By: JIM VANDER SPEK - For the North County Times on December 3, 2005
Is your low “Prop 13” property tax basis stopping you from selling your home? Do you know that there is a way to transfer and keep your low tax basis even after selling and moving?
Here are the basics of how to claim a “Prop 60” property tax benefit:
You need to be over 55 years of age when you sell. For couples as well as individuals, this is generally a “once in a lifetime” claim.
You need to buy a home of equal or lesser value than the one you sell. “Moving on up” will not work since there is no partial benefit available. Keep in mind that the comparison is of “value to value” not “selling price to purchase price”. Suspicious transactions will be investigated. Interestingly, if you wait more than a year to buy, the replacement can be slightly more than equal value. This is due to an inflation formula that allows you to buy for more if you wait more than twelve months for your replacement property.
Your new home must be in the same county as that of your previous home or in one of the counties that allow inter-county transfers. For example, you could sell in Riverside County and buy in San Diego County and still get the benefit. However, the reverse transaction of selling south and moving north will not work since Riverside does not approve inter-county transfers. Other counties besides San Diego who have allowed this are Alameda, Los Angeles, Orange, Ventura, San Mateo and Santa Clara.
You must buy within two years of selling. Even if building a new home, you will need to move in within two years of selling your prior home.
You must file an application within three years of buying your new home. It is not too late if you bought and sold a few years ago as long as you qualify and apply in time.
These rules are complicated and you should contact the assessor’s office of the county you are moving into or obtain other professional help if this is in your plans. The assessor’s office can provide all the forms you need.
It is easy to confuse these rules with those relating to the capital gains exclusions on home sales, which provide an income tax benefit in the year of sale. In contrast, the above rules provide a property tax break, which can stretch for many years.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
Friday, December 16, 2005
Monday, November 21, 2005
Should you operate as an LLC?
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By: JIM VANDERSPEK - For the North County Times on March 27, 2005
Should you operate your small business as a Limited Liability Company (LLC) or as an S corporation?Ever since LLCs were permitted a few years ago, many new businesses have been told that it as a preferred choice. However, if you own a small business, you will probably find that setting yourself up as an S corporation is the way to go.
Here's why:
First, this choice will probably save you Social Security and Medicare taxes. In your S corporation, you can pay yourself a salary and issue yourself a W-2 at the end of the year. Only the amount on your W-2 will be subject to these taxes. Other profits, even if they are distributed, remain exempt.Since there is no limit on the amount of earnings that are subject to Medicare tax and the ceiling on earnings subject to Social Security taxes keeps rising, this is frequently the primary motive for setting up an S corporation.
However, one must not be too greedy when avoiding Social Security and Medicare taxes. The IRS is increasingly coming down on those S corporations which underpay their owner. As the pendulum swings to raising taxes again, this is one benefit that could be deemed a loophole. In fact, a proposal, which is gaining favor, would subject all profits from professionals who operate within S corporations to the taxes.
This result already exists for most small business limited liability companies. Since these are usually taxed as partnerships, Social Security and Medicare taxes kick in at full force.Another reason you may prefer using an S corporation is that it could work better as a way of protecting yourself from personal liability. In many cases this protection is the underlying reason for choosing either the S corporation or the limited liability structure. In our litigious society, there is a huge benefit in being able to isolate your personal assets from those in your business.
The difference is that the case law surrounding limited liability companies is very undeveloped. Each LLC is generally created by its own unique document. The chances are, in a serious lawsuit, that these organizing documents and other similar paperwork could be flawed or challenged.
In contrast, corporations including S corporations are fairly easy to set up and operate.It is less likely that your corporate structure will be successfully attacked.Finally, unlike virtually any other type of business, limited liability companies operating in California are subject to a tax on their gross receipts as well as being subject to a minimum tax. Paying taxes even when you are losing money can be especially distressing.
Both S corporations and LLCs are subject to a minimum California tax of $800. This could go even higher if you have high income. However, you will generally pay less in California income taxes as an S corporation.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
By: JIM VANDERSPEK - For the North County Times on March 27, 2005
Should you operate your small business as a Limited Liability Company (LLC) or as an S corporation?Ever since LLCs were permitted a few years ago, many new businesses have been told that it as a preferred choice. However, if you own a small business, you will probably find that setting yourself up as an S corporation is the way to go.
Here's why:
First, this choice will probably save you Social Security and Medicare taxes. In your S corporation, you can pay yourself a salary and issue yourself a W-2 at the end of the year. Only the amount on your W-2 will be subject to these taxes. Other profits, even if they are distributed, remain exempt.Since there is no limit on the amount of earnings that are subject to Medicare tax and the ceiling on earnings subject to Social Security taxes keeps rising, this is frequently the primary motive for setting up an S corporation.
However, one must not be too greedy when avoiding Social Security and Medicare taxes. The IRS is increasingly coming down on those S corporations which underpay their owner. As the pendulum swings to raising taxes again, this is one benefit that could be deemed a loophole. In fact, a proposal, which is gaining favor, would subject all profits from professionals who operate within S corporations to the taxes.
This result already exists for most small business limited liability companies. Since these are usually taxed as partnerships, Social Security and Medicare taxes kick in at full force.Another reason you may prefer using an S corporation is that it could work better as a way of protecting yourself from personal liability. In many cases this protection is the underlying reason for choosing either the S corporation or the limited liability structure. In our litigious society, there is a huge benefit in being able to isolate your personal assets from those in your business.
The difference is that the case law surrounding limited liability companies is very undeveloped. Each LLC is generally created by its own unique document. The chances are, in a serious lawsuit, that these organizing documents and other similar paperwork could be flawed or challenged.
In contrast, corporations including S corporations are fairly easy to set up and operate.It is less likely that your corporate structure will be successfully attacked.Finally, unlike virtually any other type of business, limited liability companies operating in California are subject to a tax on their gross receipts as well as being subject to a minimum tax. Paying taxes even when you are losing money can be especially distressing.
Both S corporations and LLCs are subject to a minimum California tax of $800. This could go even higher if you have high income. However, you will generally pay less in California income taxes as an S corporation.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
Online shopping? Pay the tax
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By: JIM VANDER SPEK - For the North County Times on March 21, 2004
Are you ready to pay a use tax? California rightly believes that it is not collecting enough of this tax. In fact, most people don't even know what a use tax is.
The use tax is the lightweight twin of the sales tax.
Although you think you pay sales taxes every day, the sales tax added to your purchases are actually owed and paid by retailers. It is a vital tax for California and its local governments. Cities compete fiercely for their valuable slice out of each sale transacted in their boundaries. In areas such as North County or Riverside County with lots of rival cities, the result is that vast valuable tracts of prominent real estate have been turned into commercial ghettos, full of car dealers and big boxes.
The big problem with the sales tax is the change in the way consumers are buying their stuff. When you purchase items from out of state by means of catalogs or on the Internet, California does not collect the sales tax if the seller does not choose to pay it.
Although you may correctly believe that you are avoiding the sales tax, you may not have known that for all such transactions, you still owe the use tax. This is because the use tax is owed by the buyer, not the seller, even though the rate is identical. It only applies in situations where the state does not collect its sales tax. In this sense, it is very comprehensive. Internet and catalog purchases, as well as purchases made by residents while traveling out of state, are all covered.
The effort now under way is to educate the public and to simplify the means by which people pay the use tax on all purchases that have escaped the sales tax. Basically, you are being asked to track all of such purchases, multiply the total by the 7.75 percent rate used in this area, and then pay this when you file your income tax return.
You can reduce this by any related sales tax paid to another state.You are asked to declare your tax on line 51 of the new 2003 California form 540. Before this, you had to search out an obscure form, fill it out and pay your tax in that way. Very few people were doing this.California is not the first state to use this straightforward approach.
Dozens of others have launched similar initiatives. All states with sales taxes are realizing that the sales tax is particularly susceptible to circumvention. What is unique is that California has added the same "use tax" line to other tax forms, such as on corporate income and information tax returns.
