Ronnie

• An IRA owner, age 70-½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible. To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity. Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
• To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which you claim a deduction of over $500 does not have to be in good used condition or better if you include a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
• To deduct any charitable donation of money, regardless of amount, you must have a bank record, credit card statement, or a written communication from the charity showing the name of the charity and the date and amount of the contribution. These records should show the name of the charity, the date, and the amount paid. These requirements for monetary donations do not change or alter the long-standing requirement that you obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.
• Contributions are deductible in the year made. Donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Checks count for 2008 as long as they are mailed this year.
• Check that the organization is qualified. To check, go to IRS.gov and click “Search for Charities.” Churches, synagogues, temples, mosques, and government agencies are eligible to receive deductible donations, even though they often are not listed.
• For individuals, you can only claim charitable contributions if you itemize deductions. You will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If your deduction for all noncash contributions is over $500, a properly completed Form 8283 must be submitted with the tax return.

If you need help in planning your year-end charitable contributions, email me or call me at 214.957.3366.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD, CPA

The first is conversion from a traditional IRA to a Roth IRA. Even though contributions to Roth IRAs are not tax-deductible, Roths provide significant tax benefits. Roth IRAs provide:

• tax-free growth,
• tax-free income distributions in retirement (provided you are over age 59-1/2 and you have held your Roth IRA for five or more years),
• you may continue to make Roth IRA contributions after your reach age 70-1/2, and
• after you reach age 70-1/2 you do not have to take required minimum distributions each year.

For 2008, your Roth conversion limitation is reduced (phased out) as follows:

For married taxpayers filing joint returns (or a qualifying widow or widower), the phase-out begins with modified adjusted gross income of $159,000. You cannot make a Roth conversion if your modified adjusted gross income is $169,000 or more.

If your tax filing status is single, head of household, or married filing separately (and you did not live with your spouse at any time in 2008), the phase-out begins with modified adjusted gross income of $101,000. You cannot make a Roth conversion if your modified adjusted gross income is $116,000 or more.

• If your tax filing status is married filing separately and you lived with your spouse at any time during the year you cannot make a Roth IRA conversion if your modified adjusted gross income is $10,000 or more.
• The maximum amount that you may convert (or otherwise contribute) to a Roth IRA is the lesser of $5,000 or your taxable compensation for the year if you are 49 years of age or younger at the end of 2008. If you are age 50 or older before 2009, your maximum contribution is the lesser of $6,000 or your taxable compensation for the year.
• You must roll over into the Roth IRA the same property you received from the traditional IRA. I recommend a trustee-to-trustee transfer. If your Roth will be with the same investment firm that holds your traditional IRA, simply have them re-designate the traditional account as a Roth, rather than opening a new account or issuing a new contract. Conversions from other qualified retirement plans to a Roth are also possible, but may be subject to additional rules.

So, what’s the downside to converting a traditional IRA to a Roth? The amount converted is subject to regular income taxation in the year of the conversion. However, with the decline in the value of investments held in traditional IRAs and the prospect of higher individual income tax rates after 2008, this might be a good year to make a conversion.

My second thought for the day involves dividends. Currently, “qualified dividends” are subject to the same 15% maximum tax rate as long-term capital gains. This rate is expected to increase to 20 or 25% in 2009.  However, the provision in the law that permits dividends to be taxed at this very favorable tax rate was originally scheduled to expire after 2008. It was subsequently extended through 2010. There is a strong possibility that this extension will be repealed and the dividend rate will revert to regular income tax rates after 2008. With an expected maximum individual tax rate of 39.6% in 2009, this represents a potential tax increase of 164% on dividends received after 2008. Planning suggestions; take all dividends possible in 2008; corporations contemplating a dividend should pay them this year for the benefit of your shareholders.

I will continue to share year-end tax planning thoughts with you as they come to mind. If you have any questions concerning your year-end tax strategies, email me or call me at 214-957-3366.

Ronnie

Copyright 2008 Ronnie C. McClure, PhD CPA

For 2008, an individual may transfer $12,000 transfer and generation-skipping tax-free to an unlimited number of individuals. A married couple may transfer $24,000 without regard to which spouse’s name is on the securities. For example, a couple with four children and six grandchildren may transfer $240,000 at current market values to their family. Doing so moves all future appreciation, including a market recovery in this value, to future generations. These transfers will be free of any transfer tax and will not require filing a gift tax return.

For 2009, the amounts increase to $13,000 per individual and $26,000 for a couple.  Therefore, the same family may transfer an additional $260,000 of depressed securities to lower generation family members in January. The couple will then have moved $500,000 at current market value, and all future appreciation, out of their estates in a period of just over 45 days with no tax consequences.

Keep in mind that the income on these securities, interest or dividends for example, earned by a child who has not attained age 18 by the end of the tax year will generally be taxed at the child’s parents highest marginal tax rate. This does not include capital gains, however, when the securities are sold.

