the business changes could be more industry specific such as curtailing some of the oil and gas industry’s tax saving perks.

One of the potential changes to individual taxes that I have heard bandied about is the deduction for mortgage interest.  Currently an individual can deduct interest on up to two houses and up to $1.1 million in principle.  The deduction could be limited to only one home and the principle maximum could be reduced.  That would have a significant impact on many people.

These cuts could be on top of the recently extended Bush-era tax cuts from 2001 that are now scheduled to sunset at the end of 2012.  If these 2001 tax cuts are allowed to expire, that alone could create almost all of the revenue that is needed.  The committee has the opportunity to craft a different solution, if they can manage to work together and compromise.  There are several groups in Washington that have put forth ideas for dealing with the debt so there is the possibility that we could end up with some sort of radical tax reform. 

Where we end up is anyone’s guess at this time, but the committee has a short time frame in which to do its work.  It is to be completed before the end of 2011.  This is going to create a great deal of uncertainty in tax planning – similar to what we experienced in 2010.  With drastically higher taxes, or fewer deductions, possible in the near future, tax planning is more important than ever.  We are keeping a watchful eye on what is happening in Washington so that we can help you determine your best course of action.

By: Sandi Towns, CPA/PFS, CFP®

→ Leave a comment

Posted in Tax

Tagged , ,

Have I Made a Reportable Gift?

Posted on August 22, 2011 | Leave a comment

The Internal Revenue Service’s definition of a gift is “any transfer to an individual, either directly or indirectly, where full consideration is not received in return.”  Consequently, there are many instances where cash or property exchanges hands with little to no consideration received by the donor.  These exchanges are reportable to the IRS if they exceed the annual exclusion of $13,000 (for gifts made after January 1st, 2009).  There are exceptions to this rule (spousal gifts, tuition paid, medical expenses paid, and gifts to political organizations) however,  most transfers exceeding $13,000 are reportable.

A reportable gift does not make your gift taxable.  The amount of your gift that exceeds $13,000 will reduce your lifetime exemption (currently $5,000,000) and only become subject to tax once the aforementioned exemption has been fully utilized.  As a result, there are many gifts that will fall under the lifetime exemption and not become subject to the gift tax.

With the great opportunity provided under the lifetime exemption comes greater emphasis by the IRS on gift tax compliance.  The IRS will be on the prowl for transfers of money or property exceeding $13,000 and assess penalties and interest on those delinquent filers.  In addition, specific attention is being placed upon transfer of real estate.  Information technology has improved databases so that the IRS can track property transfers as soon as title changes hands.  Public and private means exist for the IRS to compile reports detailing these transfers.  These reports can then be cross-referenced with past gift tax return filings to determine the parties subject to examination.  Consequently, it is critical that each taxpayer review their transfers each year for possible reportable transactions.

Taxpayers should be aware that an immense benefit of timely filing (in addition to the obvious reduced penalties and interest) is the statute of limitations.  Typically the IRS has up to three years after the gift tax return is filed to levy additional taxes.  If no return is filed, the statute has not been initiated and the IRS can assess additional taxes far beyond the previously denoted three year window.  Thus, it is imperative to file a gift tax return whenever applicable.  Taxpayers may even find it worthwhile to file for years when the transfer is valued at an amount close to the annual exclusion in order to begin statute and mitigate the risk of the transaction being examined by the IRS in future years.

As part of your year-end tax planning, please consider if you may have made a reportable gift.  Opportunity for gifting tax free provided by the lifetime exemption has increased IRS scrutiny in this area.  Timely filings will start your statute and diminish the likelihood of increased taxes, penalties, and/or interest assessed in the event of an audit.

By: Nate Bernath, CPA

→ Leave a comment

Posted in Tax

Tagged , , ,

The Power of Giving

Posted on August 18, 2011 | Leave a comment

In today’s estate tax environment we hear frequently about great opportunities with gifting in regards to the five million dollar exemption, and with good reason.  The current five million dollar exemption can be a very powerful gifting opportunity and there isn’t much debate that this is a very small window of opportunity for such a lucrative planning tool because the current exemption is set to expire after 2012.  What we don’t frequently hear about is the benefits of making a taxable gift and actually paying the gift tax now.

If a person is going to have a taxable estate of one million dollars, for example, they have two choices on how to pass this on to their heirs.  They can bequest it upon death through the estate, or gift it to them now.  It is easy to say things such as, the gift tax rate and the estate tax rate are the same (currently both are at 35%), and if I gift that money now it is gone from me so I can’t get it if I need it in life, so with these things why wouldn’t I just keep the money and let it pass upon death because it will all even out in the end.  This logic does not pass the mathematical test through the proper application of both the gift and estate tax.