Everyone is being asked to kick in, including corporations and nonprofits, since it is not only individuals who are escaping the sales tax. For example, more than a few business owners have chosen to buy computers or other equipment and had it shipped to them from out of state after factoring in the sales-tax savings.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
By: JIM VANDER SPEK - For the North County Times on March 21, 2004
Are you ready to pay a use tax? California rightly believes that it is not collecting enough of this tax. In fact, most people don't even know what a use tax is.
The use tax is the lightweight twin of the sales tax.
Although you think you pay sales taxes every day, the sales tax added to your purchases are actually owed and paid by retailers. It is a vital tax for California and its local governments. Cities compete fiercely for their valuable slice out of each sale transacted in their boundaries. In areas such as North County or Riverside County with lots of rival cities, the result is that vast valuable tracts of prominent real estate have been turned into commercial ghettos, full of car dealers and big boxes.
The big problem with the sales tax is the change in the way consumers are buying their stuff. When you purchase items from out of state by means of catalogs or on the Internet, California does not collect the sales tax if the seller does not choose to pay it.
Although you may correctly believe that you are avoiding the sales tax, you may not have known that for all such transactions, you still owe the use tax. This is because the use tax is owed by the buyer, not the seller, even though the rate is identical. It only applies in situations where the state does not collect its sales tax. In this sense, it is very comprehensive. Internet and catalog purchases, as well as purchases made by residents while traveling out of state, are all covered.
The effort now under way is to educate the public and to simplify the means by which people pay the use tax on all purchases that have escaped the sales tax. Basically, you are being asked to track all of such purchases, multiply the total by the 7.75 percent rate used in this area, and then pay this when you file your income tax return.
You can reduce this by any related sales tax paid to another state.You are asked to declare your tax on line 51 of the new 2003 California form 540. Before this, you had to search out an obscure form, fill it out and pay your tax in that way. Very few people were doing this.California is not the first state to use this straightforward approach.
Dozens of others have launched similar initiatives. All states with sales taxes are realizing that the sales tax is particularly susceptible to circumvention. What is unique is that California has added the same "use tax" line to other tax forms, such as on corporate income and information tax returns.
Everyone is being asked to kick in, including corporations and nonprofits, since it is not only individuals who are escaping the sales tax. For example, more than a few business owners have chosen to buy computers or other equipment and had it shipped to them from out of state after factoring in the sales-tax savings.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
Annuities an option to consider
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By: JIM VANDER SPEK - For the North County Times on August 22, 2004
Has someone tried to sell you an annuity?
An annuity in its most basic structure provides an income stream in exchange for a fixed sum paid upfront. For example, if you are 80, you could be guaranteed a monthly income of about $1,100 if you pay $100,000 upfront to an insurance company. You can try out different scenarios by going to immediateannuities.com.
Annuities have morphed into many varieties. You can now buy an annuity that invests and guarantees income or principal in unlimited variations. For example, your annuity may guarantee an income equal to certain underlying investments or include a guaranteed death payment to your surviving beneficiary.
One of the appealing features of an annuity is that you can defer income within the annuity until you are ready to withdraw it. This has caused many people to treat them as retirement vehicles, especially since you cannot generally get the money easily until you are about 60.
Annuities are under attack from many sides, primarily because they are being pushed on people for whom they are not appropriate and because many are excessively expensive. Due to the complexity of plans offered, it takes an expert to properly analyze these products. The person selling to you can quickly reap 3 percent or more by making a sale, but you will be stuck with the product you choose for a very long time.
Without getting into all the pros and cons of annuities, I want to look at the idea of buying annuities within retirement plans, such as IRAs. At first glance, this looks like a mismatch. After all, IRA monies already have income deferral built in.
However, buying an annuity inside of your retirement plan may be the only way for you to guarantee a retirement income down the road. Your IRA or 401(k) funds may represent your largest asset. You may be counting on these funds to carry you through retirement. But who knows how long you will live and how much you can spend now? In a volatile investment environment, hitching your quality of life to financial markets may not help you sleep at night. Getting a big insurance company to guarantee your income for life with at least part of your funds may be a good idea.
No matter where you look, you won't get as sweet a deal as the guaranteed income plans provided certain government employees. These lucky ones often retire early and receive generous lifetime incomes, including cost-of-living adjustments. Properly valued, many of such plans are easily worth more than $1 million and can't be bought in the private market. Get in on one of these, if you can, before taxpayers and our profligate politicians wise up.
The key to buying any annuity is to obtain advice you can trust and to shop and compare among competing products. You need to fully understand the guarantees and restrictions built into your plan before you buy. Try going direct for comparisons with companies such as Fidelity or Vanguard, which may charge lower fees. Since this could be your longest-term investment, you need to make the most informed choice possible.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
By: JIM VANDER SPEK - For the North County Times on August 22, 2004
Has someone tried to sell you an annuity?
An annuity in its most basic structure provides an income stream in exchange for a fixed sum paid upfront. For example, if you are 80, you could be guaranteed a monthly income of about $1,100 if you pay $100,000 upfront to an insurance company. You can try out different scenarios by going to immediateannuities.com.
Annuities have morphed into many varieties. You can now buy an annuity that invests and guarantees income or principal in unlimited variations. For example, your annuity may guarantee an income equal to certain underlying investments or include a guaranteed death payment to your surviving beneficiary.
One of the appealing features of an annuity is that you can defer income within the annuity until you are ready to withdraw it. This has caused many people to treat them as retirement vehicles, especially since you cannot generally get the money easily until you are about 60.
Annuities are under attack from many sides, primarily because they are being pushed on people for whom they are not appropriate and because many are excessively expensive. Due to the complexity of plans offered, it takes an expert to properly analyze these products. The person selling to you can quickly reap 3 percent or more by making a sale, but you will be stuck with the product you choose for a very long time.
Without getting into all the pros and cons of annuities, I want to look at the idea of buying annuities within retirement plans, such as IRAs. At first glance, this looks like a mismatch. After all, IRA monies already have income deferral built in.
However, buying an annuity inside of your retirement plan may be the only way for you to guarantee a retirement income down the road. Your IRA or 401(k) funds may represent your largest asset. You may be counting on these funds to carry you through retirement. But who knows how long you will live and how much you can spend now? In a volatile investment environment, hitching your quality of life to financial markets may not help you sleep at night. Getting a big insurance company to guarantee your income for life with at least part of your funds may be a good idea.
No matter where you look, you won't get as sweet a deal as the guaranteed income plans provided certain government employees. These lucky ones often retire early and receive generous lifetime incomes, including cost-of-living adjustments. Properly valued, many of such plans are easily worth more than $1 million and can't be bought in the private market. Get in on one of these, if you can, before taxpayers and our profligate politicians wise up.
The key to buying any annuity is to obtain advice you can trust and to shop and compare among competing products. You need to fully understand the guarantees and restrictions built into your plan before you buy. Try going direct for comparisons with companies such as Fidelity or Vanguard, which may charge lower fees. Since this could be your longest-term investment, you need to make the most informed choice possible.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
The law and what it means to you
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By: JIM VANDER SPEK for the North County Times on June 8, 2003
How much will the new tax law signed by President Bush last month help you?
The most immediate benefit will go to you if you received a child tax credit last year.. With the child credit increasing to $1,000 from $600 in 2003, Congress wants to pass out the money now. Here is how this works:
If you received a $600 credit for any child born after 1986 when you filed your 2002 tax return, you will be eligible for an additional $400 advance credit this year. You will automatically receive a $400 check in the mail for each child sometime in late July or early August.
For any child born in 2003, you will need to wait until you file your return at the end of the year to receive your credit. The credit only applies to those who pay income taxes.. This is why some people consider it discriminatory against the poor.
Unless you are a very low-income taxpayer, your taxes will drop because of the new law. If your top marginal rate was 35 percent, 30 percent or 28 percent, your rates will drop a full 2 percent. Although the bottom rate of 10 percent did not go down, this bottom rate now applies to more income. Married couples will not move up to a higher bracket until their taxable income is over $14,000, and higher-income taxpayers also will have more of their income subject to this lower rate.
To help you get the benefit of these lower rates right now, the government is issuing new withholding schedules to employers to increase take-home pay this year.
