Holding Period for Capital Assets

Re: Holding Period for Capital Assets – A LETTER IN RESPONSE


 Dear Client:


This letter is intended to give you a better understanding of the importance of holding period to your investment strategy, as well as how to measure holding period for federal income tax purposes.


Holding period makes the greatest difference in determining whether an asset is entitled to short-term or long-term capital gain treatment. At today’s rates, that can be the difference between being taxed at the highest ordinary income tax rate of 35% and the long-term capital gain rate of 15%. Although an investment strategy should not postpone good economic decisions in order to benefit from the 15% long-term capital gain rate, it should consider postponing action when a “sell” decision is made just short of the one year and a day holding period necessary for long-term capital gain. By the same token, however, a decision to sell an asset at a loss may involve timing the sale prior to the one year and one day holding period, to take advantage of short-term capital loss treatment.


The basic rules for holding period include the following:


Long- and short-term capital gain.  In general, the capital gains rates of 15% (or 5%, reserved for those in the 10% and 15% regular income tax bracket) applies for the sale of capital assets. In general, this includes all investment assets, and for individuals it includes assets held for business income purposes. Assets must be held for one year and one day to be entitled to long-term capital gain treatment. That requires keeping track of exactly when a property is purchased (when the asset is sold, not the date the sales contract is executed; for stocks, it is the trade date that counts, not the settlement date).


Determining holding period.  In determining how long an asset was held, the taxpayer begins counting on the date after the day the property was acquired. The same date of each following month is the beginning of a new month regardless of the number of days in the preceding month. For example, if property was acquired on February 1, 2003, the taxpayer’s holding period is considered to have begun on February 2, 2003. The date the asset is disposed of is part of the holding period.


5-year holding period eliminated.  The 2003 tax legislation has eliminated a special rate that had applied to assets held for more than five years. That rate was 8 percent for those in the 10 or 15 percent tax brackets and 18 percent for those in the higher brackets. Those in the former category had the 8 percent rate available for tax years 2001 and 2002. For the latter group, the rate would only have applied for tax years after 2005. In order to qualify for the 18 percent rate on assets held before 2001, however, a taxpayer had to have made a “deemed sale election,” on which appreciation up to 2001 was taxed immediately. Since that “deemed sale election” is now useless, any taxpayer who made a “deemed sale election” should file an amended return immediately.


Wash sales.  Where there has been a wash sale of securities, the holding period of the securities acquired includes the period for which the taxpayer held those securities on which the loss was not deductible.


Options.  In determining whether a capital gain on stock is long-term or short-term, the holding period begins on the date after the option is exercised, not the date the option is granted.


“Carryover” holding period.  In determining the holding period for long-term capital gain and loss purposes, the holding period is “tacked on” to another person’s holding period in the case of gifts or property received in a divorce. Additional rules when business assets are distributed to owners or partners may also apply.


If you have any further questions in regard to how tax holding period rules may apply to your particular situation, please do not hesitate to call.


Sincerely yours,

Like-Kind Exchanges


Dear Client:

This letter is in reply to your questions regarding the federal income tax consequences of a “like-kind” exchange. The principal advantage of a like-kind exchange is that taxable gain is not triggered at the time of an exchange but, instead, that gain is deferred and added to the gain that will eventually be taxed upon the sale or other disposition of the exchanged property. Alas, from such a simple principal, however, comes a set of federal income tax rules that will make your head spin.

Deferred exchange. If the exchange of properties is not simultaneous, the property to be received must be identified within 45 days after the date the relinquished property is transferred. In addition, the identified property must be received within 180 days after the date of transfer or the extended due date for the return for the tax year in which the transfer occurred, whichever date is earlier.

Several other potential pitfalls may threaten to derail deferred exchanges (for example, failure to adhere to certain time limits and/or meet qualified intermediary requirements). Our office can help you avoid these pitfalls.

Safe harbors in deferred exchange. In a deferred exchange, the “seller” cannot actually or constructively receive money or other property for the relinquished property before the replacement property is received. To protect a seller who has given up his property but has received nothing in return except a promise to acquire replacement property in the future, several safe harbors in particular have been utilized by practitioners to prevent the transaction from being treated as a sale. The “buyer” can deposit cash into an escrow account or provide a letter of credit or third-party guarantee. Alternatively, the seller can transfer his property to a qualified intermediary (defined in Treasury regulations). A qualified intermediary will acquire the replacement property with funds furnished by the buyer and then transfer the relinquished property to the buyer and the replacement property to the seller.

Contribution to another entity. The transfer of replacement property to an entity may be desired for nontax purposes but could be viewed as violating the investment or trade or business use requirement, thereby jeopardizing Code Sec. 1031 treatment. For example, the IRS held in Rev. Rul. 75-292, that replacement property contributed to a corporation for stock shortly after an exchange was not a continuation of the real property investment. However, the Tax Court distinguished Rev. Rul. 75-292 in Magneson v. Commr. , when it allowed an immediate contribution of replacement property to a partnership.

