With the current economic slowdown, most taxpayers have seen their stocks’ values decline in recent months. The Federal Reserve has lowered interest rates as a way of providing economic stimulus. For taxpayers who are involved in certain types of transactions, these events can have a significant impact on tax and estate planning strategies.
One of the best estate planning strategies is to make gifts to family members when assets are at a low value. This gets the assets out of a person’s estate and the hope is that they then significantly increase in value in the future. In this case, all of the appreciation on the asset after the date of the gift would not be included in the donor’s estate. If you own assets (for example, stocks, bonds, real estate, partnership interests in hedge funds, closely-held business interests, etc.) that have recently declined in value, but you believe that the value of these assets will significantly appreciate in the future, consider a gifting strategy now to help reduce your taxable estate. If you think that this strategy might be of value to you, please consider immediately scheduling a consultation to fully explore this option.
Interest rate reduction
There are tax planning strategies to consider when interest rates move up or down dramatically. In our current low interest rate environment, one significant strategy is to loan family members money at a very low rate of interest for long periods. For example, if a wealthy individual loaned his adult child $100,000 at the federally allowed interest rate of 4% for nine years with only interest payments due annually, no gift tax implications would apply (assume the child has other investment income of at least $4,000 to cover this interest). If the adult child used that $100,000 to buy bank stocks (some of which are paying an 8% dividend) today, and the dividend was a qualifying dividend with a maximum tax rate of 15%, then a potential good tax strategy will be accomplished. The child will have $8,000 of dividend income and, after tax, will have $6,800 of cash flow net. The $6,800 would be enough to pay the potential $4,000 interest on the loan and net $2,800 after tax. Further, the child could also enjoy the benefit of any appreciation in the stock for the next nine years. The parents have effectively transferred the potential appreciation on their stock for the next nine years to the child without any gift tax implication, and the parents will get their loan back at the end of nine years. This is just one of many strategies that could be considered. And, should tax rates on dividends change during the nine years, the child can sell the stock, repay the loan, and the parents can adopt a more appropriate tax strategy.
The basic tax law regarding capital loss is as follows: if you sell a stock that you held for greater than one year at a loss, that loss can offset, dollar for dollar, any capital gains that you might have. If you do not have any capital gains in a year, you can offset up to $3,000 of a capital loss against ordinary income and any remaining loss carries on the future years.
Now, many clients who have invested in stocks for years, even in today’s market, might still have significant appreciation on their stock, so that they would have a capital gain on a sale. Let’s assume that other stocks they have held for a shorter time might be sold at a loss. We have seen that some clients have a large concentration of their wealth in one stock, and while diversification would generally be a good deal, the client has been unwilling to pay the tax on the gain. As a tax planning strategy today, if you recognize a loss on some stocks in your portfolio, this loss can be used up to the gain that you could recognize on another stock in which you are highly concentrated. In this way, you can diversify your portfolio without a tax burden.
Real estate losses
If you have invested in rental real estate, it is important to understand the tax consequences of a sale. Generally, if you hold the property for more than one year, and sell it at a gain, you qualify for favorable long term capital gain treatment. A planning strategy would be to sell certain stock in the same year at a loss, so that this capital loss could offset the capital gain. If you instead sell the rental real estate at a loss, this loss is fully deductible without limit against other ordinary income, such as wages.
If you feel that any of the above ideas could possibly apply to a situation you have, please feel free to give us a call to discuss these opportunities fully.
Most businesses are not making full use of the many tax advantaged fringe benefits available in the Internal Revenue Code for employers and business owners. In most instances, fringe benefits offer great tax results in that an employer can take a tax deduction for the costs, and employees do not need to include such amounts in income. In certain cases, those benefits must be offered on a nondiscriminatory basis to all employees. However, in other cases you are legally allowed to discriminate to exclusively benefit key employees and owner employees and their families. Further, the discrimination rules vary significantly from one type of fringe benefit to another. Below is a list of the many kinds of fringe benefits that businesses can consider offering:
Health Benefits (including health insurance, dental insurance, vision insurance, prescription drug insurance, and long term care insurance):
From a federal tax perspective, business owners can offer to pay all or a portion of employees’ and their families’ health insurance. Employers can offer different types of insurance to different employees. Most employers who require employees to pay part of the cost should consider setting up a cafeteria plan to save taxes for employees.
Medical Reimbursement Plan:
Employers can pay all or create limits to reimburse employees for their out-of-pocket medical costs. There are special rules that require that these benefits be offered on a nondiscriminatory basis.
Health Savings Accounts:
This is a type of plan where employers and/or employees can contribute to pay for their medical costs on a tax advantaged basis.
