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Kerstetter
Letter®
Issue
99-1
Spring
1999
©
3/18/99 by Kerry M. Kerstetter, MBA~CPA~ATP~ATA
This
is the complete text from the latest issue of the Kerstetter Letter. Annual (four quarterly issues) subscriptions
to the blue-paper printed version, including all of the hilarious cartoons and
animal pictures, is available by sending a check for $19.95 to Kerstetter
Letter, 11802 Deer Road, Harrison, AR
72601-6550
Prologue
As always for the Spring edition, which I write in the midst of tax season, there are several items related to the preparation of 1998 tax returns.
Those of you who have read at least a few of my Letters know that I frequently take stands on issues that are diametrically opposed to the prevailing common wisdom. In fact, that is the very reason I started this publication, to debunk the vast amount of misinformation in this country. Being among a very small group of people who believe wholeheartedly in the truth, I am often criticized and ridiculed by those who believe that the majority is always right. Sorry to disappoint anyone, but it has never been my practice to accept or endorse lies just to fit in with the crowd.
If, for some reason, I do ever change my opinion and come around to the majority consensus on a particular topic, I will make that point very openly in these pages, along with a full explanation of my change of heart. To date, no such explanations are required because I have yet to back off from any of my stated positions. It’s not for lack of trying on the part of others. Over the years, I have written scathing commentaries on multi-level marketing programs and pyramid schemes. A week doesn’t go by without someone trying to convince me to join up with one.
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IRS
& Perjury
How many of you recognize the
following statement?
“Under penalties of perjury, I
declare that I have examined this return and accompanying schedules and
statements, and to the best of my knowledge and belief, they are true, correct,
and complete.”
It’s the exact wording from just
above where you sign your individual income tax return (Form 1040). With the current focus on the issue of perjury,
and the United State Senate (the most august legislative body in the history of
the world) officially proclaiming that perjury is no big deal when committed by
the leader of the free world, I wondered how the IRS feels about this. Besides the tax return oath mentioned
above, there are many times when the same oath is required when submitting
other documents to IRS. If perjury
is inconsequential for the President, how important is it for the average taxpayer? If everyone lies about sex, isn’t it just
as true that everyone lies about their taxes?
I don’t like to waste my valuable
space quoting from government documents; but following is the relevant section
from the infamous Internal Revenue Code that everyone loves so much (how else
do you explain its continued existence?).
SECTION 7206: FRAUD AND FALSE
STATEMENTS
Any person who--
(1) DECLARATION UNDER PENALTIES OF PERJURY
Willfully makes and subscribes any return,
statement, or other document, which contains or is verified by a written
declaration that it is made under the penalties of perjury, and which he does
not believe to be true and correct as to every material matter shall be guilty
of a felony and, upon conviction thereof, shall be fined not more than $100,000
($500,000 in the case of a corporation), or imprisoned not more than 3 years,
or both, together with the costs of prosecution.
A little background: In 1982, the fine was increased to
$100,000 ($500,000 for corporations) from its previous level of $5,000.
While we all know that there are plenty of
goofy laws on the books that are rarely enforced, I wanted to know about this
one. Although I have been
preparing tax returns for thousands of clients over the past 23+ years, I have
never seen the issue of perjury raised.
However, I have never had any clients involved with the IRS’s Criminal
Investigation Division, which is where this kind of charge is handled. To answer this question, I went to the
source, IRS headquarters in Washington, DC. In fact, my questions so intrigued the IRS representative I
spoke with, that she jumped right in and obtained the answer for me within a
few hours, much sooner than the two to three days she had me expecting to wait.
For the Fiscal Year 1998, IRS Criminal
Investigation Division had the following number of cases in regard to perjury
charges
492
taxpayers investigated
488
taxpayers prosecuted
377
taxpayers indicted
351
taxpayers sentenced
Because of the length of time it takes to see
one of these cases through, the taxpayers in each of the above groups are not
the same ones. While even she
admitted that it would be interesting to know what the sentences were, my
source at IRS HQ was unable to obtain that information.