Here is an example to illustrate the above statement.  If an individual has a gross estate of six million dollars, and hasn’t used any of their five million dollar exclusion, if they died tomorrow they would have a one million dollar taxable estate (6,000,000 – 5,000,000 = 1,000,000).  See the chart below for the difference between our two choices of handling our remaining $1,000,000.

As you can see, if a gift is made in life an additional $90,741 will be passed on than if you keep everything through death.  The reason for this is the gift tax paid.  The amount of tax paid on the gift is now removed from the estate and thus the tax on the tax is saved ( $259,259 x 35% = $90,741).  Please note that this example is only from a federal perspective and may not encompass a complete transaction for people who live in states with a separate estate tax.

It is with extreme frequency that we hear about tax avoidance in all our tax planning strategies.  This is a rare situation where paying your tax actually saves you money and allows you to leave a greater legacy on to your heirs.  So when planning how you want to leave your treasures, do not forget about the power of giving.

By: Tim M. Wisnewski, CPA

→ Leave a comment

Posted in Tax

Tagged , ,

Want to know how to get rid of that old car?

Posted on August 12, 2011 | Leave a comment

If you are like everyone else I am sure the economy is still affecting your cash flow. Did your disposalable income levels drop, but you still want to donate to a charity but are unsure how you can afford it? The great news is that many charities will take property, including vehicles as donations!  And you most likely will receive the full fair market value tax deduction on your return; while helping someone out who really needs it in this tough time.  Sounds like a win-win to me!

William Vaughan Company Manager, Bob, may want to consider donating his car!

As many of us know, selling an older vehicle can be difficult; especially, if you want to try and get the Blue Book value. The vehicle can sit for months taking up a spot in your yard or driveway and become an eye soar. Instead of letting the vehicle rust away you can donate the vehicle to a local charity.

If you do decide to donate to charity make sure you get the proper paperwork. You must have written acknowledgment for any donations (vehicle or not) of $250 or more.  However, if the fair market value is greater than $500, the charity is required to provide additional information which is normally reported on Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, which must include your social security number. If not, you will only be entitled to deduct up to $500. Additionally, if the charity sells the vehicle you are only allowed to deduct the gross proceeds from the sale, which will appear on Form 1098-C. Unless the charity intends to give or sell (at a significant price reduction) the vehicle to a needy individual, then you can deduct the fair market value, only if, it is detailed in your acknowledgement letter.

There is an exception, (shocker, right?) to the gross sales amount deduction but only if the charity intends a significant intervening use of the vehicle, (i.e. substantial use in regular conduct of activities) then you are entitled to the full fair market value deduction on your individual tax return. 

With the economy in the state that it’s in, this may be an easy and cost effective way to help out someone who really needs it.  Plus, you can get rid of that old vehicle without the headache of trying to sell it.  Just make sure you fully understand the charity’s intentions and you receive the form 1098-C from them.

By: Bob Bradshaw, CPA

→ Leave a comment

Posted in Tax

Tagged , ,

Summer Fun and Summer Meals Can Lead to Nice Business Deductions

Posted on August 1, 2011 | Leave a comment

Company picnic coming up in a couple weeks? Want to make the most of this as a business owner? Hosting a company gathering in the summer not only helps with employee morale, but also leaves you with a great business deduction!

Company picnics and holiday parties are fully deductible and excluded from the usual 50% limitation of meals and entertainment. Company parties are a nice way to show your employees you appreciate them while you get to benefit from the expense against your taxable income. It’s a win-win!

Another great thing about meals and entertainment is when crunch time at the office looms, show you’re workforce you appreciate their efforts by providing them a meal. Meals provided by the employer for the convenience of the employer and furnished on the business premises, are 100% deductible from taxable income. Certain rules apply but if it’s better for the employer to provide the meal and keep productivity going, there’s most likely a nice deduction available.

None of the above applies? Never fear, meals and entertainment expenses incurred directly relating to the active conduct of business is deductible against taxable income, however is limited by the 50% rule as mentioned above. The key to making the meals and entertainment expenses deductible in this sense is to have an active and documented business objective.

In the end do not be afraid of having that party for your employees or taking that client out to lunch-there is always some tax benefit available.  Just make sure you keep your receipt and document the business purpose.  

By: Jill Blakeman, CPA

→ Leave a comment

Posted in Tax

Tagged , , ,