Dependent Care Assistant Programs:
Employers can pay or employees can elect to participate through a cafeteria plan and pay up to $5,000 for dependent care expenses for children.
Group Term Life Insurance:
Employers can offer group term life insurance to employees on a tax advantaged basis. There are special rates if more than 60% of the benefits go to key employees.
No Additional Cost Services Fringe Benefits:
Services provided by an employer to an employee if such services are offered for sale to customers in their line of business and the employer incurs no substantial additional cost to provide it (discriminatory rules apply).
Qualified Employee Discounts:
Employers can sell goods and services to employees at substantial discounts (discriminatory rules apply).
Work Related Fringe Benefits:
Use of company car, company airplane, pay for employees’ subscription to business periodicals, home computers, outplacement services, business meals and entertainment, qualified retirement-planning services (you generally can discriminate).
Qualified Transportation Fringe Benefits:
Transit passes and parking (within limits) can be paid by employers.
Employee Awards and Prizes:
Employers can set up plans to give tax-free awards to employees for length of service, safety, or achievement with specific dollar limits and nondiscrimination rules.
Employers can set up educational assistance programs to offer tax-free reimbursement of college or continuing education costs under a written nondiscriminatory plan.
Clearly, there are many opportunities and many technical rules that must be explored by any business owner. Please call us for a consultation to explain opportunities for your company to take advantage of significant tax-advantaged programs.
Many clients use their cars for both business and personal use. The IRS code allows taxpayers to take a tax deduction in one of two ways.
1. Cent-Per-Mile Method
In 2010, taxpayers can deduct 50¢ per mile for all business miles driven in a year.
2. Depreciate the Car
Taxpayers can take a depreciation deduction for the business percentage use of their car plus all other expenses incurred, such as gas, oil, repairs, tolls, etc.
Caution: You were probably aware of the above rules, but what you might not be aware of is how strict the IRS can be in allowing these deductions. In a recent tax court case, a professor who used his car for legitimate business use was not allowed any tax deduction because he failed the IRS’s strict substantiation requirements. The key is that you must be able to document the following through log books, trip sheets, a diary, and/or other documentary evidence:
a. the mileage for each business use of the car
b. total mileage for all use of the car during the year
c. the date of each business use
d. the business purpose for the use.
The professor in the recent case submitted to the tax court a travel log consisting of a collection of preprinted forms which he had filled in; however, he had completed them after he was already being audited by the IRS, and he had no other support.
Conclusion: It is fair to state that many taxpayers are not recording and keeping the documentation they need and run a significant risk of no deduction being allowed for legitimate business use of their car. Remember that the key to most tax planning opportunities is having good records to prove your case. IF you are not certain that you are meeting the guidelines required by the IRS please give us a call.
Suppose you hire your child at age 14 to help with some basic needs at your business, such as filing or copying, and pay that child a reasonable hourly rate for the services rendered. That child will pay no federal income taxes on this earned income as opposed to you, the parent, who would pay tax on this income at a high rate. Further, if you organized your business as a sole proprietorship or a single member LLC, you do not have to withhold or pay Social Security taxes until the child turns 18. Even if your business is structured differently and you have to pay Social Security taxes, this strategy will still save you income taxes in excess of the cost of the Social Security taxes.
As your child gets older, he or she can work summers and after school and make a higher hourly rate. In 2008, if you can justify their salary as reasonable, you can pay the child up to $5,450 and the child still pays no federal income taxes. In fact, it can get even better, because the earned income permits the child to contribute up to $5,000 to a traditional deductible IRA. Therefore, the child could receive up to $10,450 in compensation and still pay no federal income tax.
The idea behind a Roth IRA account is that the contribution you make to such an account is with after-tax dollars but the income earned over the years will generally grow tax-free. The earlier you fund a Roth IRA, the bigger the tax savings. The key to making Roth IRAs is that you must have earned income. So, hiring children early and establishing a Roth for them allows that income to grow tax-free generally for the rest of their lives. In 2008, if a child has earned income up to $5,000, they can contribute all of it into a Roth account. Further, any contribution, but not the income, can be withdrawn at any time without tax implications. So, if the child needs the money for college or later in life for a house, those contributions can be withdrawn tax-free. Parents can set up a custodial Roth IRA and control these investments until the child reaches the age of majority.
If you, the parent, are in a high tax bracket, you generally do not qualify for a $2,000 lifetime learning credit for your college-age child. Under a loophole in this tax law, if you waive the dependent’s deduction for this child, the child can qualify for their own $2,000 credit. What this means is that a child can earn up to $21,458 in 2008. The child will owe $2,000 in taxes but can use the $2,000 credit. In other words, the child pays no taxes on this income.