So, what does this
all mean? Although 1,708 tax
returns out of the millions filed each year is essentially a drop in the
bucket, I was actually quite surprised that there was any official action taken
by IRS regarding perjury. It has
dozens of other penalties that it uses much more frequently. Does the new climate of tolerance for
perjury extend to taxpayers? My
guess would be that it falls into the same category as the issue of the GAO’s
audit of the IRS (discussed elsewhere in this newsletter). The rules are not enforced for members
of the governing elite; but are heavily enforced for the common people. As the Clintons have illustrated time
and again, royalty has its privileges that we common folk have no right to
expect for ourselves.
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In the last issue, I described the government’s plan to turn all bankers into spies on their customers. While it wasn’t yet in effect, I was resigned to the fact that it was an inevitable expansion of Big Brother. With the government’s insane war on drugs, they have wasted no opportunity to literally shred every protection we citizens are supposed to have.
The mainstream media, which has adopted the position of full blown support for anything the JackAss party wants, was intentionally keeping this story form the masses of people who take their thinking orders from the likes of Messrs Jennings, Rather & Brokaw. I underestimated the power of the Internet to spread the message that the mainstream press is covering up. Alternative news sites, along with political activists, such as the Libertarian Party, exposed this plot and fomented enough vocal opposition to our leaders in Washington, that the plan’s implementation has been shelved for the time being. It’s dangerous to think that the battle has been won. Fans of the big central government are a tenacious and patient lot. They will try again. Just another reason to stay tuned in to some real news sources that are not afraid to shine the light of truth on these plots that the mainstream media cover up.
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The Arkansas Governor and legislature have promised to fix the problems with property taxes. I’ll believe that when I see it. The bigger problem is that they don’t understand the real issues, which involve the whole concept of property taxes and private property.
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Get A Second Opinion
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More and more people are buying very inexpensive tax preparation software, such as TurboTax and Kiplinger Tax Cut. Is this a threat to professional tax preparers? It is for those who are just form fillers. For those of us who use some creativity in moving things around to minimize taxes, this is no threat whatsoever. It’s a textbook case of GIGO (garbage in, garbage out). In fact, I encourage clients to use these programs as a means of organizing their information for me to work with. It’s rare that I can’t beat their tax numbers by being creative. It really has nothing to do with the fact that I use a $3,000 program (Lacerte) and they use a $20 program like TurboTax.
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Quicken – QuickBooks
As I have mentioned on several occasions, I have been a big fan and advocate of the Quicken bookkeeping program by Intuit since I started using it in 1988. The most current version of my Quicken pointers is now available on my website. I also have been using Intuit’s other program, QuickBooks, for several years. I used it for my business for one year, but switched back to Quicken. While it has improved dramatically in the past few years, QuickBooks has always been much more complicated to use than Quicken. I have therefore advised most people to stick to the much more user friendly Quicken.
I have upgraded with each new version of both programs. With the 1999 versions, there is a trend that I don’t like. Intuit is pushing small businesses to upgrade to the more expensive and much more complicated QuickBooks. I had noticed this and had it confirmed by Intuit. They are no longer selling QuickPay to be used with Quicken. If you want to do payroll, you have to use QuickBooks. I’m not sure if all banks are doing this; but when I tried to sign up for online banking for one of our corporations with Regions Bank, they would only support QuickBooks. They offer online banking for Quicken for individuals.
It’s not really that bad. QuickBooks is still much better than any of its competitors. After tax season, I will be producing a video on QuickBooks 99 that is of the same format as the very popular one I did for Quicken 98.
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New Vehicles
I am often asked whether it is a good idea to buy a new
vehicle for tax purposes. Of all
the tax deductions, a new vehicle is one of the worst tax savers, unless you
are buying one that weighs over 6,000 pounds (i.e. Suburban or Lincoln
Navigator), in which case you can get an excellent depreciation deduction. It’s best to make the decision to
replace a vehicle without considering taxes, and just consider such things as
maintenance costs. I have seen
that, at around 100,000 miles, they often become money pits for repairs. At 45,000 miles, you should have
another couple of years of useful life in it. For tax deductions, you are much better off spending on
fully deductible things like trips and equipment (computers, digital cameras,
etc.).
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As you can see from the front page, I have once again changed the
location of my website, to www.TaxGuru.org This is much more reliable and powerful
than the previous server I was using.
I have started posting the text of these newsletters on the site. For various reasons, it’s not possible
or practical to include the photos and comics; so that will continue to be a
bonus for the blue-paper subscribers.