If you are fortunate enough to be an investor, the taxable rate on stock dividends and capital gains drops to 15 percent. The new capital gains rate applies to sales after May 6. As you can imagine, these new rules raise the complexity factor another notch.
With tax rates dropping on long-term capital gains and stock dividend income, it may make sense to keep stocks and stock mutual funds outside of your annuities, IRAs and other tax deferred accounts while shifting non-dividend income producing investments back in.
The reason for this is that all income distributed from tax-deferred accounts is taxed at ordinary income rates. The new breaks on capital gains and dividends won't help you if such income passes through those accounts.
Another group benefiting from the new tax law is married couples who do not itemize. Up until now, these couples had a lower standard deduction than if they were unmarried. The new law increases the deduction so that it equals the sum of two single standard deductions. This partly relieves the "marriage penalty" that is still alive and well in other parts of the tax code.
Congress lost its nerve when it came to dealing with the Alternative Minimum Tax. The AMT was adjusted only slightly, making tax planning even more difficult. Much of the benefit from the new rates could be nullified if you are part of the increasing group that falls under the AMT.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
By: JIM VANDER SPEK for the North County Times on June 8, 2003
How much will the new tax law signed by President Bush last month help you?
The most immediate benefit will go to you if you received a child tax credit last year.. With the child credit increasing to $1,000 from $600 in 2003, Congress wants to pass out the money now. Here is how this works:
If you received a $600 credit for any child born after 1986 when you filed your 2002 tax return, you will be eligible for an additional $400 advance credit this year. You will automatically receive a $400 check in the mail for each child sometime in late July or early August.
For any child born in 2003, you will need to wait until you file your return at the end of the year to receive your credit. The credit only applies to those who pay income taxes.. This is why some people consider it discriminatory against the poor.
Unless you are a very low-income taxpayer, your taxes will drop because of the new law. If your top marginal rate was 35 percent, 30 percent or 28 percent, your rates will drop a full 2 percent. Although the bottom rate of 10 percent did not go down, this bottom rate now applies to more income. Married couples will not move up to a higher bracket until their taxable income is over $14,000, and higher-income taxpayers also will have more of their income subject to this lower rate.
To help you get the benefit of these lower rates right now, the government is issuing new withholding schedules to employers to increase take-home pay this year.
If you are fortunate enough to be an investor, the taxable rate on stock dividends and capital gains drops to 15 percent. The new capital gains rate applies to sales after May 6. As you can imagine, these new rules raise the complexity factor another notch.
With tax rates dropping on long-term capital gains and stock dividend income, it may make sense to keep stocks and stock mutual funds outside of your annuities, IRAs and other tax deferred accounts while shifting non-dividend income producing investments back in.
The reason for this is that all income distributed from tax-deferred accounts is taxed at ordinary income rates. The new breaks on capital gains and dividends won't help you if such income passes through those accounts.
Another group benefiting from the new tax law is married couples who do not itemize. Up until now, these couples had a lower standard deduction than if they were unmarried. The new law increases the deduction so that it equals the sum of two single standard deductions. This partly relieves the "marriage penalty" that is still alive and well in other parts of the tax code.
Congress lost its nerve when it came to dealing with the Alternative Minimum Tax. The AMT was adjusted only slightly, making tax planning even more difficult. Much of the benefit from the new rates could be nullified if you are part of the increasing group that falls under the AMT.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
Invest now for future
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By: JIM VANDER SPEK - For the North County Times January 10, 2004
With the stock market roaring back, you may be eager to invest more into your retirement accounts. If your employer has a 401(k) or similar plan, now is the time to determine the maximum that you can manage to contribute on a consistent level and lock this in for all of 2004. Committing to this lets you take advantage of three big benefits.
The first is that payroll deduction contributions don't hurt so much, since they are gradual and also because less taxes are withheld. Secondly, you won't miss out on any money that your employer "matches." Finally, by investing each month, you can dribble money into your investments all year long. This is called "dollar cost averaging," and is a proven investment strategy. With new limits up to $14,000 per year, few complain that they can't put away more.
If your employer is not offering a 401(k)-type plan, you may want to lobby for a SIMPLE plan starting in 2004. For firms that have fewer than 100 employees, this is a very low-cost, uncomplicated 401(k)-type plan, which allows you to put away up to $9,000 a year.
For self-employed taxpayers, the most popular plan is called a SEP. It allows you to deduct about 20 percent of your income or as much as $40,000 under the right circumstances. You have until your tax returns are due to make these payments and to deduct these on your 2003 return.
Of course, if none of the above apply, your only option may be to invest money into an IRA. The limit for 2003 is $3,000, or $3,500 if you are older than 49. You have until April 15 to invest. With these higher limits, the IRA starts to make sense for more and more taxpayers.
The most frequently asked question about IRAs is whether or not to go with a Roth IRA. A Roth IRA does not generate a deduction, but will generate tax-free income when you pull it out. On the other hand, a conventional IRA will give you a 100 percent deduction right now. So, which is better for you?
The key is estimating what kind of income you will have when you retire.If you are looking at a nice retirement income at that time, drawing from a regular IRA could generate heavy taxes and a Roth may be your best bet. On the other hand, if you anticipate a meager retirement income, you should grab your deduction now and use your tax savings to save even more money outside of your retirement accounts. Without a large retirement income, taxes will be the least of your problems.
Even if you have maxed out your 401(k) or other qualified plan, there may still be a way to save more. Unless you have quite high income levels, a Roth is still available for you and will make an ideal long-term investment. In fact, the majority of Roth IRAs are opened by those who are well enough off to supplement existing plans.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
By: JIM VANDER SPEK - For the North County Times January 10, 2004
With the stock market roaring back, you may be eager to invest more into your retirement accounts. If your employer has a 401(k) or similar plan, now is the time to determine the maximum that you can manage to contribute on a consistent level and lock this in for all of 2004. Committing to this lets you take advantage of three big benefits.
The first is that payroll deduction contributions don't hurt so much, since they are gradual and also because less taxes are withheld. Secondly, you won't miss out on any money that your employer "matches." Finally, by investing each month, you can dribble money into your investments all year long. This is called "dollar cost averaging," and is a proven investment strategy. With new limits up to $14,000 per year, few complain that they can't put away more.
If your employer is not offering a 401(k)-type plan, you may want to lobby for a SIMPLE plan starting in 2004. For firms that have fewer than 100 employees, this is a very low-cost, uncomplicated 401(k)-type plan, which allows you to put away up to $9,000 a year.
For self-employed taxpayers, the most popular plan is called a SEP. It allows you to deduct about 20 percent of your income or as much as $40,000 under the right circumstances. You have until your tax returns are due to make these payments and to deduct these on your 2003 return.
Of course, if none of the above apply, your only option may be to invest money into an IRA. The limit for 2003 is $3,000, or $3,500 if you are older than 49. You have until April 15 to invest. With these higher limits, the IRA starts to make sense for more and more taxpayers.
The most frequently asked question about IRAs is whether or not to go with a Roth IRA. A Roth IRA does not generate a deduction, but will generate tax-free income when you pull it out. On the other hand, a conventional IRA will give you a 100 percent deduction right now. So, which is better for you?
The key is estimating what kind of income you will have when you retire.If you are looking at a nice retirement income at that time, drawing from a regular IRA could generate heavy taxes and a Roth may be your best bet. On the other hand, if you anticipate a meager retirement income, you should grab your deduction now and use your tax savings to save even more money outside of your retirement accounts. Without a large retirement income, taxes will be the least of your problems.
Even if you have maxed out your 401(k) or other qualified plan, there may still be a way to save more. Unless you have quite high income levels, a Roth is still available for you and will make an ideal long-term investment. In fact, the majority of Roth IRAs are opened by those who are well enough off to supplement existing plans.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
Control your fate; sign health directive
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By: JIM VANDER SPEK - For the North County Times on January 24, 2004
There is probably no worse financial scenario for your family than being responsible for someone who is stuck in medical limbo. The importance of this issue was highlighted by the tragic situation of a comatose woman in Florida last year. Her family and community are being torn by difficult decisions that she can no longer make. Think of the expense and grief they all could have been spared if she had laid out her preferences before she was thrust into this horrible situation.