The Tax Court in Mason v. Commr. (1988) also recognized a nontaxable exchange when a partnership first distributed property to its partners before the exchange. Since not all of the partners desired like-kind treatment, they were free to make their own arrangement to recognize or not to recognize gain. Limited liability companies (LLCs) with at least two members are similarly treated.

Recent ruling. The IRS in a recent Letter Ruling held that the conversion of two LLCs treated as partnerships into limited partnerships did not result in termination of either LLC under Internal Revenue Code Section 708 and the respective limited partnerships were considered a continuation of the respective LLCs. Furthermore, the partnerships were treated as both the transferors of the relinquished properties and the transferees of the replacement properties.

In this latest ruling, the taxpayers intended to exchange hotels in one state for resort hotels in another state through a qualified intermediary. Each LLC was to be liquidated, with the assets transferred to the new limited partnership. Following the formation of partnerships and on or before 180 days following the transfer of the relinquished property to the qualified intermediary, the qualified intermediary would transfer the replacement property to the partnerships. The stated business purpose for the formation of the partnerships was to satisfy the requirements of potential lenders that the acquiring entities of the replacement properties be separate and apart from the owners of the relinquished properties as a safeguard against any liabilities carrying over to the replacement properties.

Vehicles. In 2009, in a Letter Ruling, the IRS determined that cars, light-duty trucks, and cross-over vehicles qualify as like-kind business property that can be exchanged tax-free under Code Sec. 1031. The IRS concluded that the vehicles are like-kind even though they are in different asset classes under the depreciation rules.

We hope that this letter gives you an understanding of the many variables that should be considered before a “like-kind” exchange is undertaken in place of a contemplated ordinary sale. Please call to discuss how these rules may interrelate with your specific circumstances and how we can achieve the most advantageous results for you.

Sincerely yours,

10 Tax Tips for Home Sellers

10 Tax Tips for Home Sellers

  1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
  2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
  3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
  4. If you can exclude all of the gain, you do not need to report the sale on your tax return.
  5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
  6. You cannot deduct a loss from the sale of your main home.
  7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
  8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
  9. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

Glossary of Tax Terms

Glossary of Tax Terms

Glossary of Tax Terms

Accelerated death benefits are benefits that can be paid from a life insurance policy to an insured who is terminally or chronically ill. If tax law requirements are met, the payment is treated the same as payments on account of the death of the insured (with a dollar limit applied in the case of a chronically ill insured).

Accumulated earnings tax  is a tax penalty of the highest individual income tax rate (38.6% in 2002) levied on a C corporation that accumulates more than $250,000 ($150,000 in the case of professional corporations) in excess of the reasonable needs of the business.

Adjusted Net Earnings from Self-Employment are the unadjusted net earnings from self-employment minus the deduction allowed in Code Sec. 1402(a)(12). The unadjusted net earnings from self-employment will usually be equal to the total income reported on a taxpayer’s Schedule(s) C (or Schedule F for a farmer). The deduction in Code Sec. 1402(a)(12) equals the product of unadjusted net earnings from self-employment and one-half of the self-employment tax rate. This deduction is mathematically equivalent to multiplying the unadjusted net earnings from self-employment tax by 92.35 percent.

Advance medical directive (see health care proxy; health care durable power of attorney; living will).

Alternate valuation is an election to value assets on the date six months after the date of death (or the date the assets are disposed of, if earlier than that six-month date) if it decreases the value of the gross estate and results in less estate (and, where applicable, generation-skipping) transfer tax.

Annual gift tax exclusion is an exclusion that applies to gifts of present interests on a per donee basis. The exclusion is $10,000 (adjusted for inflation after 1998); for 2002, the exclusion is $11,000.

Annuity is a contract under which a person is paid an income (typically for life). Annuities can be paid by an insurance company (called a commercial annuity), an employer retirement plan (called an employer annuity), an individual (called a private annuity), or a charity (called a charitable gift annuity).

Applicable credit amount is a credit used to reduce the tentative estate or gift tax in order to reduce it to the appropriate applicable exclusion amount (also known as the unified credit).

Applicable credit amount trust is a trust intended to allow married couples to make full use of the applicable credit amount in the estate of the first spouse to die without causing any additional federal estate tax in the first estate (also known as a credit shelter trust or a bypass trust).

Applicable exclusion amount is an amount ($1 million 2002) that can be passed free of estate and gift tax because tax is completely offset by an applicable credit amount. Note: After 2003, the amount for estate and gift tax purposes is not the same (the estate tax amount increases while the gift tax amount remains at $1 million).

Automatic survivor benefits are benefits that a qualified retirement plan must provide to a spouse (or surviving spouse) unless this feature is properly waived. The benefits include a joint and survivor annuity to a spouse and a qualified pre-retirement survivor annuity to a surviving spouse.