There are a number of benefits to the online edition.
First is the timeliness. There is normally a lag of almost two
weeks between the time when I finish producing the master for the printer, and
when it’s in your mailbox. The
online edition is posted within a day of its completion.
Next is the ability to keep the online edition
more up to date and accurate. That
was crucial with the last issue.
As it was being printed, IRS announced a change in the effective date
for its lower standard mileage rate, until 4/1/99 (which will make preparing
1999 tax returns a lot of fun). I
was able to print up stickers with this info for the blue paper editions. I was able to incorporate this into the
actual article in the online edition.
Finally, the online medium allows the use of a
very powerful tool, the hyperlink, to take readers directly to the websites I
mention.
In addition to these lengthy quarterly newsletters, I have periodically
been posting short articles (Kerry’s Commentaries) which are much more timely
alerts. Some of them even become
full articles in the next issue of KL.
For those of you who still haven’t taken the plunge into
the online world, I’m not saying that this is reason enough to do so. However, as the mainstream media
continue their one-sided reporting of the news, more and more people are
realizing that the only place to get the truth is on the net. The price of computers continues to
drop, as does the cost of Internet access. A year or so ago, I mentioned the plans to give away
computers for Internet Service subscribers. This trend has now grown to free computers and Internet
access if users agree to watch a bunch of ads and reveal a lot of personal
details about themselves.
Free-PC.com in Southern California had a million and half people apply
in the first two weeks of its offer for free use of 10,000 computers.
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Retirement Plans
In their usual incompetence, Congress has added so many new types of retirement plans
that it’s more complicated than ever to comprehend the different options
available. They’ve added so many
new types of IRAs that nobody, including IRS, has the foggiest idea of how they
are supposed to coexist. In one
more ironic twist, one of the most complicated of the new plans has been called
a SIMPLE (Savings Incentive Match Plans For Employees) IRA. I have already experienced confusion
with clients who ask for a “simple IRA” when they actually mean the old
fashioned traditional IRA.
Contrary to
popular belief, all IRA money doesn’t have to be deposited into the same
account or an existing account. In
fact, it’s a classic bit of investment prudence to diversify and avoid putting
all of our retirement eggs in the same basket.
Another overlooked
aspect of IRA accounts is the fact that they can be moved around. Most people are under the false
impression that it has to stay with the same custodian until retirement. Banks love IRAs for this very
reason. It’s a very stable long
term deposit base. If you aren’t
happy with your current custodian, you can move it to another. If you have the money transferred
directly between custodians, no taxes have to be withheld. If you take a check for the money, the
former custodian is required to withhold 20% and send it to IRS. You have 60 days to roll it back into
another account; but you’ll have to come up with the 20% from other sources.
This brings up
another misconception I hear a lot from people. They believe that the 20% withholding has paid up all of the
tax on distributions from retirement plans. They are then shocked when their tax return is finished and
find that they still owe several thousands more. The 20% withholding is really only a down payment towards
the tax. The actual tax is
normally much higher, around 50% when considering Federal, State, and early
withdrawal taxes.
Required
Distributions
IRS doesn’t like
the idea of people leaving their untaxed retirement money in tax deferred
accounts forever; so they have a requirement for certain minimum
distributions. If the minimum
isn’t met, IRS assesses a 50% penalty on the difference. [There’s a 10% penalty for taking money
out too soon (before 59½), so a 50% penalty for not taking enough out must make
sense in the bizarro world of Washington logic.] As with most areas of the tax code, this is often
misunderstood. While the magical
age for this rule is 70½, the first distribution doesn’t actually have to be
taken until April Fools Day of the year after reaching that milestone. Thereafter, each year’s payout must be
taken by December 31.
How it works is
that all retirement accounts are totaled up and then divided by the IRS’s
actuarial life expectancy. At
least that much must be taken out for that particular year. For example, if you have $100,000 total
in three different retirement accounts, and the official table says that you
have 10 more years of life ahead of you, you must take out at least $10,000 and
include it on that year’s tax return.
Where the money comes from is up to you. It can be some from each account or all from one. Next year, you do the calculation all
over again with the new total balance and your new life expectancy.