Fortunately, an inexpensive and complete solution to this sensitive problem has become available. It is called the Advance Health Care Directive. By taking the time to complete this "fill in the blanks" document, you will answer questions such as:
1. Who is it that you want to make decisions about your health care, should you no longer be able to speak for yourself? The person you select will become your agent if the need occurs and will make important decisions for you. For example, that person will be authorized to decide if extraordinary steps will be taken to prolong your life when you are in an "end of life" situation. If you want to limit this power, there are ways to do this, also.
2. How exactly do you want to be treated? Just picking an agent is not enough if you don't instruct that person about your desires.The AHCD walks you through the kinds of hard choices most of us don't want to consider. It provides a way to express your values and preferences.
3. Do you want to be an organ donor? If you know someone waiting for a kidney, lung or other vital organ, you know that there is a critical shortage of donors. Without expressing your willingness to be a donor, it won't happen. By addressing this when you fill out the AHCD, you could save someone else's life.
Once you have filled out the AHCD, you need to make sure that it is available when needed. You may want to give a copy to your primary physician. You may also want to give a copy to your designated agent or to family members.
The obvious ones needing an AHCD are the elderly or terminally ill.
However, it makes sense for everyone, even if they are young and in good health.
Who knows what tragic circumstance could be just around the corner? Surely, none of us wants to complicate the lives of our loved ones by not making our wishes crystal clear.
The AHCD is an improvement over a "living will," which is a similar document no longer used, even if it has a less catchy name. Since it is designed to be a do-it-yourself form, you should be able to create your personal AHCD without professional help. Of course, if you get confused, it makes sense to get some legal help.
Blank AHCD forms are available in a number of places, including our Web site at vanderspekcpas.com.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
By: JIM VANDER SPEK - For the North County Times on January 24, 2004
There is probably no worse financial scenario for your family than being responsible for someone who is stuck in medical limbo. The importance of this issue was highlighted by the tragic situation of a comatose woman in Florida last year. Her family and community are being torn by difficult decisions that she can no longer make. Think of the expense and grief they all could have been spared if she had laid out her preferences before she was thrust into this horrible situation.
Fortunately, an inexpensive and complete solution to this sensitive problem has become available. It is called the Advance Health Care Directive. By taking the time to complete this "fill in the blanks" document, you will answer questions such as:
1. Who is it that you want to make decisions about your health care, should you no longer be able to speak for yourself? The person you select will become your agent if the need occurs and will make important decisions for you. For example, that person will be authorized to decide if extraordinary steps will be taken to prolong your life when you are in an "end of life" situation. If you want to limit this power, there are ways to do this, also.
2. How exactly do you want to be treated? Just picking an agent is not enough if you don't instruct that person about your desires.The AHCD walks you through the kinds of hard choices most of us don't want to consider. It provides a way to express your values and preferences.
3. Do you want to be an organ donor? If you know someone waiting for a kidney, lung or other vital organ, you know that there is a critical shortage of donors. Without expressing your willingness to be a donor, it won't happen. By addressing this when you fill out the AHCD, you could save someone else's life.
Once you have filled out the AHCD, you need to make sure that it is available when needed. You may want to give a copy to your primary physician. You may also want to give a copy to your designated agent or to family members.
The obvious ones needing an AHCD are the elderly or terminally ill.
However, it makes sense for everyone, even if they are young and in good health.
Who knows what tragic circumstance could be just around the corner? Surely, none of us wants to complicate the lives of our loved ones by not making our wishes crystal clear.
The AHCD is an improvement over a "living will," which is a similar document no longer used, even if it has a less catchy name. Since it is designed to be a do-it-yourself form, you should be able to create your personal AHCD without professional help. Of course, if you get confused, it makes sense to get some legal help.
Blank AHCD forms are available in a number of places, including our Web site at vanderspekcpas.com.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
New law may alter health care
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK - For the North County Times February 4, 2004
The stage is set for a battle between Health Savings Accounts and Health Maintenance Organizations.
HMOs are a form of privatized socialism and are especially prevalent in Southern California. The promise of HMOs was that by buying a policy, all of your medical expenses would be covered. Unfortunately, HMOs have failed us.
Doctors feel that HMOs exploit them and their skills.
Patients believe that HMOs take away their ability to choose treatments or providers.I
Insurance companies think that they are victims of people abusing the HMO system.
Our tax laws have aggravated the situation. To get a deduction, employers have had to choose between paying premiums for either a conventional insurance policy or for HMO insurance. Either way, the only way to get a deduction has been to have an insurance middleman.
Now, there is an alternative. In December, legislation was signed by President Bush allowing HSAs. This new program has the potential of revolutionizing the health-care industry.
Here is how it works. As an employee, your employer offers health insurance with a high deductible. With the savings from buying this type of insurance, your employer invests money into your personal HSA account. Since you will have a high deductible, most of your medical expenses will need to be paid out of your own pocket. However, these out-of-pocket expenses can be reimbursed out of your HSA. You can even draw out funds for such things as dental, optical or other medical expenses not normally covered.
The kicker in all this is that the money not paid out of the HSA accumulates for your benefit. It can be used for future medical expenses or stay invested in the HSA. If left invested, it acts much like an IRA. If you have a relatively healthy year, your insurance company won't hear from you at all and the money remaining in your HSA will be invested for the long term.
It is projected that as people get used to owning HSA accounts, the insurance portion of these plans will come into play only when there is a major medical issue. The relationship between health-care providers and patients should improve, since there will be a direct and fair economic relationship between them.
By providing an alternative to low-deductible or HMO insurance, Congress has opened the door to a more rational health-care delivery system.
Medical providers and patients can balance out the best value for their dollar, and the money will go to the ones actually providing the service.
If there is a major problem, the insurance will kick in and protect you from extraordinary expense.
It will take a while for the insurance companies to bring HSA plans to market that will take advantage of the new tax law enacted. It will also take time for employers and employees to grasp the new dynamic.
However, this is a chance to reward the prudent use of health services and also to boost retirement savings.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
By: JIM VANDER SPEK - For the North County Times February 4, 2004
The stage is set for a battle between Health Savings Accounts and Health Maintenance Organizations.
HMOs are a form of privatized socialism and are especially prevalent in Southern California. The promise of HMOs was that by buying a policy, all of your medical expenses would be covered. Unfortunately, HMOs have failed us.
Doctors feel that HMOs exploit them and their skills.
Patients believe that HMOs take away their ability to choose treatments or providers.I
Insurance companies think that they are victims of people abusing the HMO system.
Our tax laws have aggravated the situation. To get a deduction, employers have had to choose between paying premiums for either a conventional insurance policy or for HMO insurance. Either way, the only way to get a deduction has been to have an insurance middleman.
Now, there is an alternative. In December, legislation was signed by President Bush allowing HSAs. This new program has the potential of revolutionizing the health-care industry.
Here is how it works. As an employee, your employer offers health insurance with a high deductible. With the savings from buying this type of insurance, your employer invests money into your personal HSA account. Since you will have a high deductible, most of your medical expenses will need to be paid out of your own pocket. However, these out-of-pocket expenses can be reimbursed out of your HSA. You can even draw out funds for such things as dental, optical or other medical expenses not normally covered.
The kicker in all this is that the money not paid out of the HSA accumulates for your benefit. It can be used for future medical expenses or stay invested in the HSA. If left invested, it acts much like an IRA. If you have a relatively healthy year, your insurance company won't hear from you at all and the money remaining in your HSA will be invested for the long term.
It is projected that as people get used to owning HSA accounts, the insurance portion of these plans will come into play only when there is a major medical issue. The relationship between health-care providers and patients should improve, since there will be a direct and fair economic relationship between them.
By providing an alternative to low-deductible or HMO insurance, Congress has opened the door to a more rational health-care delivery system.
Medical providers and patients can balance out the best value for their dollar, and the money will go to the ones actually providing the service.
If there is a major problem, the insurance will kick in and protect you from extraordinary expense.
It will take a while for the insurance companies to bring HSA plans to market that will take advantage of the new tax law enacted. It will also take time for employers and employees to grasp the new dynamic.
