WEBTAXCPA

Here is an article that appeared recently in Forbes that reiterates the savings of gifting property before the end of 2010 to descendants of 2 or more generations below the transferor. These individuals are referred to as a “skip person” as defined by IRC Sec. 2613.

The generation-skipping transfer tax, or GSTT, is subject to this definition of who the transferor of the assets to the skip beneficiaries is. The qualified terminable interest property [QTIP] election under IRC Sec.(b)(7)(B) ensures that the surviving spouse is provided with income for life, however, the QTIP election allows for property to be subjected to the maximum estate tax in the surviving spouse’s estate because interest in the property is terminated.

A reverse QTIP election made under IRC Sec. 2652(a)(3) is typically made that allows for property to remain in the decedent’s estate, and which also allows the first decedent to remain as the transferor of the property for GSTT purposes. A reverse QTIP trust is for the surviving spouse’s benefit, while at the same time allocating the remainder to the decedent’s grandchildren. This enables the decedent to take advantage of the GSTT exemption in their estate, and the marital deduction placed in trust for the surviving spouse is protected.

The GSTT exclusion is $1,000,000, however, simply reduces the tax rate on a skip transfer. If the GSTT exemption equals the value of the skip transfer then the transfer will have an “inclusion ratio” as defined by IRC Sec. 2642 of zero, or 1 minus the ratio of the GSTT exemption divided by the value of the property transferred. If on the other hand, there is no GSTT exemption allocated to the gift then the inclusion ratio is the maximum rate, and the gift tax may actually exceed the value of the gift itself because the GSTT is added to the gift tax.

Previously, only direct skips to children were insulated from tax by placing property in trust with limited power over the trust by the beneficiaries. This guaranteed that wealth could be protected from inheritance taxes for at least the life of the trust. The GSTT was enacted to limit the ability to pass wealth for a longer time. However, since the GSTT lapsed along with the estate tax in 2010, the article makes the point that one can potentially avoid additional taxes on gifts made to skip beneficiaries by gifting property from a “non-exempt” GST trust before December 31, 2010.

December 3rd, 2010 | Category: webtaxcpa | Leave a comment

Here is a clever way of getting an important point across. This is an article that appeared recently in registerguard:

GRANGEVILLE, Idaho — An Idaho treasurer resisted a doctor’s push to include colonoscopy reminders in annual tax notices, fearing some taxpayers would find the notes “ironic.”

Idaho County Treasurer Sharon Cox denied the request from Dr. Andrew Jones in a letter Tuesday.

Cox says she does not find colon cancer humorous, but given many taxpayer opinions of taxes, “recommending a colonoscopy in the same envelope as the tax notice may be considered ironic.”

Jones asked the county last week for help in reminding residents about the importance of the screenings.

Jones says Idaho County has one of the lowest colon screening rates in the state and one of the highest rates of colon cancer.

The story appears to be true. I myself have seen it popping up more than one time. What I took away from this is the power of one person to make a difference. What appears on the surface to be a story about stereotypes associated with taxes turns out to be a story with a lot of hidden meanings. First, what strikes me is the power of communications today. All it took was for one clever doctor to pull what is obviously a publicity stunt to draw attention to a deadly disease, which if detected early can save lives.

Secondly, as a regular participant in colon cancer screening I can tell you it involves nothing to do with probing into sensitive areas. The test is totally externally done in the privacy of your own home. You can even mail in your sample and get the results. I guess in a way, it’s similar in many respects to taxes. It’s really not as bad as it is made out to be.

November 24th, 2010 | Category: webtaxcpa | Leave a comment

Here is an article that ran a while back that reveals the sweetheart deals in abundance in Arizona, which is why perhaps real estate seems to be in a perpetual boom and bust cycle in that state. As we argued below, laws must change to meet the expectations of fair and equitable economic development. In Arizona, the practice of developers transferring title of real estate to local governments seems to be something which is widely done, yet few make mention of this startling detail.