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Dividend Income
On Schedule B, it used to be
that you reported the total dividends earned and then you backed out the
capital gain portions. I know for
a fact that many people ended up double counting those dividends. This year
(1998), the dividends are reported differently on 1099-DIV as Ordinary
Dividends plus Capital Gains Dividends.
It may seem like a minor change, and it is; but this could prevent many
incidents of over-reporting income.
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Social Security Earnings Limits
One of the many idiotic rules regarding the central government’s mandatory retirement program, Social Security, is the penalty it charges people under 70 years old who choose to work while receiving benefits. I have explained on many occasions how easy it is to skirt these limits by running income through a corporation and changing the bad (penalized) “earned” income into the good (not penalized) “unearned” income.
What I have heard a lot is
confusion over how much earned income can be received before hitting these
limits. For 1999, people under 65 can’t earn more than $9,600 before losing
part or all of their Social Security benefits. For those between 65 and 69, the 1999 limit is $15,500. For W-2 income, it’s the gross
pay. However for independent
contractors, whose income is reported on 1099-MISC, it is the net profit after
Schedule C deductions. A person
who earned $100,000 in real estate commissions, and had $95,000 of business
expenses for the year would not be subjected to the Social Security
penalty. What you need to
understand is that the SSA does not receive a copy of the $100,000 1099-MISC. They do receive a copy (from IRS) of
the person’s Schedule SE, showing his net self employment income, which could
also include net income or losses from partnerships and farming activities.
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Home Sales
As I have described in more detail earlier, the laws for sales of primary residences were changed drastically in 1997. For sales after May 6, 1997, up to $500,000 of gain per couple is tax free. There is no more reinvestment requirement nor any minimum age. I have found that this information still hasn’t reached enough people in this country because I am constantly being asked how much someone needs to reinvest from the sale of a residence. I recently amended a 1997 tax return for a couple who had sold their home on May 30, 1997 and their prior CPA had told them they had to reinvest equal or higher than their prior home sale. Their gain was well under $500,000; so they didn’t have to reinvest a dime.
What has confused a lot of tax professionals and taxpayers with 1998 tax returns is the fact that IRS has completely eliminated Form 2119, which for decades had been used to report the sales of residences. If you sold your home and you qualify as exempt from tax on the gain, you are no longer required to report it anywhere on your tax return.
Now for the more practical real world, as well as another reason why electronically filing tax returns is an unwise move. If you sell a home and use the money for tax deductible things, such as charitable contributions or purchasing business assets, IRS will suspect you of having unreported income and being a tax cheater. As a measure of self defense, attach a statement to your return explaining that you did receive a large amount of tax free money from the sale of your home. Of course, if you’re a lonely person and look forward to spending some quality time with an IRS auditor, keep this fact a secret and wait for them to ask you about it and everything else you’ve been doing.
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Know Your Basis
When you sell an asset, almost as important as the sales price is its cost basis. There is no way to compute your gain or loss without knowing it. It’s so important that it’s the first topic in my seminar on real estate investment taxation. I am still encountering a lot of misunderstanding regarding this; so I wanted to do a little refresher.
For most assets, the cost basis is what you paid for them. But what if you didn’t pay anything? What if it was a gift from a relative? A common belief is that the cost basis is zero. In actuality, the cost basis that you the recipient are required to use is the cost basis the giver had. So, while it may be in bad taste, if you plan to take a tax deduction for a gift, you need to ask what it cost.
How about an asset that you inherited? Many people assume that since they paid nothing, their basis is zero. That is also wrong. Since the person who bequeathed the asset to you is no longer around, it would be very difficult to ask him how much he paid for it. For that reason, the cost basis is the market value at the time of death. For assets with a very low cost basis, such as depreciated rental property, this essentially wipes the accumulated capital gains off the books. It’s the big payoff for the “Swap ‘til you Drop” investment strategy in real estate.
I work with a lot of ranchers and farmers who occasionally have animals die. What is the tax deduction for this? Again, the basis number is critical. For an animal that was purchased, its basis is its cost less any depreciation claimed. If that number is more than zero, the remainder is deducted for the year of the animal’s death. What about animals that were born on your ranch that died before you could sell them or put them to work? Since you didn’t pay anything for them, the cost basis is zero, with no deduction for their death.