However, this is a chance to reward the prudent use of health services and also to boost retirement savings.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
Fear and uncertainty over once-admired IRAs
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK - For the North County Times on April 9, 2003
The thrill is gone. It was only a few years ago that everyone was excited about their IRAs and sought out the hottest mutual fund to invest in. Now, it seems that most people cringe when looking at their latest quarterly statements and wonder if investing in IRAs is still smart.
The latest studies bear this out, showing that the lack of enthusiasm is translating into less money going into deferred retirement accounts of all types. The unfortunate reality is that the lousy performance that we are expecting from the market should drive us to put more away, not less. Remember, only positive performance and new contributions add to the kitty. You may even by chance be buying stocks when they are cheap.
A little late to the party, our government has radically increased the maximum amounts that can be invested in IRAs, 401(k)s and other plans starting in 2002. For example, the limit for a standard IRA, whether a Roth or conventional, has been increased from $2,000 to $3,000. If you are older than 50, the increase goes all the way to $3,500. You can make an IRA contribution right up to April 15 and still deduct it for 2002. Invest now and amend your returns if necessary to receive a refund.
Many people are confused by the many options. One constant question I get is whether one should choose a Roth over a conventional IRA. I love Roths but believe that you should view them as supplemental retirement plans instead of core plans. For example, if down the road you are assured a large retirement income from whatever source it may come, a conventional IRA may be a problem, since it will add to your income.On the other hand, if you are scrambling to save for your retirement and don't foresee a sizable income in your retirement years, you should go for the regular IRA and snag a deduction right now. The money you draw from your IRA in your retirement years will not be taxed heavily unless you have sizable other income at that time, whereas the taxes you save now can be substantial.
A Roth IRA works great if you participate in a plan already and have money left to put away. Unless your income is too high (about $150,000 for married couples), you are eligible to invest in a Roth over and above other plans. In a Roth IRA, your investment can grow tax-free, indefinitely. Also, if you are having a bad year with low income, consider converting your conventional IRA funds into Roth accounts. The resulting taxable income could escape taxes.
Little understood by those whose income is too high to invest in a Roth is that they could still be eligible to invest in an odd duck called a "non-deductible IRA." This vehicle works like a mini annuity. You put the money in without a deduction, but it will grow tax-free until you retire.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
By: JIM VANDER SPEK - For the North County Times on April 9, 2003
The thrill is gone. It was only a few years ago that everyone was excited about their IRAs and sought out the hottest mutual fund to invest in. Now, it seems that most people cringe when looking at their latest quarterly statements and wonder if investing in IRAs is still smart.
The latest studies bear this out, showing that the lack of enthusiasm is translating into less money going into deferred retirement accounts of all types. The unfortunate reality is that the lousy performance that we are expecting from the market should drive us to put more away, not less. Remember, only positive performance and new contributions add to the kitty. You may even by chance be buying stocks when they are cheap.
A little late to the party, our government has radically increased the maximum amounts that can be invested in IRAs, 401(k)s and other plans starting in 2002. For example, the limit for a standard IRA, whether a Roth or conventional, has been increased from $2,000 to $3,000. If you are older than 50, the increase goes all the way to $3,500. You can make an IRA contribution right up to April 15 and still deduct it for 2002. Invest now and amend your returns if necessary to receive a refund.
Many people are confused by the many options. One constant question I get is whether one should choose a Roth over a conventional IRA. I love Roths but believe that you should view them as supplemental retirement plans instead of core plans. For example, if down the road you are assured a large retirement income from whatever source it may come, a conventional IRA may be a problem, since it will add to your income.On the other hand, if you are scrambling to save for your retirement and don't foresee a sizable income in your retirement years, you should go for the regular IRA and snag a deduction right now. The money you draw from your IRA in your retirement years will not be taxed heavily unless you have sizable other income at that time, whereas the taxes you save now can be substantial.
A Roth IRA works great if you participate in a plan already and have money left to put away. Unless your income is too high (about $150,000 for married couples), you are eligible to invest in a Roth over and above other plans. In a Roth IRA, your investment can grow tax-free, indefinitely. Also, if you are having a bad year with low income, consider converting your conventional IRA funds into Roth accounts. The resulting taxable income could escape taxes.
Little understood by those whose income is too high to invest in a Roth is that they could still be eligible to invest in an odd duck called a "non-deductible IRA." This vehicle works like a mini annuity. You put the money in without a deduction, but it will grow tax-free until you retire.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
Individuals will profit
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK - For the North County Times on June 15, 2003
The new tax law passed this year by Congress is targeted mostly to help individuals rather than businesses.
However, if you own a small business and are profitable, the new law will help a bunch. This is because the profits of most small businesses flow directly to the owners one way or another. In fact, a press release issued by the Treasury Department claims, with typical precision, that "23 million small-business owners will receive tax cuts averaging $2,209" under the new law.
The bulk of the savings accruing to these business owners comes from the drop in the top tax rates. If you are a moderate- to higher-income taxpayer, your federal tax bite will go down somewhere between 5 percent and 8 percent.
The area where businesses are helped directly is in the area of depreciation. When you purchase equipment, you typically are required to depreciate it over the useful life that it is owned. Even if you paid for a piece of equipment in the current year, you need to wait till future years to get some of the deductions.
When you buy less than $200,000 of equipment in a year, you have been allowed to "expense" up to $25,000 of these purchases in the first year. Under the new law, this has been expanded to cover businesses buying up to $400,000 in equipment with a new maximum amount you can expense of $100,000.
If you need even greater deductions, you can take advantage of the expansion in the "bonus depreciation" rules implemented after 9/11. You are now allowed to write off up to 50 percent of property acquired after May 5 right off the top. Even vehicles weighing more than 6,000 pounds get the generous new treatment. That's right. Large sport utility vehicles and other heavy vehicles are treated mostly like other equipment. Lighter vehicles are subjected to punishing restrictions on how fast they can be depreciated. "Off-the-shelf" computer software can also now be completely expensed when purchased.
Not changed are the comical depreciation rates applying to real estate. The law allows a useful life of 27.5 years or 39.5 years, depending on how buildings are used. These strange numbers with decimals have become a permanent part of the code.
What all these new depreciation rules mean is that businesses have even greater flexibility as to how they claim deductions when they purchase new equipment. You must think carefully about the way you choose to depreciate your equipment. One common mistake is to use the default settings that are built into the tax program you or your tax preparer are using, since you could depreciate more or less than the optimum amount depending on your situation now and in future years. If you attempt to depreciate without using a computer, you face a daunting set of computations.
Of course, California is not expected to follow suit with the same, more generous depreciation rules. Since you will be depreciating differently for California and for the Internal Revenue Service, you face a new layer of complication as to your tax planning and record keeping.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
By: JIM VANDER SPEK - For the North County Times on June 15, 2003
The new tax law passed this year by Congress is targeted mostly to help individuals rather than businesses.
However, if you own a small business and are profitable, the new law will help a bunch. This is because the profits of most small businesses flow directly to the owners one way or another. In fact, a press release issued by the Treasury Department claims, with typical precision, that "23 million small-business owners will receive tax cuts averaging $2,209" under the new law.
The bulk of the savings accruing to these business owners comes from the drop in the top tax rates. If you are a moderate- to higher-income taxpayer, your federal tax bite will go down somewhere between 5 percent and 8 percent.
The area where businesses are helped directly is in the area of depreciation. When you purchase equipment, you typically are required to depreciate it over the useful life that it is owned. Even if you paid for a piece of equipment in the current year, you need to wait till future years to get some of the deductions.
When you buy less than $200,000 of equipment in a year, you have been allowed to "expense" up to $25,000 of these purchases in the first year. Under the new law, this has been expanded to cover businesses buying up to $400,000 in equipment with a new maximum amount you can expense of $100,000.
If you need even greater deductions, you can take advantage of the expansion in the "bonus depreciation" rules implemented after 9/11. You are now allowed to write off up to 50 percent of property acquired after May 5 right off the top. Even vehicles weighing more than 6,000 pounds get the generous new treatment. That's right. Large sport utility vehicles and other heavy vehicles are treated mostly like other equipment. Lighter vehicles are subjected to punishing restrictions on how fast they can be depreciated. "Off-the-shelf" computer software can also now be completely expensed when purchased.
