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By month:January 2006

Beware of Tax Reform

Tax reform always sounds great. For example, the 1986 Tax Reform Act dropped the top tax rate from 50 percent to 28 percent. That sounded great. But this tax reform also reduced the after-tax rate of return on a real estate investment by 60 percent. If you were making a 20 percent return on your rental before the reform, you were making 8 percent afterwards. Students of this tax law sold their properties before the nonstudents heard about this cut in profits.

Estate Planning for 2006 and Beyond

Current law deletes the federal estate tax in 2010 and then reinstates it at higher rates in 2011. The year 2010, when there is no estate tax, contains its own unique planning requirements. If you are concerned about taking care of your loved ones and protecting what you have worked so hard to build, free your mind of a major worry by getting your federal estate plan in order.

$500,000 Exclusion

You do not need to be married during the 24 months of residential use to claim the $500,000 exclusion of profits on the sale of your home.

Fake 1099 on Auto Purchase Creates Trouble

The auto dealer sent this customer a bogus 1099 because the customer refused to return to the dealership and redo the “no interest” loan to an interest bearing loan. The dealer made a mistake originally and then wanted the customer to help fix the problem—at the customer’s expense. The customer said, “No.” Later, when the bogus 1099 showing interest income from the no-interest loan showed up in this customer’s mailbox, the customer took this dealership problem to the IRS.

Victim Not Entitled to Embezzler’s Estimated Tax Payments

This taxpayer embezzled money from his employer, got caught, and died in jail. Before he died, the embezzler sent the embezzled money to the IRS as an estimated tax payment.

Van Donation Valued at Sale Price, Not Blue Book or Appraised Value

The IRS told lawmakers that a number of people were cheating on vehicle donations and that some changes in the rules could put a quick stop to that. This court case explains why lawmakers went along with the IRS and enacted the changes that are in effect today.

Are Corporate Advances to the Owner Loans or Dividends?

To make sure that the IRS will treat the C corporation’s advances to the employee-owner as tax-favored loans rather than tax-penalized dividends, make sure you can answer “yes” to the seven questions.

Shaky Proof in Gambling Income and Loss Case

When you win more than $1,200 at the slots, the casino must report your winnings to the IRS. In this court case, the taxpayers mistakenly reported gambling income of $21,100 and the IRS received 1099s showing income of $44,464. This difference in reported income did not look good in court. But these taxpayers fared far better in court than anyone in their right mind could expect because they had proof that this court liked.

Home Office for Corporation

The IRS audit manual states: “If you rent all or part of your residence to your employer and use the rented portion when performing services for the employer, you cannot deduct home-office expenses attributable to the rental.” Thus, forget the rental to the corporation and use the corporate-reimbursement-to-the-employee strategy for maximum benefits.

Who Owns This Property?

When you receive property in which you had an interest as a result of a family member’s death, make sure you clarify your income-tax basis in this property right away.

Interest on Refinanced Rental

The security for the loan does not determine if the interest is tax deductible or not.

Both CPA and IRS Wrong on Audit of Home Office

This taxpayer had his CPA with him during the IRS audit of his tax return. When the home-office deduction came up, the CPA agreed with the IRS that this taxpayer did not qualify for the home-office deduction under Soliman—a Supreme Court case that lawmakers made obsolete in 1999 with enactment of a new law. Thank goodness this taxpayer was a subscriber to this newsletter and, because of that subscription, knew the rules on the home office.

Mortgage Interest

This taxpayer takes out a $4 million mortgage and makes the interest on $1 million of the mortgage deductible as home-mortgage interest and the interest on the remaining $3 million of the mortgage deductible as investment interest.

Life Insurance Loan

Interest paid on a loan used to buy an investment is considered investment interest. Investment interest is deductible to the extent of investment income. The loan used to buy this life insurance is not a loan to buy an investment.

Auditor Gives 80%

During an audit, the IRS can pretty much allow or disallow whatever it wants. In this first stage of the audit process, the burden of proof is on you.

$75 Rule on Vehicles

Under tax law, your vehicle is considered “listed property.” The IRS has a regulation that applies the $75 receipt rule to listed property.


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