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IRS’s Audit
You may have seen news reports about how the IRS’s own books are a mess, with billions of dollars totally unaccounted for. This is nothing new, but it does come at a good time. Dozens of reviews of IRS’s books over the years have come up with the exact same results. IRS’s excuse is always the same: “Our books were not meant to be audited.” Don’t fall into the trap of believing that you can use this excuse if you are audited by IRS. As with all aspects of our government, IRS is a champion at double standards. Regardless of how sloppy they are with accounting, you are expected to maintain perfect books and will be severely penalized if you don’t have them.
What is good about this news release is its timing. Normally during the tax filing season, IRS mounts a publicity campaign, such as indicting celebrities, to put the fear of God in everyone as to how dangerous it is to not file returns and pay all of your taxes. Fortunately, last year, and again this year, IRS has been put on the defensive with the release of these news reports of incompetence on their part. As I said, these are not new revelations, but they are coming at a perfect time to take the wind out of IRS’s sails.
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Because of the growing skepticism over the stability of the Social Security system, the Social Security Administration has been sending out earnings reports to everyone with a message to “please believe in Social Security.” It’s pretty much informational only. Although they ask you to review for mistakes, correcting any is next to impossible and so frustrating that I’m sure most people just give up. I did when I tried to correct a mistake in my report.
There are some people who want to take steps to meet the minimum of 40 quarter credits in order to qualify for benefits. There are ways to do that. Check with your tax advisor. I had a client back in California a number of years ago whose mother had just immigrated from China. In order to qualify her for Social Security, we prepared a W-2 each year for her babysitting services.
Don’t you feel much better about the future of Social Security now that Clinton has proclaimed it his goal to save it? He claims to want to use most of the projected budget surplus for this purpose. His propaganda ministries (aka NBC, PBS, CNN, CBS & ABC) have proclaimed Bill Clinton as the savior of senior citizens. There are just a few problems with this. First, as I have mentioned for years, is the supposed surplus. This is a fraud that was started under LBJ and has been continued by every President and Congress since. There only appears to be a surplus because the funds being paid in for Social Security are being stolen and applied toward the general fund. Any private industry manager who tried that with his employees’ pensions funds would be tossed into the old gray bar hotel. If that weren’t chutzpah enough, Clinton is planning to use that same stolen Social Security money to save Social Security. He wants to count the same money twice. Of course, he’ll get away with this.
According to some reports, people in Generation X and younger don’t worry much about Social Security. This is extremely short sighted thinking. While they are right to believe that they won’t see a dime of benefits from Social Security, that doesn’t do anything for the several thousands of dollars they are forced to pay in every year (i.e. flush down the commode). If they were to take steps to reduce or eliminate those taxes, and do something wiser with that money, they will increase their net worth by millions by their retirement.
I have always explained that the Social Security program is a government sponsored Ponzi scam. What I have always advised is that you need to let go of the money you’ve already paid in and don’t waste any more energy over trying to recover it. I mention this again because there are some tax protestor scamsters promising (for a fee) to be able to help people recover all of their taxes paid in. I actually learned of the latest version of this scam from a recent IRS email newsletter. IRS said they are blocking all such requests.
Now for those of you under 60 who may be tempted to rely on Social Security for your retirement. I remember back during Richard Nixon’s presidency, there was a poster with his face and the caption “Would you buy a Used Car from this man?” Today’s version of that poster would be Bill Clinton’s sneering mug with the caption “Would you rely on this man to take care of your retirement?” For those of you who say yes, please contact my office about investing in the latest get rich quick pyramid plan. I can’t let the Feds be the only ones to make money off your naïveté.
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IRS agents have always behaved so ruthlessly because
they have enjoyed complete immunity from any personal accountability for their
actions. This has been consistent
with the mandate from Congress and the Prez to do whatever it takes to get
money for the big central government.
In a small step in the right direction, the 1998 tax law authorized
civil damages of up to $100,000 against agents who negligently disregard
provisions of the Code or regulations in collecting federal tax. This is so new that it hasn’t been used
yet. I have serious doubts as to
whether this will make much difference in the IRS mindset for several reasons.
In other examples of Congress mandating that IRS
play fair, they have stacked the deck against taxpayers and refused to obey the
laws.