Not changed are the comical depreciation rates applying to real estate. The law allows a useful life of 27.5 years or 39.5 years, depending on how buildings are used. These strange numbers with decimals have become a permanent part of the code.
What all these new depreciation rules mean is that businesses have even greater flexibility as to how they claim deductions when they purchase new equipment. You must think carefully about the way you choose to depreciate your equipment. One common mistake is to use the default settings that are built into the tax program you or your tax preparer are using, since you could depreciate more or less than the optimum amount depending on your situation now and in future years. If you attempt to depreciate without using a computer, you face a daunting set of computations.
Of course, California is not expected to follow suit with the same, more generous depreciation rules. Since you will be depreciating differently for California and for the Internal Revenue Service, you face a new layer of complication as to your tax planning and record keeping.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
Consider that home office deduction
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK - For the North County Times on February 14, 2003
An office in the home is a necessity for some and a luxury for others. I read once that the San Diego area had more home-based offices than any other in the United States. Whether you believe that factoid or not, we do know that thousands of professionals, contractors and others operate their business from their homes here in Southern California. We also know that the tax implications of owning your office in your home and claiming a home-office deduction are significant.
One huge impact is that a proportion of home interest and taxes could become deductible for Social Security and Medicare taxes, as well as for income taxes. This is because your home-office deduction will decrease your business income. Additional deductions include utilities and other household expenses. Also, you should not forget that your business auto mileage increases because your trips begin at your doorstep.
Our government has had mixed feelings about HODs for a long time. The Supreme Court a few years ago gave the IRS a huge victory and stopped many professionals from claiming a HOD. Congress gave that one back.
Still, many taxpayers avoid the HOD for several reasons. First, they think it will cause their returns to be audited. This is unfortunate. HODs are perfectly legitimate and clearly deductible when the proper conditions apply. Why not take every legitimate deduction? There is even a special form that works out most of the calculations. Besides, audits are few and mostly random, anyway.
The most compelling reason not to claim an office in your home has been that it could expose a portion of your gain to capital gains taxes when you sell. Let's say that your home office is 10 percent of your home. When it comes time to sell, 10 percent of your gain could become taxable since it is used for business, not as your residence. I have even advised some taxpayers to give up their HOD after a few years so that they fall under a two out of five years safe harbor rule, eliminating this danger.
This reason has now suddenly disappeared. In an unexpected, stunning move, the Internal Revenue Service has now ruled that claiming an HOD will not subject that portion of the house to capital gains taxes. The only portion that remains taxable, which is not usually significant, is the cumulative amount of depreciation that you have already claimed. The primary prerequisite is that the office must be a part of the home, not in a separate building. With this new ruling, we can expect more people to claim an HOD and receive the tax deductions to which they are entitled.
How do you know if you qualify for a HOD? Basically, the office needs to be the primary office, not a second office. Also, the space must be used exclusively for your business on a regular basis. The rules also do not allow most of your expenses if your business is unprofitable.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
By: JIM VANDER SPEK - For the North County Times on February 14, 2003
An office in the home is a necessity for some and a luxury for others. I read once that the San Diego area had more home-based offices than any other in the United States. Whether you believe that factoid or not, we do know that thousands of professionals, contractors and others operate their business from their homes here in Southern California. We also know that the tax implications of owning your office in your home and claiming a home-office deduction are significant.
One huge impact is that a proportion of home interest and taxes could become deductible for Social Security and Medicare taxes, as well as for income taxes. This is because your home-office deduction will decrease your business income. Additional deductions include utilities and other household expenses. Also, you should not forget that your business auto mileage increases because your trips begin at your doorstep.
Our government has had mixed feelings about HODs for a long time. The Supreme Court a few years ago gave the IRS a huge victory and stopped many professionals from claiming a HOD. Congress gave that one back.
Still, many taxpayers avoid the HOD for several reasons. First, they think it will cause their returns to be audited. This is unfortunate. HODs are perfectly legitimate and clearly deductible when the proper conditions apply. Why not take every legitimate deduction? There is even a special form that works out most of the calculations. Besides, audits are few and mostly random, anyway.
The most compelling reason not to claim an office in your home has been that it could expose a portion of your gain to capital gains taxes when you sell. Let's say that your home office is 10 percent of your home. When it comes time to sell, 10 percent of your gain could become taxable since it is used for business, not as your residence. I have even advised some taxpayers to give up their HOD after a few years so that they fall under a two out of five years safe harbor rule, eliminating this danger.
This reason has now suddenly disappeared. In an unexpected, stunning move, the Internal Revenue Service has now ruled that claiming an HOD will not subject that portion of the house to capital gains taxes. The only portion that remains taxable, which is not usually significant, is the cumulative amount of depreciation that you have already claimed. The primary prerequisite is that the office must be a part of the home, not in a separate building. With this new ruling, we can expect more people to claim an HOD and receive the tax deductions to which they are entitled.
How do you know if you qualify for a HOD? Basically, the office needs to be the primary office, not a second office. Also, the space must be used exclusively for your business on a regular basis. The rules also do not allow most of your expenses if your business is unprofitable.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
Walking the income-tax high wire
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK- for the North County Times January 8, 2003
How will California close its colossal budget deficit? Much of the talk hinges on raising taxes, including possible surcharge income taxes on high earners and sales taxes on services. It will not be easy, no matter which way they slice it.
Rather than worry about this now, let's take a look at steps Sacramento has already taken. Before it realized the budget mess it was in, our Legislature fully conformed our state to the federal rules for IRAs, SEPs and other retirement plans. At least for now, if you save for your retirement based on the generous federal rules, you will get the same benefit for California. Because many of the contribution limits are increasing and California rules have historically been different, this is a great development.
Now, some bad news. Teachers who have been getting a special credit for staying in their profession won't get it for 2002. Also, teachers will not be able to claim a new deduction for out-of-pocket expenses that the feds are allowing.
Another nasty surprise is that net operating losses generated in 2002 will be suspended. Up until now, if you had a bad year, you could use losses to offset income in future good years. This is especially valuable for new and cyclical businesses, and has been a dependable part of the federal tax system. California, which already never lets you carry back losses, will now make taxpayers pay full freight in a good year without considering a previous bad year.
Perhaps the change that will cause the most vocal complaints is a new withholding tax charged to sellers on real estate transactions. This is an expansion on a rule that has hit out-of-state sellers for years. By making escrow withhold and forwarding taxes to California, out-of-state sellers have been forced to report sales on a California income tax return in order to get the taxes refunded. This generated a lot of howling, but since these people don't vote in California, and might not pay taxes they owed, it made a certain amount of sense.
On the other hand, the new rules are simply a way to force Californians to lend money, interest-free, to Sacramento for a while. Since the state budget is on the cash basis, forced advance withholding payments look like real income, even if they are not.
Here is how it works: If you sell property from now on, your escrow company will withhold 3 1/3 percent of the gross selling price and send it for you to California. Escrow costs also will increase. When you file your taxes at the end of the year, you must report the sale and claim credit for the taxes withheld. There are exceptions. These include the sale of your principal residence, such as kind exchanges, sales by certain non-individual entities, and if you're a Californian prove that the sale resulted in a loss.
However, this new rule could really hurt you. For example, if you owe no taxes or if the transaction was structured to not generate cash, you still must comply. Also, those who sell on an installment sale basis face even more complicated rules.
Jim Vander Spek is a certified public accountant with offices in Escondido, contact him at Jimv@vanderspekcpas.com
By: JIM VANDER SPEK- for the North County Times January 8, 2003
How will California close its colossal budget deficit? Much of the talk hinges on raising taxes, including possible surcharge income taxes on high earners and sales taxes on services. It will not be easy, no matter which way they slice it.
Rather than worry about this now, let's take a look at steps Sacramento has already taken. Before it realized the budget mess it was in, our Legislature fully conformed our state to the federal rules for IRAs, SEPs and other retirement plans. At least for now, if you save for your retirement based on the generous federal rules, you will get the same benefit for California. Because many of the contribution limits are increasing and California rules have historically been different, this is a great development.