Bargain sale is a part sale, part gift of property to an individual or a charity.

Below market loans are demand loans on which interest is payable at a rate below the applicable federal rate or term loans where the amount loaned exceeds the present value of all payments due under the loan (using a discount rate equal to the applicable federal rate).

Bypass trust (see applicable credit amount trust).

Buy-sell agreement is a contract that obligates someone (or gives someone the option) to buy the shares from an outgoing owner at a fixed price (or formula) set in the agreement.

Cafeteria plan is a plan that allows employees to choose between cash and certain qualified benefits.

Call is an option that entitles the purchaser to buy, at any time before a specified future date, property, such as a stated number of shares of stock at a specified price.

Cash surrender value is the money that can be received when a life insurance policy is canceled.

Capital Gain is a gain from the sale or exchange of a capital asset. The portion of a net Code Sec. 1231 gain is also treated as if it were a long-term capital gain.

Capital Loss is a loss from the sale or exchange of a capital asset.

Ceiling for OASDI.  The adjusted net earnings from self-employment for the old age, survivors, and disability insurance (OASDI) portion of the self-employment tax are subject to a ceiling that changes annually. The ceiling is $87,000 for 1993 and $87,900 for 2004.

Charitable gift annuity is a type of charitable contribution entitling the donor to an income for life and a deduction for the difference between the value of the annuity and the value of the property contributed to the charity.

Charitable lead trust is a trust in which a charity receives an income interest for a set term, after which the property reverts to the donor or passes to some other non-charitable beneficiary.

Charitable remainder trust is a trust in which a noncharitable beneficiary has an income interest and the charity has the remainder interest.

Church employee income is income for services performed as an employee of a church or qualified church-controlled organization if the church has made an election under Code Sec. 3121(w) to be exempt from Social Security tax. Church employee income does not include the compensation of an ordained minister or the compensation of a member of a religious order.

Code Sec. 179 deduction is the amount that a taxpayer elects to deduct, rather than depreciation, of eligible property purchased and placed in service in a trade or business during the year.

Code Sec. 1231 Gain is the gain that remains after subtracting depreciation recapture recognized as ordinary income from the total gain realized on the sale or exchange of real estate or depreciable property used in a trade or business and held long term.

Code Sec. 1231 Loss is the loss realized on the sale or exchange of real estate or depreciable property used in a trade or business and held long term.

Commodity future is a contract for the sale of a commodity (such as wheat) at a future date for a fixed price.

Community Property is a form of automatic co-ownership of property between spouses who live in community property states.

Competency is legal capacity to make a will, trust, or take other legal actions.

Complex trust is a trust that can accumulate income and/or distribute principal to the beneficiary.

Contingency.  An existing condition, situation, or set of circumstances involving uncertainly as to possible gain or loss to an enterprise that ultimately will be resolved when one or more future events occur or fail to occur.

Copyright.  A copyright is a property right granted by the United States Copyright Office of the Library of Congress for works such as written works, works of art, and works of music. The copyright is good for the life of the author plus 70 years.

Coverdell education savings accounts (ESAs). Formerly known as education IRAs, are a type of savings vehicle for children under age 18 to pay for higher education costs.

Credit shelter trust (see applicable credit amount trust).

Cross purchase agreement is a type of buy-sell agreement where owners are obligated to buy out ach other’s interests upon the happening of a specified event (such as death or retirement).

Crummey power is a right under the terms of a trust given to a beneficiary to withdraw additions to the trust within a set period of time.

Custodianship Custodianship is a legal arrangement in which a person holding a fiduciary position manages the property for the benefit of another person. Custodianships can be arranged under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Acts (UTMA) or by court designation.

Defective Grantor Trust is a trust designed specifically to fall within the grantor trust rules so that income is taxed to the grantor rather than the beneficiary but the trust is not includible in the grantor’s gross estate.

Defined benefit plan is a qualified retirement plan that targets the benefit the participant will receive and actuarially computes the annual contribution necessary to fund that benefit.

Defined contribution plan is a qualified retirement plan to which annual contributions are made and he retirement benefit the participant receives depends on the investment performance of the contributions.

Design Patent.  A design patent is a property right granted by the United States Patent and Trademark Office for a new design for an article of manufacture. The legal life of a design patent is 14 years from the date it is granted.

Direct skip is a type of generation-skipping transfer to someone two or more generations below the generation assignment of the transferor (for example, grandparent bequests money to grandchild).

Disclaimer is an irrevocable refusal to accept a bequest of property made in writing to the executor within nine months of the decedent’s death where the person disclaiming has not accepted any benefits and the property passes to someone else at other than the disclaiming person’s direction.

Distributable net income is taxable income (not accounting income) of a trust.

Double indemnity is a feature of a life insurance policy that pays twice the face value if the owner dies in an accident.

Durable power of attorney is a document authorizing an agent to handle the financial affairs of a principal even when the principal becomes incapacitated.