Several
laws have been passed by Congress making it illegal for IRS to promote agents
based on the money collected; yet that is exactly how they continue to be
evaluated.
Interest
charges are supposed to be abated when there are delays caused by IRS. I know from personal experience that
this is next to impossible to obtain, even when the first IRS auditor
disappears for an entire year and we have to restart the audit from ground zero
with the replacement.
IRS is required to reimburse
taxpayers for legal costs (up to $75 per hour) if they have acted
recklessly. So few of these
reimbursements are awarded that they make the national news when they are.
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Besides the disrespect towards the citizens that
lying politicians display, I have never understood how journalists could tolerate
such bald face lies in their interviews.
If I had an interview show, there would be a few strict ground
rules. Guests would be expelled if
they tell a lie. I would give a
signal and have a couple of huge ex-football players pick them up and physically
remove them from the set. Giving
the men wedgies would be an added touch of punishment. It would be like a combination of Jerry
Springer meets Jim Lehrer. Any
takers out there in TV land?
Fox? The other ground rule
would be a similar fate for anyone who disparages the United States
Constitution unless they start the interview by identifying themselves as a
Communist. Any journalist who
claims to support the freedom of speech, yet advocates gun control and speaks
ill of the NRA would be immediately jettisoned.
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I often discuss the benefits of incorporating. It’s a natural progression from a Schedule C sole proprietorship to a corporation. Many people think this means the Schedule C should be shut down. Not true. There are benefits to having both. Family wages, where kids under 18 are exempt from payroll taxes, are only available to unincorporated businesses because by definition, a corporation is not human and can’t have kids. A common strategy I use is to have the corporation pay the parents for consulting, which the parents show as gross revenue on their Schedule C. They then show what they have paid to their kids as family wages, essentially canceling out the income. It’s a bit of a hassle, but who said anything in life is hassle free, much less anything to do with taxes?
A way of increasing the tax free amounts shifted to kids is to also incorporate IRAs into their tax returns. For 1999, kids can earn up to $4,300 (the standard deduction) tax free. If you pay them $6,300 each, they can deduct $2,000 for an IRA and still come out tax free.
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Don’t Ignore Tax Notices
It’s no secret that most notices sent out by the IRS and state taxing agencies are partially or completely wrong. Some are so ridiculous as to be laughable. However, the bigger mistake many people make is to ignore the notices, especially the ridiculous ones, such as the occasional bill IRS sends out to individuals for a billion dollars of taxes and penalties. While they are ludicrous, you should consider them to be the same as cancer. Ignored, they don’t usually go away on their own; but instead grow beyond control. Even tiny amounts, such as 25 cents, will trigger an IRS levy and other drastic steps.
The key is to respond to the notices quickly and explain the errors. I have actually found IRS to be increasingly cooperative in dealing with erroneous notices. I can’t say the same for the state agencies, especially the California Franchise Tax Board. Either way, not responding to a notice is perceived as an admission of guilt and that you agree with it.
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Tax Cuts – Not
I’m sure you’ve seen all the polls that claim that there is very little sentiment for a tax cut. Since our government has changed from the republic established over 200 years ago, to one driven by daily popularity polls, you can kiss any chance of a tax cut from Washington goodbye. The fact that these polls are as phony as those that claim Bill Clinton to be the greatest president in history is irrelevant. The spineless elephants and socialist jackasses in Washington treat them as gospel.
The demagogues in the media and in Washington have proclaimed that any tax cut is impossible if it will save the evil rich people even one dime. Since the evil rich pay almost all of the income taxes in this country, any across the board cut would have to save them some taxes. Ipso facto, no tax cut is possible. I hate to keep harping on this fact; but this is textbook socialism. Redistribute from the evil rich to the oh so wonderful poor people. What this means is that if you have any hope of reducing your taxes, it’s up to you.
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Y2K Update
I’ve been sick of this subject for the past year; but it obviously won’t go away. It’s the most common question I receive: “What do you think about this Y2K problem?” I will be so glad to wake up on January 1, 2000 and see that the Earth is still spinning and the doomsayers will look like morons.
The professional Y2K fear mongers have convinced almost everyone that there will be no electricity on 1/1/2000. Canada’s power companies set their computer clocks ahead and did just fine in the year 2000. I may be a chauvinist, but I believe that the United States has better technology than our neighbors to the north.