Now, some bad news. Teachers who have been getting a special credit for staying in their profession won't get it for 2002. Also, teachers will not be able to claim a new deduction for out-of-pocket expenses that the feds are allowing.
Another nasty surprise is that net operating losses generated in 2002 will be suspended. Up until now, if you had a bad year, you could use losses to offset income in future good years. This is especially valuable for new and cyclical businesses, and has been a dependable part of the federal tax system. California, which already never lets you carry back losses, will now make taxpayers pay full freight in a good year without considering a previous bad year.
Perhaps the change that will cause the most vocal complaints is a new withholding tax charged to sellers on real estate transactions. This is an expansion on a rule that has hit out-of-state sellers for years. By making escrow withhold and forwarding taxes to California, out-of-state sellers have been forced to report sales on a California income tax return in order to get the taxes refunded. This generated a lot of howling, but since these people don't vote in California, and might not pay taxes they owed, it made a certain amount of sense.
On the other hand, the new rules are simply a way to force Californians to lend money, interest-free, to Sacramento for a while. Since the state budget is on the cash basis, forced advance withholding payments look like real income, even if they are not.
Here is how it works: If you sell property from now on, your escrow company will withhold 3 1/3 percent of the gross selling price and send it for you to California. Escrow costs also will increase. When you file your taxes at the end of the year, you must report the sale and claim credit for the taxes withheld. There are exceptions. These include the sale of your principal residence, such as kind exchanges, sales by certain non-individual entities, and if you're a Californian prove that the sale resulted in a loss.
However, this new rule could really hurt you. For example, if you owe no taxes or if the transaction was structured to not generate cash, you still must comply. Also, those who sell on an installment sale basis face even more complicated rules.
Jim Vander Spek is a certified public accountant with offices in Escondido, contact him at Jimv@vanderspekcpas.com
Thursday, November 17, 2005
The complexities of "luxury vehicle" depreciation
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK - For the North County Times August 30, 2003
Congratulations. You don't need to buy a giant truck after all. Since July 7 of this year you have been able to purchase a light truck or van and still depreciate it in a quick manner within your business.
To understand the significance of this, you need to know the history of what Congress calls "luxury vehicles." Back in the heady days of the first Reagan tax reforms, businesses for one brief year were allowed to depreciate all cars in a nifty three years. This caught the attention of some ultra luxury auto dealers who used this as a way to sell their high-priced wheels to well-heeled business buyers. The deductions were enormous.
The reaction was swift. Congress decided to stomp out the problem by curtailing the deductions on autos. A new rule came into play, which limited depreciation to the amount of auto depreciation, which a "non-luxury vehicle" would generate over five years.
As a result, the IRS redefines the definition of "luxury auto" every year based on an inflation adjustment. The threshold is about $15,300, although we are not sure yet for this year. A new wrinkle was added after 9-11. Congress said that autos for the first time could exceed the luxury limits by taking "bonus depreciation" of $4,600 on top of the mandated maximum of $3,060 in the first year. Suddenly, buying a regular car got smart again since the total first year deduction jumped to $7,660.
To further muddy the water, Congress recently increased the deduction by an additional $3,050 for autos placed in service after May 5, 2003. Simply put, you can get a big deduction this year if you buy a new vehicle and use it in your business, even if it is a "luxury vehicle." In the second and later years, however, things calm way down. You can only deduct as if it were about a $15,300 vehicle ---- no matter what you paid for it.
All of this brings us to the unfortunate business owner who buys a light truck or delivery van, especially if it is specially modified. Why should a vehicle like this be branded as a luxury vehicle with limited deductions, unless it weighs more than 6,000 lbs?
The IRS listened and developed a brand new category called "qualified non-personal use" vehicles. These are light vans and trucks with little personal use. If you buy a vehicle like this from now on, you can ignore the luxury auto rules and depreciate them as rapidly as other equipment, including massive first year depreciation allowances.
Of course, the big sigh of relief for car retailers is that SUVs and other big iron which weigh over 6,000 lbs. still get a bright green light. The big boys don't care about the new definition. Since they weigh so much, they slipped through the cracks and were never considered luxury autos to start with. Perhaps using such vehicles for everyday use was never contemplated when the law was originally written.
Jim Vander Spek is an accountant in Escondido and a frequent contributor to the North County Times. Contact him at JimV@VanderSpekCPAs.com.
By: JIM VANDER SPEK - For the North County Times August 30, 2003
Congratulations. You don't need to buy a giant truck after all. Since July 7 of this year you have been able to purchase a light truck or van and still depreciate it in a quick manner within your business.
To understand the significance of this, you need to know the history of what Congress calls "luxury vehicles." Back in the heady days of the first Reagan tax reforms, businesses for one brief year were allowed to depreciate all cars in a nifty three years. This caught the attention of some ultra luxury auto dealers who used this as a way to sell their high-priced wheels to well-heeled business buyers. The deductions were enormous.
The reaction was swift. Congress decided to stomp out the problem by curtailing the deductions on autos. A new rule came into play, which limited depreciation to the amount of auto depreciation, which a "non-luxury vehicle" would generate over five years.
As a result, the IRS redefines the definition of "luxury auto" every year based on an inflation adjustment. The threshold is about $15,300, although we are not sure yet for this year. A new wrinkle was added after 9-11. Congress said that autos for the first time could exceed the luxury limits by taking "bonus depreciation" of $4,600 on top of the mandated maximum of $3,060 in the first year. Suddenly, buying a regular car got smart again since the total first year deduction jumped to $7,660.
To further muddy the water, Congress recently increased the deduction by an additional $3,050 for autos placed in service after May 5, 2003. Simply put, you can get a big deduction this year if you buy a new vehicle and use it in your business, even if it is a "luxury vehicle." In the second and later years, however, things calm way down. You can only deduct as if it were about a $15,300 vehicle ---- no matter what you paid for it.
All of this brings us to the unfortunate business owner who buys a light truck or delivery van, especially if it is specially modified. Why should a vehicle like this be branded as a luxury vehicle with limited deductions, unless it weighs more than 6,000 lbs?
The IRS listened and developed a brand new category called "qualified non-personal use" vehicles. These are light vans and trucks with little personal use. If you buy a vehicle like this from now on, you can ignore the luxury auto rules and depreciate them as rapidly as other equipment, including massive first year depreciation allowances.
Of course, the big sigh of relief for car retailers is that SUVs and other big iron which weigh over 6,000 lbs. still get a bright green light. The big boys don't care about the new definition. Since they weigh so much, they slipped through the cracks and were never considered luxury autos to start with. Perhaps using such vehicles for everyday use was never contemplated when the law was originally written.
Jim Vander Spek is an accountant in Escondido and a frequent contributor to the North County Times. Contact him at JimV@VanderSpekCPAs.com.
On the subject of wills and living trusts
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK - For the North County Times October 9, 2003
Get your living trust here! Numerous California attorneys hustle trusts as if they were a vital financial cure-all. Before you go this route, consider the following:
1. A will is much simpler and works fine for most people. If you don't have a will, shame on you. Track down a "fill in the blanks" form if necessary and fill it out, especially if you have minor children. I can assure you that you will die and whoever must clean up after you will really appreciate that you made up a will.
2. There are no minimum probate fees. Maximum probate fees are written into the law to stop lawyers from taking everything. However, your attorney should charge less if things are clean and organized. Misrepresenting these maximum fees as "court mandated" fees is a common marketing ploy for living trusts.
If you become an executor of an estate, shop for an ethical attorney who will charge only for the work needed. Note also that there is no limit to the amount charged for legal work related to trusts.
3. Living trusts alone do not save estate taxes. Living trusts are neutral as to tax benefits. Remember also that estate taxes usually do not apply to amounts you leave to a spouse plus an additional $1 million in assets.
4. A "half-baked" trust is much worse than no trust. A living trust only works well when you keep it up to date. You must first move most assets into a trust and be careful to title new investments and large purchases into the trust from then on. Having a mix of trust and nontrust assets when you die is expensive, confusing and counterproductive.
5. Make sure you trust your trustee. The trustee works for you (but you will be gone) and the trust. He or she is not accountable to a probate court. A greedy, dishonest or incompetent trustee can drive the rest of your heirs and interested parties crazy, and it is very expensive to make them shape up.