The purpose of the deal from the local government’s point of view is to spur development, however, development is done at the taxpayer’s expense, which usually translates into unfairness of the worst kind. The developer pays no property taxes in the first few years of the property’s life, since the city owns the property. Who gets stuck with the bill? The taxpayer does, of course. And the results could not be more catastrophic.

Fair and equitable allocation of real assets is the basis for a vibrant economy. When the balance is tipped in favor of large developers at the expense of the tax base, the result is this:

And of course, uncertainty is the death knell for efficient market forces. Tax policies must be robust and flexible to meet the needs of communities. Growth occurs when the tax base is vibrant and healthy, just like the roots of a plant. To share a video from one of my favorite movies, Being There, here is the inimitable Chauncey Gardner on the subject of economic growth:

November 22nd, 2010 | Category: webtaxcpa | Leave a comment

Everyone seems to be well aware of what is wrong with the economy, yet few seem to have a specific recommendation of how to start in on fixing it without resorting to a discussion of monetary policy and the virtues of a private central banking system. The arguments for and against each proposal to find a solution seem to get bogged down in a seemingly never-ending discussion about the nature of capitalism itself. We took to the task of figuring out what if any solutions there might be to fix what is seemingly an impossible task, only fixable to date by printing up lots of cash. The results of our findings are difficult and painful, yet they might yield an insight as to the solutions that are at our disposal.

First, it was decided that one has to allow the value of real estate fall or rise based on market influences. Propping up prices artificially is a recipe for disaster, especially in real estate. Think of it this way. People do not invest in real estate in order to lose money no more than people would invest in anything in order to watch their values stagnate or lose ground. The reason why there is lackluster interest in real estate ownership is due perhaps to people knowing the price is being kept artificially high. Allowing real estate prices to fall by, say, raising interest rates or decreasing the rate of increase in the money supply would easily trigger such an event. The inherent lost confidence in the believability of real estate prices is what is causing there to be depressed interest in it. Allowing market forces to take their natural course of events would restore confidence to this ailing sector.

Secondly, tax laws must treat all rental real estate ownership as an active business pursuit. The classification of real estate as a passive investment that sets its ownership apart from other kinds of investments should be ended. Additionally, the Section 121 exclusion of $250,000 of gains from the sale of a residence for individuals and $500,000 for marrieds should be tossed out. All real estate should count as an investment, because this is the way in which people generally perceive it nowadays. Moreover, the 121 exclusion allows gains to build up over time, which delays new inventory from being introduced into the market. When people are taxed right away on gains, there will be less tolerance for sitting on top of gains. Higher volumes of real estate turnover translates into greater choices and increased competition – all necessary ingredients for a vibrant economic sector.

Additionally, landlords who hold relatively small numbers of residential and commercial rental units should be allowed to delay recognition of income rather than to have passive losses being suspended and used against only passive income. Suspending losses is predicated upon the notion that either rents will somehow increase or borrowing rates will miraculously go down, both of which are occurring now, however values are also decreasing. If passive losses are freed up to offset active income then there will be more of an incentive to take advantage of active income, i.e., to jump-start economic activity. Moreover, by delaying recognition of income for, say, two to five years will result in more interest in real estate investment by small investors, and prices will adjust accordingly. Renters will also get a break. The less tax burden a landlord incurs generally result in lower rents.

The basic underlying argument in the industrial age relating to economic growth has typically centered around a discussion of land ownership. The liberal point of view that grew out of this tradition centered around the notion of fairness and encouraging greater access by the public to land. However, old school liberalism generally rejected the treatment of land as commerce and thus treated it in the same manner as any other inherent right. At the beginning of the modern age, some went so far as to view rent as a drain on society, which leads one inevitably to consider the treatment of land as a public right that governments should control.