Education IRAs (see Coverdell ESAs)

Employee Stock Ownership Plan (ESOP) is a qualified plan funded by employer stock instead of cash.

Fair Value

, also known as fair market value, is the price that a willing buyer would pay a willing seller for an asset, assuming that neither is compelled to complete the transaction and each has reasonable access to the same information.

Family limited partnership (FLP) is a partnership with family members in which the senior member typically retains a general partnership interest (and thereby control) with limited partnership interests owned by other family members.

Farm Optional Method.  A taxpayer may use the farm optional method if the majority of the taxpayer’s services would be considered agricultural labor if performed by employees. Under the farm optional method, the taxpayer’s adjusted net earnings from self-employment are deemed to be the lesser of (1) 66 2/3 percent of gross farm income or (2) $1,600. The law does not limit the number of years for which the taxpayer may use the farm optional method.

Floor.  The adjusted net earnings from self-employment tax are subject to a $400 floor. If adjusted net earnings from self-employment are less than $400, the taxpayer is not subject to the self-employment tax. This $400 floor is equal to $433.13 ($400 ÷ 0.9235) in unadjusted net earnings from self-employment.

Freeze rules are rules for valuing certain intra-family gifts that attempt to minimize transfer tax costs by “freezing” the value of the gifts.

Generation-skipping transfer is a gift or bequest that skips the tax on the intervening generation (for example, grandfather gives in trust income for life to child, remainder to grandchild; transfer from grandfather to grandchild is a generation-skipping transfer).

Goodwill is an intangible asset resulting from a company’s ability to generate superior rates of return because of such things as favorable reputation, good location, and good employees. Goodwill can be generated internally or acquired in a business acquisition.

However, internally generated goodwill is not recorded in the accounts. Goodwill acquired in a business acquisition equals the excess of the purchase price of the other company over the fair market value of its other net assets. A company records purchased goodwill in the accounts and analyzes it for impairment at least annually.

Grantor retained income trust (GRIT) pays the grantor income for a term of years, with the property passing to family members at the end of the trust term. To obtain desired tax benefit, the trust must be in the form of a grantor retained income unitrust (GRAT) or a grantor retained income annuity trust (GRUT) or a personal residence trust.

Grantor trust rules are rules under Code Secs. 671 to 677 that tax the grantor on income from a trust even though the grantor is not an income beneficiary.

Guardianship is a legal arrangement in which a person acts in a fiduciary capacity to manage the property of another under court supervision. It may also involve the appointment to raise a child until the age of majority.

Health care durable power of attorney is a document naming someone to make medical decisions on the principal’s behalf in accordance with the principal’s wishes if the principal is unable to communicate his wishes.

Health care proxy is a document naming someone to make medical decisions on the principal’s behalf in accordance with the principal’s wishes if the principal is unable to communicate his wishes.

A Hobby is an activity in which the taxpayer does not engage with a profit motive.

Holdback provision is a clause in a trust that allows the trustee not to pay out income or principal to a beneficiary where it is in the beneficiary’s interest for the trustee to retain the funds (for example, where the beneficiary is on drugs).

Holographic will is a handwritten will without any witnesses (valid only in certain extreme circumstances such as war).

Impairment occurs when a company is not likely to recover the carrying value of an asset from the cash flows it will generate in future accounting periods. For impairment of goodwill to exist, the carrying value of a reporting unit must be greater than its fair market value. The amount of the impairment loss for goodwill is the excess of its carrying value over its implied fair value.

Implied Fair Value applies to goodwill. It is the estimated fair value of goodwill. Goodwill cannot have a true fair value because a company cannot sell its goodwill alone. A company calculates the implied fair value of the goodwill by determining the fair value of the reporting unit and subtracting from it the fair value of the net assets other than goodwill. The difference is the implied fair value of the goodwill.

Incentive stock options (ISOs) are stock options granted in connection with employment that are not subject to regular income tax on the grant or on their exercise (but may be subject to AMT in the year the stock is freely transferable and not subject to any substantial risk of forfeiture).

Inclusion ratio is a ratio used to determine the portion of property constituting a generation-skipping transfer that is subject to the generation-skipping transfer tax.

Income in respect of a decedent (IRD) is income earned by a cash method decedent before death but which is receivable after death by the decedent’s estate or other person.

Inflation-indexed securities are a federal security issued at a discount with daily adjustments for inflation (in addition to regular interest, adjustments to principal are reported as interest under OID rules).

Intangible assets are long-term assets that generally lack physical substance. They confer legal rights or contractual obligations and include such assets as patents, copyrights, trademarks, licenses, and goodwill. Receivables and investments in stocks and bonds are not classified as intangible assets on the balance sheet.

Inter vivos trusts are trusts set up during the grantor’s life (either revocable or irrevocable).

Irrevocable trusts are trusts whose terms cannot be changed after they are set up.