These gifts are not a slam-dunk decision, however. It is necessary to consider how capital gains will be taxed when the securities appreciate and are subsequently sold. 

Generally, a donor’s tax basis in gifted property carries over to the donee. Under this general rule, for example, if a couple transfers’ securities having a market value of $125,000 and a tax basis of $100,000 to a child, the child’s tax basis in those securities is also $100,000.  A subsequent sale of the securities at $125,000 results in a $25,000 capital gain that is taxed to the child. If the parents have held the stock for at least one year, the gain will be long-term capital gain to the child, even if sold immediately. In other words, the parents’ holding period of the securities "tacks" to the holding period of the child. That’s the general rule for appreciated property; special "dual basis" rules apply to gifts of property when the fair market value is less than the donor’s basis. This “dual basis” should give some pause in planning gifts of depreciated property.

Under the dual basis rule, the donee’s basis for determining loss in depreciated property is the lesser of the donor’s basis or fair market value on the date of the gift if the property is subsequently sold at a value less than the donor’s basis on the date of sale. Assume that a couple transfers securities having a market value of $90,000 and a tax basis of $100,000 to a child. The child subsequently sells the securities at their $90,000 fair market value. In this case, the child recognizes no gain or loss; the child’s basis is $90,000, and $10,000 of the parents’ basis has fallen through the cracks. In a like manner, assume the value of the securities continues to decline and are sold for $50,000. The child has a capital loss of $40,000 ($50,000 sales price less $90,000 basis) and, again, $10,000 of the parent’s basis has disappeared.

Assume, however, that the value of the securities fully recovers and continues to appreciate to a value of $150,000 at the time the child sells them. Here, the value is greater than the parents’ basis resulting in real gain. Now the child’s basis for determining taxable gain is the same $100,000 as it was in the hands of her parents and the child recognizes a gain of only $50,000.

The bottom line is that there are several considerations in gifting depreciated property. If you expect that the property will fully recover its value and continue to appreciate over the long-term, a gift now of securities at depressed value makes a lot of sense from the standpoint of estate tax planning. If you believe that the securities will recover some value before being sold, but not up to the level of the donor’s basis, you may need to consider the loss in basis that might occur. It may be more appropriate to sell the securities yourself, recognize the full loss, gift the cash proceeds to the child, and have the child reinvest the cash. I recommend the child postpone reinvestment in the same or substantially similar securities for 30 days to avoid possible application of the "wash sale" rule and the parents’ loss disallowed.

If you have specific questions concerning estate planning, please contact me at response@phdcpa.com or call me at 214.957.3366.

Ronnie

© 2008 Ronnie C. McClure, PhD, CPA

Neither candidate specifically addressed transfer taxes (estate, gift, and generation-skipping) in their acceptance speeches. With the need for increased revenue, Congress will not repeal them. Something must be put in place before 2010 estate tax holiday. I believe we are most likely to see continuation of the transfer tax programs in much the same fashion as currently exists, with an individual transfer tax exemption ranging from $3.5 million to $5 million. Carryover of a deceased spouses’ exemption amount to a surviving spouse may be appropriate, but will likely add additional complexity to the Internal Revenue Code, rather than reduce it. Use of a testamentary trust at the first spouses’ death will continue to be appropriate for non-tax reasons, even if not necessary to utilize that spouse’s transfer tax credit. The gift and estate transfer tax exemptions should be re-integrated to a single lifetime exemption as they were before the 2001 tax law changes.

Both candidates will monkey with corporate taxation. Obama will close “loopholes” and likely try to raise the rates. McCain espouses lowering them in order for U.S. corporations to be more competitive worldwide. Obama must realize that a “loophole” is tax “incentive” enacted by Congress to encourage economic behavior. Those incentives become loopholes only when a given taxpayer is unable to take advantage of them. Closing loopholes simply ends economic behavior incentives previously thought to be desirable.

With regard to corporate taxes, both candidates must realize that corporations do not pay taxes; people pay taxes. Which people pay corporate taxes depends on the corporation’s ability to shift the burden of the levy. Very simplistically, a corporation has four alternatives for shifting its tax burden. If a corporation completely absorbs the tax, the burden is shifted to shareholders in the form of lower current or future dividends. The corporation may shift the burden to its customers or clients in the form of higher prices. Employees bear the corporate tax burden if the corporation maintains its revenue, dividends, and investments and cuts (or defers increases) in wages or employee benefits, or cuts jobs. A corporation’s only other alternative to shift the burden is to cut expenses (which are income to someone) and reduce investment in plant, equipment, research, and technology. In these taxing times the public should not be lulled into believing that a corporate tax increase will have no impact on an individual’s economic wellbeing.

The debate is on. It will certainly intensify after November 2 when a new administration is being formed. The year 2009 will be a year of tax law change. The only remaining question is, “Whose ox will get gored?”

Ronnie

© 2008 Ronnie C. McClure