Saturday, March 26, 2011

Is all this trouble worth it?

Q.  My dad told me to be certain to keep track of all the reinvested dividends on the AT&T stock he gifted me about 8 years ago. He keeps asking me if I've kept records, and I must admit, at first I did, but then stopped as I have no idea why I need to go to this trouble. Is there a reason I really need to do this? JF, Nebraska

A.  Yes, because each time you reinvest a dividend, you are re-purchasing the stock. For example, let's say your gift had a tax basis of $5,000 when he gifted the stock to you. Let's say you decide to sell the stock this year, and you receive $7,000 for the shares. On the surface, that would seem like a gain of $2,000.

However, AT&T has paid a dividend ranging from $0.33+ cents a share to $0.43 cents a share since 2005. Each year, for each 100 shares owned, you would have received and paid an additional amount ranging from $132 to $172 in reinvested dividends. Using an average of $152 for 5 years = $760.  This increases your cost basis from $5,000 to $5,760, making the gain on your sale $1,240 instead of $2000.  If you are paying a 15% capital gain, the savings in tax amounts to $114. 

I realize my example is overly simplified and I didn't go back 8 years, but I think you can see the importance of keeping track of all re-invested dividends for any securities you may own.

Friday, March 25, 2011

What's the big deal?

Q.  Last year I refinanced one of my rentals and my personal residence. My preparer wants me to send her a copy of the escrow settlement statement. I gave her the settlement fees. Why does she need to see the actual document?

A.  Very briefly, there are items included in the escrow settlement fees which may not be currently deductible. As an example, if you refinanced your loan for 15 years, the points you paid, if any, must be amortized over 15 years on a re-fi. The rules differ for the type of loan and type of property.

Another reason I ask for escrow settlement statements is to have copies for when the properties are finally disposed. I had one couple who made 4 major moves in the US and finally disposed of one of the properties. I found 13 escrow settlements which pertained to this one property which had long been forgotten about and partially lost by the movers. How happy do you think they were when I pulled out every re-fi and was able to increase their cost basis by several thousand dollars?

Tax Tip:  Very few of those pesky costs to re-fi are deductible in the year of the re-fi. They are deductible, however, when you finally dispose of the property. This can add tens of thousands of dollars to your cost basis, so be sure to save them until you sell the property!

Thursday, March 24, 2011

Charitable to whom?

Q.  Last year I donated $10,000 to the University my grandson attends to help with his tuition. This can be deducted as a charitable donation, right? CJ, North Dakota

A.  Well, you were indeed charitable to your grandson, but not to the University as you specified your donation as tuition. The gift you made to your grandson has no income tax implications. Sorry!

Wednesday, March 23, 2011

Making sense of a 1041K-1 Form

Q.  I gave my preparer all the proper documents for the preparation of both the trust return and my individual return. For the life of me, I can't figure out how the figures from the trust return correlate to either the 1041 K-1 form or to my individual return. I never seem to be able to get a hold of my CPA, he's always with a client. Can you help? AJ, Arizona

A.  Trust returns are a unique kind of entity, in that they are not treated the way an individual tax is. For example, you are allowed to deduct the expenses related to the trust directly from income. Additionally, you are allowed to allocate the net income to have expenses offset the highest taxable income first. No other tax return allows us to do that!

I realize how busy your CPA is, and suggest you make an appointment for after April 18th this year. He or she should be happy to review it with you and answer any remaining questions.

Tuesday, March 22, 2011

A lost opportunity? Perhaps. . .

Q.  At a dinner table discussion last night, I learned that if I roll my traditional IRA into a Roth IRA, the limitation on Adjusted Gross Income has been lifted and I can defer the payment of the tax over the next 2 years. I'm seriously considering this. What do you think?

A.  Your dinner table conversation was half true. It is true the AGI limitation has been lifted, which is really good news for many, many taxpayers. The half truth is the deferral of payment of the tax was a one time opportunity only for those rolling their IRA's over to a Roth IRA in 2010. If you choose to do so this year, (which if feasible for you considering the extra tax burden) you will need to adjust your estimated tax payments to cover the entire additional tax.

Having said that, a Roth IRA or now a Roth 401K, are the only vehicles available which allow us to invest in our retirement and have the earnings totally tax free, as long as the requirements are met. I highly endorse the opportunity to do so. With a little planning, even if you can only afford to roll over a few thousand dollars each year, the savings in tax 10, 20, or even 30 years from now could be enormous!

Monday, March 21, 2011

Better safe than sorry

Tax Tip:  Having a separate business entity such as an LLC, Partnership or Corporation is a great way to separate business from personal expenses if you have the type of business and degree of profitability to offset the additional costs of maintaining the entity.

These separate taxable entities live on paper, which means there is considerable extra paperwork involved in order to maintain them. One essential, often overlooked, is to have an accountable business reimbursement plan.
For a plan to be considered accountable, the following requirements must be met:

  • The expenses must have a business purpose
  • The employee must properly substantiate the expenses to the employer, and
  • In the case of allowances or advances, any amount in excess of the substantiated expenses must be returned to the employer.