Joint ownership means co-ownership of property with other parties that allows the surviving joint owner to inherit the entire property upon the death of the other joint owner (includes joint tenancy and tenancy by the entirety).

Joint tenancy is a type of co-ownership that allows the surviving joint tenant to inherit the entire property upon the death of the other joint tenant.

Joint wills are a single will executed by two or more individuals.

Junk bonds are high yielding corporate bonds with an investment rating below triple B.

Kiddie tax is a way of figuring tax on the income of a child under 14 using the parent’s top marginal tax rate on income over a threshold amount ($1,500 in 2002).

Lapse is the failure to exercise a power of appointment.

Living trusts are trusts set up during the grantor’s life. Revocable trusts are trusts in which the grantor retains an income interest sometimes called a “will substitute” because trust assets pass without having to go through probate.

Living will is a document expressing a person’s wishes regarding medical care (such as withholding of feeding and hydration under certain circumstances) when the person is terminally ill.

Medicaid is a federal/state program that provides medical care for certain needy individuals (such as those requiring nursing home care who meet income and asset levels).

Medicare is a federal health insurance program primarily for those age 65 and older.

Multiple trusts are two or more trusts treated as one trust (with one income tax exemption and shared tax brackets) if they have the same grantor and substantially the same primary beneficiary and a principal purpose of using more than one trust is tax avoidance.

Mutual wills are wills made by persons pursuant to an agreement to dispose of property in a certain way.

Nonskip person is someone who is not more than one generation below the generation of the transferor.

Nuncupative will is an oral will witnessed by the required number of people.

Net gift is a gift where the donor conditions the gift on the donee’s promise to pay the gift tax.

The nonfarm optional method is a method of calculating the self-employment tax in which the adjusted net earnings from self-employment are deemed to be $1,600, assuming that the taxpayer has no farm income. The taxpayer may use the nonfarm optional method for a maximum of five years.

Nonqualified stock options are stock options granted in connection with employment that give rise to taxable income on their exercise (the difference between the value of the stock and the option price is ordinary income).

Offshore trust is a trust set up in a foreign country and used primarily for asset protection.

Original issue discount is the amount by which the stated redemption price at maturity of a long-term debt instrument is more than its issue price.

A passive activity loss is a loss from an activity in which the taxpayer does not materially participate as defined in the regulations under Code Sec. 469.

A patent is a property right granted by the United States Patent and Trademark Office to an inventor that prohibits others from making, using, or selling the product that is the subject of the patent for a specified period.

Personal holding company penalty is a penalty tax on C corporations levied if at least 60% of the corporate income is personal holding company income and more than 50% of the value of the stock is owned by not more than five individuals.

Phantom stock is a form of employee bonus that gives an employee the benefit of appreciation in the price of the stock.

A plant patent is a property right granted to a person who invents or discovers a new and distinct type of plant. The person must be able to cause the plant to reproduce asexually. The life of a plant patent is 20 years from the date of application.

Pooled income fund is a fund to which the donor receives an income interest based on the annual performance of the fund (made up of contributions from various donors).

Pourover trust is a trust set up to receive assets from other sources (such as inheritances under a will).

Power of appointment allows a person holding the power to direct who will ultimately receive the property. A general power of appointment allows the person to name anyone; a limited power allows the person to name a beneficiary from a set class of people, not including the holder, the holder’s estate, or creditors of the holder.

Premarital agreement is a contract between parties approaching their marriage which specifies rights and obligations of each party (also called a prenuptial agreement and an ante nuptial agreement).

Private annuity is an annuity issued by someone other than an insurance company (typically a family member).

Probate is the court process of settling a person’s estate (it applies only to assets held in sole name that are subject to probate).

Put is an option that entitles the purchaser to sell, at any time before a specified future date, property, such as a stated number of shares of stock, at a specified price.

Qualified conservation easement is a gift of an easement to a charity entitling the donor to a charitable contribution deduction and a partial exclusion from estate tax for the retained interest.

Qualified personal residence trust (QPRT) is a trust that allows the parent to transfer a home to a child at reduced transfer cost (parent retains a term interest, thereby reducing the valuation of the gift of the remainder interest).

Qualified retirement plan is plan set up by an employer to provide retirement benefits and obtain tax benefits.

Qualified terminable interest property trusts (QTIP trusts) are trusts qualifying for the marital deduction in which a spouse is given an income interest for life with remainder passing to others at the direction of the grantor.

Reciprocal wills are wills with reciprocal provisions made by two persons naming each other as beneficiary.

Redemption is a buy back by a corporation of its own stock. A redemption may be treated as an ordinary dividend or as capital gains, depending on the circumstances.

Relation back doctrine means that gifts made at year end by check are valid for that year even though the check is cashed in the following year as long as there were sufficient funds in the account at all times to satisfy payment of the check.

Required minimum distributions are distributions from qualified retirement plans and IRAs that generally must begin no later than April 1 of the year following the year of attaining age 70 1/2.