The laws have evolved into a special categorization of land and the rents derived thereof. By allowing rents to decline in relation to the decline of the value of the underlying land asset is key toward understanding how the treatment of real estate without bias in relation to any other asset might well solve this seemingly endemic economic conundrum facing us in the twenty-first century. Incentives for real estate ownership in the form of changing its tax treatment should take precedence over monetary policy. For capitalism to survive, the laws must reflect the need brought about by changing times. Efficient capital markets should not be stymied by one economic sector that defies the laws of market gravity. Allowing demand and supply to achieve price parity is essential for laying the groundwork of market confidence.

The notion of land reform has typically been associated with countries which have had little or no experience with the capitalist model and were popular movements that led to violence and instability. For modern governments to retain their relevance going forward, serious consideration should be given to changing the way we view real estate. Perhaps the laws which helped give rise to the greatest increases in land values are now in need of being rewritten in order to nurture the growth of a fair and equitable real estate resurgence that as history has proven will lead to greater economic opportunity.

November 21st, 2010 | Category: webtaxcpa | Leave a comment

Business journalist Francine McKenna weighs in on the fine print of the GM IPO:

1. Deferred tax assets are being carried over from the old GM.
2. Millions in goodwill is on the GM balance sheet.
3. Underfunded pension liabilities.

Read more about how audits should matter when making investment decisions here. And for a video of Francine on the topic of the GM IPO, go here. Find out more about Francine McKenna’s background here. You can also follow Francine on Twitter here.

November 18th, 2010 | Category: webtaxcpa | Leave a comment

I am going to try to make it a habit to write a weekly article before tax season starts. This is a special time of the year, when one can let their mind wander a bit. I decided to clean up and organize the office, and in doing so I came across a test question in one of my LSAT exam books. It had to do with the concept of redistributional retrenchment, which is shorthand for a political movement that comes along ever so often and pulls the rug out from under long-held ideologies predicated upon the notion that government spending is good.

Some say the same arguments exist today that have been discussed long ago, ever since lavish US spending programs were embarked upon decades ago. The political forces against taking such steps predicated their collective positions upon the premise that redistribution programs have negative economic consequences. First off, I had to think about how this topic became the lore of LSAT exams. I’m sure many lawyers look back and laugh about the seemingly serious tone set by the arguments for and against redistribution.

The article makes the argument that in the end political forces win the day. Yet, there is no solid proof that government spending, commonly referred to as redistributing wealth, or progressive taxation for short, causes harm. I believe we have all become witness to the fact that notwithstanding government intervention through redistribution, the central bank wields the real power. Perhaps this is the secret code of lawyers that everyone has been trying to crack!

In the end, America is perhaps the most sought after piece of turf in the world. In this well-written article, the argument in favor of growth tends to push aside the notion of redistribution, which most would agree does little to accomplish many of the goals it sets out to achieve. Nothing could be more apropos to mention at this juncture than the sudden departure of the literally clueless Speaker of the House of Representatives, who cannot connect the dots between rising taxes and unemployment. If it weren’t for the Federal Reserve outspending the government with its obsession with automobile manufacturers, bond traders on Wall Street, and hedge funds, then perhaps the next Great Depression might well have occurred.

However, nobody has a crystal ball, and when those of us who care to do so look back in history and see the arguments for and against government intervention, it is perhaps best advised in this case to choose less government intervention. Perhaps it was an overreaction to a casino atmosphere created by a cabal of crooked banksters, who really took advantage of ordinary people in the worst possible way. A financial adviser who is worth their pay has a responsibility to tell their client whether an action is warranted or not, not based upon the expectation of a fee but rather because it is good for the individual. The buyer must beware. But something went terribly awry with the mortgage meltdown, and the effects are still being felt. The blame game is well under way with George W. Bush’s new book, Decision Points. Fannie and Freddie took the hit. But there was much more to it than just Fannie and Freddie. There was far too much speculation in the real estate market. It was just a matter of time before somebody cries uncle.