An entire industry of fear mongers has blossomed. They are now mentioning the Russian
nuclear missiles as non-Y2K compliant and how we will have to either pay to fix
them or worry about Armageddon. Of
course, that isn’t a problem with China’s nuclear missiles since the Clinton
gang has seen that they have the best state of the art technology that they can
buy and steal from us.
It’s going to be exactly like when the predicted end of the world dates come and pass, a subject with which I am very familiar. Cult leaders always have some lame excuse for why the world didn’t blow up. As I mentioned last time, the true effect of the Y2K bug will be the mass hysteria driving up prices for survival supplies. Being self sufficient is not a bad idea; but just like the popularity of SUVs (sport utility vehicles) among people who never leave the pavement, a lot of people really don’t need the things they are buying in anticipation of this coming disaster. I’m actually looking forward to the beginning of 2000 when all those people who bought expensive generators and other survival gear try to sell them for much less. We’re going to pick up a huge generator to power our entire main house. We have had more power outages in the past few months due to ice and snow than in the entire six years we have been here.
Because of the concern about the banking system being able to handle the new date, and the potential for a run on banks, the Feds have been printing a lot more cash (around $50 billion extra) to cover the anticipated demand. If you do worry about banks, it may be a good idea to spread your deposits around among several. If any freeze up, odds are that the others will still be open for business.
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Rebates
How many times do you see a product advertised, whether in a catalog or on the store shelf, with its price net of a mail-in rebate? I see that all the time with computer hardware and software that I purchase online and through catalogs. I also see it a lot at places like Sam’s Club, where they have a full wall of rebate coupons near the exit doors. Do these rebates actually reduce the purchase price? My experience has been that it is a clear cut case of false advertising. Many of the rebates advertised at Sam’s Club have already expired. Of course, you don’t discover this until you have already paid for the product and are on your way out to the parking lot. I have also found expired rebate promotions with items I receive through the mail.
Even if the rebate promotion is still in effect, and I have sent in all of the required documentation (sales receipt, box flap, UPC) I have found that the rebates often never arrive. I have read several articles in computer trade publications indicating that this happens to many consumers all over the country. The truth is that the companies believe that few people are going to raise a stink over a ten or thirty dollar rebate, which is true for me (although I have other ways to get even, such as this article). They receive the best of both worlds. They give the impression of being a lower cost to the consumer without actually having to pay out the rebate.
My advice? When comparison shopping, ignore rebates. Only look at what you have to pay out now. If you feel lucky and the rebate promotion hasn’t expired, send in for the rebate. If you actually receive a check in the mail, consider it the same as winning a small lottery. Just as with the real lotteries, don’t be surprised if you receive nothing back.
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State Taxes
I’ve discussed on a number of occasions the strategy
of using a tax free state as the tax home for individuals and/or corporations
in order to avoid state taxes.
George & Barbara Bush have set the standard for this by using Texas
as their tax home while actually residing in Washington and Maine. Taxing states obviously don’t like this
tactic and are doing what they can to assess as many taxes as possible. One trick they use, with the full
cooperation of IRS, is to review lists of tax returns filed with addresses in
the state. If the state doesn’t
have a tax return for these taxpayers, it sends out a letter requesting
one. As with all tax matters, the
burden of proof is on taxpayers to prove they don’t owe state tax.
Whenever possible, it’s best to use a mailing
address on the tax returns that isn’t in the state with which you are not
filing a return. For example a
California address on the tax return for a Nevada corporation or an Arkansas
address on a Texas corporation return, would open the door for some unnecessary
scrutiny from the state taxing agencies.
The best thing is to keep them out of the information loop. Use a mail drop in the tax home state
if you don’t have someone to collect your mail there.
Attachments to State Returns
Most state tax returns piggyback on the federal
return. Some states require a
complete copy of the federal return to be attached, while others require
specific federal schedules. I
prepare tax returns for dozens of states and was always having to deal with
different attachment requirements for the different states. Often, clients would receive requests
for additional schedules. Sick of
this, I started a new policy a few years ago of attaching a copy of the
complete federal return to every state return I prepare. I do this for all types of tax returns
– individual, corporate, partnership, and fiduciary. It adds more pages than are required; but since I started
that practice, we have never had a state tax agency ask us for more information. Just a note for those of you who
prepare tax returns.