Restricted stock is stock issued for services and which is subject to a substantial risk of forfeiture.

Reverse mortgage is a type of home mortgage that allows an elderly homeowner to tap into the home’s equity without a sale or

conventional mortgage; reverse mortgage generally does not have to be repaid until the owner sells the home or dies.

Revocable trusts are trusts that can be amended, changed or canceled while the grantor is still competent (sometimes referred to a “living trusts”).

Right of election is a right of a spouse to elect to take a statutory share in the deceased spouse’s estate in place of the amount left to the surviving spouse under a will.

Savings Incentive Match Plan for Employees (SIMPLE) is a type of retirement plan for self-employed individuals and small employers who do not maintain any other type of qualified retirement plan.

Second-to-die policy is life insurance on the life of a couple that pays proceeds only on the death of the second spouse to die.

A securities dealer is a person who holds securities for sale to customers

Selling short against the box is an investment strategy used to lock in gain now but postpone recognition of it to the following year.

Short sale is the sale of property that the seller does not own but is borrowed to deliver to the buyer and, at a later date, the seller buys substantially identical property and delivers it to the lender.

Simple trust is a trust that requires all income to be distributed each year to the beneficiary, has no charitable beneficiaries, and distributes no trust corpus.

Simplified Employee Pension (SEP) is a retirement plan that allows self-employeds and employers to make contributions using an IRA for receiving the contributions.

Skip person is someone who is in a generation that is more than one generation below the generation of the transferor (or a trust if all interests in the trust are held by skip persons).

Special use valuation is an estate tax valuation method for farms and land used in certain closely held businesses in which the property is valued according to its actual use rather than its highest and best use.

Spendthrift provision is a clause in a trust that prohibits a beneficiary from assigning the interest in the trust to creditors.

Split dollar life insurance is an arrangement in which a company helps an employee pay for a whole life policy with the company retaining an interest to cover premiums it expends and the employee has the right to name a beneficiary to proceeds in excess of amounts belonging to the company.

Split gifts are gifts made by one spouse to a third party in which the other spouse consents to treat the gift as having been made one-half by each of them so that the annual gift tax exclusion is doubled in amount.

Springing durable power of attorney is a durable power of attorney that becomes effective upon the happening of an event (such as disability) specified in the document (See durable power of attorney).

Standby trust is a trust set up now but which is left unfunded until some future date.

Start-Up Costs are costs incurred before the taxpayer begins the active business that would otherwise be deductible as an ordinary and necessary business expense.

Stock appreciation rights (SARs) are a type of bonus paid to employees to allow them to benefit from the stock’s growth.

Stock redemption agreement is a type of buy-sell agreement in which the corporation is obligated (or given the option) to redeem the shares of an outgoing shareholder.

Surrogate decision making (see health care proxy; health care durable power of attorney).

Survivorship clause is a clause in a will or trust specifying which person is presumed to survive in case they perish under circumstances that make it impossible to determine actual survival.

Tax clause is a clause in a will specifying responsibility for the payment of federal and state death taxes.

Taxable distribution is a distribution of income or principal from a trust that skips a generation and is subject to the generation-skipping transfer tax.

Taxable termination is a gift or bequest that occurs when a property interest held in trust terminates and which is subject to the generation-skipping transfer tax.

Technological feasibility for internally developed computer software occurs when the company completes all activities necessary for the company to determine that it can produce the software product to meet all specifications. Technological feasibility generally occurs when (1) a company has finished both the product design and the detail program design, (2) the company has verified that the detail program design is complete and compatible with the product design, and (3) the company has determined that no uncertainties exist regarding development issues that have a high risk or the company has resolved such uncertainties.

Tenancies by the entirety is a form of joint ownership between spouses that enables the surviving tenant to own the entire property on the death of the other spouse and the tenancy cannot be severed except by mutual consent unless the marriage is ended.

Tenancy in common is a form of joint ownership where each co-tenant owns an undivided interest in property but there is no survivorship interest.

Tentative tax is the estate or gift tax before reduction for any applicable credits.

Term insurance is life insurance that provides only a death benefit (there is no build up of cash value).

Terrorist victims are those affected by terrorist attacks on September 11, 2001, the Oklahoma bombing on April 19, 1995, and anthrax incidents occurring after September 10, 2001, and before January 1, 2002.

Testamentary trusts are trusts set up under the terms of a will.

Time Sharing is multiple ownership and use of property (such as vacation homes) where each owner has the right to use the home for a set period of time each year.

A trader is an individual who trades securities frequently for his or her own account.

Trust is a legal arrangement in which a fiduciary (called a trustee) holds and manages property for the benefit of another (called the beneficiary).

Trustee is a fiduciary who manages a trust.

The unadjusted net earnings from self-employment are the net earnings from self-employment before the deduction provided in Code Sec. 1402(a)(12). The unadjusted net earnings from self-employment will usually be equal to the total income reported on a taxpayer’s Schedule(s) C (or Schedule F for a farmer).