Sometimes, an institutional trustee such as a bank can be overly expensive and unresponsive. In contrast, a probate court will hold the executor named in your will to very strict accountability.
6. You do not need a living trust to set up a bypass trust at your death. A marital bypass trust could leave more money to your children while still providing for your spouse. This common device does save estate taxes for larger estates, but can be created by means of a will without a living trust.
7. Don't make your trust the beneficiary of IRAs and similar assets. Your beneficiaries have nifty options in how such funds are paid out and taxed. However, getting the best result with a trust as the beneficiary is very tricky.
8. Living trusts are great if you have a complex estate and a capable trustee. Crafted by a skilled attorney as part of a comprehensive, maintained estate plan, they can provide privacy, simplify administration and perhaps save legal fees for your estate, but not for you.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
By: JIM VANDER SPEK - For the North County Times October 9, 2003
Get your living trust here! Numerous California attorneys hustle trusts as if they were a vital financial cure-all. Before you go this route, consider the following:
1. A will is much simpler and works fine for most people. If you don't have a will, shame on you. Track down a "fill in the blanks" form if necessary and fill it out, especially if you have minor children. I can assure you that you will die and whoever must clean up after you will really appreciate that you made up a will.
2. There are no minimum probate fees. Maximum probate fees are written into the law to stop lawyers from taking everything. However, your attorney should charge less if things are clean and organized. Misrepresenting these maximum fees as "court mandated" fees is a common marketing ploy for living trusts.
If you become an executor of an estate, shop for an ethical attorney who will charge only for the work needed. Note also that there is no limit to the amount charged for legal work related to trusts.
3. Living trusts alone do not save estate taxes. Living trusts are neutral as to tax benefits. Remember also that estate taxes usually do not apply to amounts you leave to a spouse plus an additional $1 million in assets.
4. A "half-baked" trust is much worse than no trust. A living trust only works well when you keep it up to date. You must first move most assets into a trust and be careful to title new investments and large purchases into the trust from then on. Having a mix of trust and nontrust assets when you die is expensive, confusing and counterproductive.
5. Make sure you trust your trustee. The trustee works for you (but you will be gone) and the trust. He or she is not accountable to a probate court. A greedy, dishonest or incompetent trustee can drive the rest of your heirs and interested parties crazy, and it is very expensive to make them shape up.
Sometimes, an institutional trustee such as a bank can be overly expensive and unresponsive. In contrast, a probate court will hold the executor named in your will to very strict accountability.
6. You do not need a living trust to set up a bypass trust at your death. A marital bypass trust could leave more money to your children while still providing for your spouse. This common device does save estate taxes for larger estates, but can be created by means of a will without a living trust.
7. Don't make your trust the beneficiary of IRAs and similar assets. Your beneficiaries have nifty options in how such funds are paid out and taxed. However, getting the best result with a trust as the beneficiary is very tricky.
8. Living trusts are great if you have a complex estate and a capable trustee. Crafted by a skilled attorney as part of a comprehensive, maintained estate plan, they can provide privacy, simplify administration and perhaps save legal fees for your estate, but not for you.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com
Ways to make AMT less painful
Read NCTimes.com Article Here >>
By: JIM VANDER SPEK - For the North County Times January 18, 2004
Perhaps the most confusing part of our income tax laws is the alternative minimum tax.
Originally, the AMT was designed to force taxpayers who had high incomes and paid little taxes to pay more. Such taxpayers were using the tax law as written and were making out too well. To make them pay more, an "alternative" system was developed that excluded deductions and exemptions.
Initially, few people were affected by the AMT, and then only in extraordinary circumstances. However, the AMT tax rate has actually climbed during the years that "tax cuts" were enacted, making the AMT a growing tax threat. This is especially true for 2003 tax returns.
Although Congress threw a small benefit to AMT payers, most of the new tax cuts going into effect last year provide no benefit to those paying the AMT. The result is that more taxpayers will be bedeviled by the AMT than ever before, especially in high-tax states such as California.
There are ways to make the AMT less painful. Usually, this has to do with timing how you take certain itemized deductions. Here is an example.
One of our clients sold property in 2003 and received a portion of the payment that year and will receive the balance in 2004. With the new 15 percent long-term capital gain tax rate, it looked like no special planning was needed. Looking deeper, however, we found that since more money was coming in during 2004 than in 2003, the AMT would come into play in that year and not in 2003.
Knowing this ahead of time made it clear that he should "bunch" deductions into 2003 when those deductions would actually reduce the final tax bill. We zeroed in on property taxes and state income taxes, since he had discretion as to the year in which these would be paid. It also made sense for him to move more income into 2004 from 2003, since it would be taxed at a lower rate.
Unfortunately, it is quite difficult to plan out these strategies, since the AMT hits in unexpected ways. Unless you have a sophisticated multiyear tax planning computer program, there is virtually no way to get it done.
For you, the average person, the best strategy is to keep your head low.
If you receive an unusually large income item this year, pay the related California taxes before the year end. Although you could wait till April 15, 2005, to pay, doing that could leave that deduction wasted.
This is because paying the extra tax in 2005 when there is no extra income could trigger the AMT, thereby wasting your otherwise deductible tax payment.
The same applies to other deductions. If you incur a major expense, which could qualify as a miscellaneous deduction, such as for legal fees, you may want to spread the payment of these fees over a few years.
That way, the AMT won't neutralize your deduction.
The best solution would be for Congress to simplify the tax code so that an AMT would no longer be needed. It is bad public policy to have a tax law that is too dense for most taxpayers to understand or plan for.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
By: JIM VANDER SPEK - For the North County Times January 18, 2004
Perhaps the most confusing part of our income tax laws is the alternative minimum tax.
Originally, the AMT was designed to force taxpayers who had high incomes and paid little taxes to pay more. Such taxpayers were using the tax law as written and were making out too well. To make them pay more, an "alternative" system was developed that excluded deductions and exemptions.
Initially, few people were affected by the AMT, and then only in extraordinary circumstances. However, the AMT tax rate has actually climbed during the years that "tax cuts" were enacted, making the AMT a growing tax threat. This is especially true for 2003 tax returns.
Although Congress threw a small benefit to AMT payers, most of the new tax cuts going into effect last year provide no benefit to those paying the AMT. The result is that more taxpayers will be bedeviled by the AMT than ever before, especially in high-tax states such as California.
There are ways to make the AMT less painful. Usually, this has to do with timing how you take certain itemized deductions. Here is an example.
One of our clients sold property in 2003 and received a portion of the payment that year and will receive the balance in 2004. With the new 15 percent long-term capital gain tax rate, it looked like no special planning was needed. Looking deeper, however, we found that since more money was coming in during 2004 than in 2003, the AMT would come into play in that year and not in 2003.
Knowing this ahead of time made it clear that he should "bunch" deductions into 2003 when those deductions would actually reduce the final tax bill. We zeroed in on property taxes and state income taxes, since he had discretion as to the year in which these would be paid. It also made sense for him to move more income into 2004 from 2003, since it would be taxed at a lower rate.
Unfortunately, it is quite difficult to plan out these strategies, since the AMT hits in unexpected ways. Unless you have a sophisticated multiyear tax planning computer program, there is virtually no way to get it done.
For you, the average person, the best strategy is to keep your head low.
If you receive an unusually large income item this year, pay the related California taxes before the year end. Although you could wait till April 15, 2005, to pay, doing that could leave that deduction wasted.
This is because paying the extra tax in 2005 when there is no extra income could trigger the AMT, thereby wasting your otherwise deductible tax payment.
The same applies to other deductions. If you incur a major expense, which could qualify as a miscellaneous deduction, such as for legal fees, you may want to spread the payment of these fees over a few years.
That way, the AMT won't neutralize your deduction.
The best solution would be for Congress to simplify the tax code so that an AMT would no longer be needed. It is bad public policy to have a tax law that is too dense for most taxpayers to understand or plan for.
Jim Vander Spek is a certified public accountant with offices in Escondido. Contact him at Jimv@vanderspekcpas.com.
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