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Death Planning
I don’t intend to settle the debate over whether
it’s better to die suddenly or over a long period of time, such as with a
terminal illness. However, with
some advance notice, it does allow some plans to be made that could save a lot
of money, both in taxes and administrative and legal costs. If preserving your estate for your
heirs is important, there are strategies that should be considered.
One of the first impulses with the news of an
imminent demise is to liquidate assets, both to tidy things up and to free up
some cash to play with. I heartily
endorse both objectives and wish more people would enjoy the fruits of their
lifetime accumulations. However,
if an asset that has a low cost basis, such as depreciated rental property, is
sold while you are alive, the taxes could take a big chunk out of your net
worth. Rather than sell the
property and pay a large percentage to the tax collectors, I often advise
borrowing. Loan proceeds are not
considered taxable income and can be used for anything you want. The eight or nine percent you will have
to pay in tax deductible interest will be much less than the 30%+ you would
have to pay in capital gains taxes.
When you pass away, the potentially taxable capital gain that had
accrued during your lifetime is literally wiped off the books. The cost basis of those assets for your
heirs will be their market value at the time of your passing. The heirs could literally sell
everything right way and there would be no tax.
In Community Property states (AZ, CA, ID, LA, NV,
NM, TX, WA, WI), when assets are left to the surviving spouse, their entire
cost basis is stepped up to the current market value, essentially wiping out
all of the capital gains. In
non-community property states, only half of the basis is stepped up, leaving
the capital gains still intact for the surviving spouse’s half share of the
assets. An issue I have had to
deal with is people who have moved from a community property state (CA or LA)
to a non community property state (AR or MO). If one of the spouses dies, do the community property rules
apply or not? If the assets can be
traced back to origination in a community property state, they do receive the
benefit of the full basis step-up.
It is a gray area (as is 80%+ of the tax code) as to how long the
community property identification remains with the assets.
Taxation - Just a reminder that the receipt of
inheritances is tax free. The
income generated by the assets in the estate is taxed, usually via K-1s for the
beneficiaries.
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Day Trading
More and more people are jumping into the “easy money”
of online day trading, where stocks are owned for a matter of minutes or
hours. The frenzy has gotten so
crazy that people are quitting their jobs and doing this full time. That’s a short term outlook because
with more people playing the game, the profit margins will drop dramatically.
The hysteria over this is exactly like that with
casino gambling. To make the
comparison even closer, there will soon be capability to trade stocks 24 hours
a day. This is just like the
policy of having no clocks in casinos.
To come out a winner in day trading, it will take the same kind of
discipline as it does for gambling.
Set a loss limit and stop when you reach it. Set a winnings goal and quit when you reach it. Unfortunately, most people are just too
greedy and undisciplined and will lose their butts, just as with casino
gambling.
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Late Penalties
Most people misunderstand the penalty process
regarding late filing of tax returns.
They often get all worked up needlessly because the penalties are based
on the amount of taxes you owe with the return. If you owe no taxes or have a refund
due, there is no late filing penalty.
There is kind of penalty if you wait too long to file for a refund. If you file more than two years late,
you forfeit your refund. Double
standard alert: if you owe money, there is no time limit for the IRS to come
after you or your heirs.
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Education Tax Credits
Just a reminder that there a couple of new tax
credits on the 1998 1040 that are worth quite a bit of money. Neither credit is available to the evil
rich, which for these credits means AGI (adjusted gross income) of over $40,000
for a single person or $80,000 for a couple. Only one of these credits can be claimed on a return. On the tax returns I have already
prepared, the Hope Credit was higher; so that’s what I used.
Hope Scholarship Credit –
Nonrefundable credit for 100% of the first $1,000 and 50% of the second $1,000
of costs associated with the first two years of college. Maximum credit of $1,500. Available per student per year.
Lifetime Learning Credit –
Nonrefundable credit of 20% of up to $5,000 of qualified tuition and fees. Maximum credit of $1,000. Available per
taxpayer per year.
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Kerstetter Letter 11802 Deer Road Harrison, AR
72601
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