Universal life policy is a type of life insurance that provides both a death benefit and investment potential (allowing the insured to change or stop paying the premium after the policy has been in force for at least one year).

A utility patent is a property right granted by the United States Patent and Trademark Office to a person who invents, discovers, or improves a new process, machine, article of manufacture, or composition of matter. The life of a utility patent is 20 years from the date of application.

Vanishing premium is an arrangement that can be set up with a whole life policy so that dividends and cash value built up in the policy at a certain point are sufficient to pay future premiums.

Variable annuity is an annuity in which the money is invested in mutual funds and the annuity payments that will be received depends upon the funds’ earnings.

Variable life policy is a type of life insurance that lets the policy owner invest the premiums (after payment of policy expenses) in mutual funds for investment return.

Venture Arrangement for Research and Development activities is when two or more companies join together in research and development activities. The arrangement allows the companies to share resources and the risk of the activities. SFAS No. 68 governs the accounting for such arrangements.

Whole life policy is life insurance that provides a death benefit and builds up cash surrender value.

Zero coupon bonds are discount bonds and, under original issue discount rules, that discount is treated as interest over the life of the bonds.


Unemployment & Taxes

Unemployment & Taxes

Unemployment and Taxes

  • Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a specific state. It includes state unemployment insurance benefits, railroad unemployment compensation benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund. It does not include worker’s compensation.
  • Normally, unemployment benefits are taxable; however, under the Recovery Act, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their federal tax return.
  • For a married couple, if each spouse received unemployment compensation then each is eligible to exclude the first $2,400 of benefits.
  • You should receive a Form 1099-G, Certain Government Payments, which shows the total unemployment compensation paid to you in 2009 in box 1.
  • You must subtract $2,400 from the amount in box 1 of Form 1099-G to figure how much of your unemployment compensation is taxable and must be reported on your federal tax return. Do not enter less than zero.


Education Credits and Deductions

Education Credits and Deductions


As a taxpayer with higher education costs, you should be aware of the many tax benefits that are available to you. Generally, educational assistance such as scholarship, fellowship, or employer-provided educational benefits are excludable from income. For education costs not covered by educational assistance, tax benefits include the Hope scholarship credit (also known as the American Opportunity credit for 2009 and 2010) and the lifetime learning credit. Alternatively, you may have the option of deducting qualified tuition and fees expenses “above the line.” These credits and deductions are coordinated with the exclusion for distributions from education savings plans, such as, Coverdell Savings Accounts and qualified tuition programs. For taxpayers who take out a loan to pay for their education, a deduction is available for the student loan interest.


The amount of the American Opportunity tax credit is computed as 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of such expenses, for a total maximum credit of $2,500. The lifetime learning credit is generally available for 20 percent of education expenses up to $10,000. For taxpayers who do not itemize, an above-the-line higher education tuition deduction can be claimed in 2009 for up to $4,000.


Each education credit and the deduction have adjusted-gross-income phase out limitations. In addition the education credits are coordinated with the deduction and Coverdell Savings Accounts and qualified tuition programs so that taxpayers cannot realize duplicate tax benefits for the same dollars of education costs. Because of the variety of tax benefits and the variations as to eligibility and the definition of qualifying education expense, some or all of the benefits may apply to you. Every taxpayer should review their tax plan in order to take maximum advantage of the tax savings for education.


For instance, a taxpayer generally should elect the Hope scholarship credit rather than the exclusion from income for distributions from a Coverdell ESA. However, a taxpayer may be better off electing the exclusion in situations in which the student incurs relatively lower tuition and fees and higher expenses of other kinds (such as expenses that qualify for the exclusion, but not for the credits). Also, because the credits are phased out when a taxpayer’s modified adjusted gross income exceeds a specific level, it may be more advantageous to forego the exemption for a dependent student and have the student claim the education credit on their own return.


Determining the best alternative for you and your dependents requires an analysis of your expected costs, resources, and income. We can advise you on the best course of action. Please call our office at your earliest convenience.

Charitable Contributions & Taxes

Charitable Contributions & Taxes


Cash contributions.  Congress has tightened the rules for cash contributions. In order to take a deduction for charitable contributions of cash, check or other monetary gift — no matter what the amount — you must provide a bank record or a written communication from the charity indicating the amount of the contribution, the date the contribution was made, and the name of the charity. Self-created log books will not suffice.

A cash-basis taxpayer generally takes a deduction when cash or property is actually paid, regardless of when a pledge is made. Payment by check is considered a payment. If the check is mailed, the payment is made at the time of mailing, even if the check is received in the following year, as long as the check is honored in the routine course of business. However, if the taxpayer post-dates the check to 2008, if the check bounces, or if the recipient holds the check because the account lacks sufficient funds, no payment has been made. If the recipient delays but ultimately cashes the check, and the date of delivery is not disputed, the payment dates back to the time the check is delivered or mailed.