Milton Friedman has long since been on the record as to who best can make these types of decisions. Is there some kind of government body that can supplant the human trait of curiosity and achievement through competition? Surely there have to be rules, but perhaps our obsession with the thought of societal disadvantages has led us to now consider whether inequality can snowball and create more inequality. It is best to ease up on the gas when you’re skidding off an icy road. Getting situated on a steady course is the best advice any financial adviser could ever offer a client. The less headaches there are, the more the person can thrive and the greater the possibility of achieving their goals.

The arguments against redistributional retrenchment on the other hand are simple. Many argue that without government intervention people at the lowest levels of the socio-economic ladder will suffer the most. A helping hand is what is inferred by redistribution. Whether this theory is true or not is hard to quantify. Yet, the state-supported university concept has benefited untold numbers of individuals. In fact, I would argue that were it not for redistribution of wealth the poor would find it harder to send their kids to college. America’s democratic miracle is possible only when education is stressed long after one leaves the local school system. There must be a system in place to introduce new members of a functional society into its ranks. Perhaps higher education itself may be in jeopardy, however, the notion of allocating resources to guide young people along the path of life is nevertheless essential if America is to regain its title of having the most educated population.

Some, such as the author of the above-referenced article, sees the problem more as a miscalculation of the political process itself. However, both political parties missed their respective opportunities during the 2008 presidential election to put forward a “continental strategy”. The author points out the government spending has added critical infrastructure such as damns, the interstate highway system, canals, railway lines, and the space programs have all benefited the United States. And the crux of the matter is that the United States of America is still the world’s richest country. The author cites numerous examples: The forests, the natural gas reserves, etc.

The common theme struck by my LSAT exam article and by the author of the article about a continental growth strategy is that redistributional retrenchment is not an option. However, what is missed by the political system is the fact that a strategic economic plan is necessary before developing any policy or following along an ideological path. Both the Republicans and the Democrats fail in this category, and one can only hope that a new voice is heard with new ideas that will cause the current chronic malaise to disappear.

November 12th, 2010 | Category: webtaxcpa | Leave a comment

Social Security is now “on the table” as well as military spending and tax reform. The bottom line is an estimated $4 trillion in deficit reduction by 2020. Sound like weird science? Maybe not. Here’s more of the panel’s recommendations, noted in the vernacular section designation:

§: Social Security: Raising the retirement age to 68 by 2050 and 69 in 2075
§: Reduce income tax rates to 8%, 14%, and 23%
§: Eliminating the home mortgage interest deduction

November 10th, 2010 | Category: webtaxcpa | Leave a comment

Timing is key when determining whether incentive stock options [ISO's] and non-qualified options [NQO's] are taxable. One must keep in mind that with respect to ISO’s the difference between the fair market value of the stock at the time of exercise and the option price is what is referred to as a “tax preference item”. In short, regardless of whether the stock is actually sold simply by exercising an ISO, the option holder can be subject to the alternative minimum tax, or AMT.

On the other hand, non-qualified options or NQO’s are taxed as ordinary income when they are exercised in an amount by which the fair market value of the stock on the date of exercise is greater than the option price. Additionally, when they are sold, the difference between the sales price and the fair market value on the date of exercise is taxable as a capital gain. Simply by exercising NQO’s this does not generate tax preference items for AMT purposes.

One must keep in mind that with respect to ISO tax preference items if the amount paid under the AMT exceeds what would have been paid under normal tax rules that year, the AMT excess becomes a minimum tax credit that can be applied in future years when normal taxes exceed the AMT amount. In some instances, it is better to incur the AMT by exercising ISO’s if the ISO’s are set to expire or if the stock price is predicted to fall, especially if in subsequent years ones regular tax is expected to exceed their AMT and the minimum tax credit is applicable.

November 7th, 2010 | Category: webtaxcpa | Leave a comment

How’s this one for a jam-packed article chock full of wonderful tidbits to bring joy to the holiday season. This article is the one I have been saving for quite some time. And rightfully so, because with the approaching end of 2010 people are finally coming to a conclusion about how to address the murky issue of the past.

Let’s assume that an individual has not filed income tax returns for a couple of years, and they possess a degree from a university, but they have had a hard time finding a job. If you believe the news then you will come to the conclusion that most of the ones who make up the class of individuals which is the focus of economists and politicians is this demographic.

The question then becomes, is there a way out for these people? Why aren’t solutions being offered that pleases the government and provides a pathway to a brighter tomorrow for those who are otherwise contributing members of society? This is why I shall start off by offering an olive branch to those who are hiding in the shadows and are afraid of filing past years tax returns because their financial situation has not improved significantly since the bottom fell out of the economy with the implosion of the mortgage-backed securities fiasco.

Posting a collateral bond can often work out much better than an offer in compromise. The offer in compromise solution really isn’t a solution to the problem of what most economists agree is a slow economic “recovery”. Maybe all that is needed is time. In an OIC, one must pay something, and the timing of the payment is not always predictable. Moreover, the amount of the offer isn’t always accepted, and liens can be placed on ones property. If you own a business the loss of income-producing property can be devastating. In some cases, ones collection due process rights are often compromised in an OIC.

A collateral bond guarantees the payment of delinquent tax. By posting collateral, or security, with the IRS liens can be released and the IRS generally will agree to withhold collection for 12-months in consideration of the guaranteed payment. Often a letter of credit, bond, or deed of trust to real property from a third party will suffice. With the threat of IRS liens and collection activity essentially suspended, one can then pursue putting ones career back together. Let’s now turn our attention to some interviewing tips.

First and foremost, one should always remember that the goal of the interview is to get another interview. Think of going to an interview as being your first day of work. You have to come out boldly stating to your employer why it is that you want this particular position with this particular company. Do your research. Find out as much as you can about the company, the key executives, their market differentiation that makes them who they are. And you have to tell the employer why you can do the job. But above all, you have to actually ask for the position. Be enthusiastic. Avoid discussing salary or benefits, especially in this environment where the key excuse for employers not hiring is uncertainty. Simply put, the age of entitlement is drawing to a close. Government cannot tax businesses into extinction or else the tax revenue streams will dry up. Employees must recognize the realities of the market if they wish to succeed.

Understand and differentiate between your short-term and long-term goals. Above all, write them down. Look at what you are describing for yourself. Then apply those words to what you are honestly looking for in a job. Stress the things that you can do for your employer rather than discussing ways in which you seek to advance yourself. And of course, the big kicker is to avoid discussing your past employers. This skunks more interviews than one can imagine. The last thing an employer needs to worry about is whether an employee is going to trash talk them to someone else. In other words, think of yourself as part-owner. Have a stake in it.

Obviously, the past has a way of coming around and biting us again. It usually comes in the form of tax penalties and interest. It is inevitable that with every downturn of the economy, tax revenues fall short, employment seems to be crippled, and the proverbial rock and a hard place of whether to raise taxes in such an environment is advocated. The hidden tax of penalties and interest will accrue on unpaid balances regardless of whether one has an agreement to pay. Every individual looking to come out from behind the shadows of the double whammy of unpaid taxes and unemployment or underemployment needs to take into consideration and plan for paying interest and penalties. Individual’s unpaid federal tax liability interest will accrue at the federal short-term rate plus 3 percentage points, or 3.41% currently. The penalty rate for unpaid individual taxes is currently 6% per year to a maximum of 25%.

Webtaxcpa will continue to provide practical steps of options available to negotiate the current environment. We do so without hesitation hopeful that this information will be helpful. Whatever your situation is, however, by all means it is recommended to consider seeking guidance from a professional who can guide you through life’s seemingly daunting predicaments.

November 6th, 2010 | Category: webtaxcpa | Leave a comment