Payment by a credit card is also considered a payment. The IRS treats the transaction as a cash equivalent. In effect, the taxpayer has borrowed funds from the bank issuing the card and has paid the seller for goods or services. Likewise, payment with a debit card is treated as a payment when the sale is completed, not when funds are later deducted from the purchaser’s account.

Household goods and clothing.  Just like the rules for cash gifts, the rules for deducting donations of clothing and household items have also been tightened. In order to take a deduction for household goods and clothing, the clothing must be in at least “good” condition, which is undefined, however. The amount of the charitable contribution is based on the fair market value of the clothing or household item. Household items must also be in good or better condition. Ensure that your donations of furniture, pots and pans, dinnerware, sheets and blankets, home furnishings, electronics, appliances, and similar items are not broken or in disrepair. You must obtain a receipt from the charity, showing the name of the charitable organization, the date and location of the gift and a detailed description of the property contributed.

Moreover, gifts of $250 or more must be substantiated by a contemporaneous written acknowledgment from the charity containing a description of the contribution, whether you received any goods or services in consideration for the contribution, and a good faith estimate of the value of any goods or services. If the claimed deduction exceeds $500, donors must include Form 8283, Noncash Charitable Contributions, with their return. Special rules apply for deductions of $5,000 or more. Our office can help navigate you through the various rules.

Contributions of automobiles.  There are special rules that apply to donations of motor vehicles to charities. For instance, if you want to donate your car to charity (or a plane or boat) with a claimed value of more than $500, your charitable deduction amount will depend on the charity’s use of the vehicle. You can deduct the full fair market value (FMV) of the vehicle if the charity actually uses the vehicle to substantially further its regularly conducted charitable activities and the use is significant. Alternatively, you can deduct the full FMV if you have made a material improvement such as a major repair that improves the vehicle’s condition in a way that increases its value. Otherwise, your contribution will be valued at its “auction price,” which is typically quite low.

Contributions of appreciated capital gain property.  The deduction for contributions of appreciated capital gain property can be quite complex. Generally, contributions of appreciated capital gain property to a qualified charitable organization are subject to a 30 percent of adjusted gross income ceiling, unless a specific election is made to reduce the deductible amount of the contribution. This election will limit your deduction to the basis of the contributed property.

Contributions from an IRA.  The deductible amount of an individual’s charitable contributions made during a tax year generally may not exceed 50-percent of the taxpayer’s “contribution base” (basically, a modified adjusted gross income amount). Certain distributions made directly from an IRA to a charity before 2010, however, are not limited by this 50-percent ceiling nor do they count toward that limit in the case of other types of contributions. This special treatment is accomplished not by allowing a charitable deduction for an IRA contribution but rather by excluding any qualifying distribution from inclusion into the taxpayer’s income. The exclusion may not exceed $100,000 per taxpayer per taxable year. To be a qualified charitable distribution, the distribution must be made after the IRA owner turns age 70 1/2 and is made directly from the IRA trustee to a qualifying charitable organization. The ability to make a donation directly from our IRA to a charity is only available through 2009, unless Congress acts to extend this provision.

Conservation easements.  You can also make a contribution of a qualified real property interest to a charity exclusively for conservation purposes. Through the end of 2009, the 30 percent contribution base limit does not apply to an individual’s qualified conservation contribution. Moreover, if the total amount of your pre-2010 qualified conservation contributions exceeds the applicable limit, you can carry over the excess to each of the 15 succeeding years.

If you have any questions about making a charitable contribution and taking a deduction for your contribution, please call our office.

Tax Return Checklist

 Tax Return Check List

  • Wages, salaries, or any other employment compensation?
  • W-2?
  • W-2G?
  • 1099R?
  • 1099INT?
  • 1099DIV?
  • Any other 1099?
  • Tips?
  • Interest on savings or checking, cash U.S. bonds, or receive stock dividends?
  • Social security or railroad retirement?
  • Lump sum from an employer sponsored plan and the recipient and/or employee was born before 1936?
  • Pension or IRA distributions and the recipient was under 59 1/2?
  • Other pension, annuity, IRA, or retirement income?
  • Unemployment compensation?
  • Alimony?
  • Self-employment and/or operation of a business?
  • Operation of a farm?
  • Rental of land and property for agricultural purposes?
  • Other rental property?
  • Gambling winnings? (lottery, race track, casinos, raffles).
  • Any miscellaneous income? (prizes, awards, jury duty) Royalties?
  • Schedules K-1? partnership or S corporation or estates or trust
  • IRS notice of a change to a prior year’s return?
  • Closing statements from real estate sales?
  • Stock, mutual fund, or other non-business related security?
  • Your personal residence?
  • Rental property?
  • State Refund (from last year)
  • Property relating to a business or farm?
  • Business property not listed above? (equipment, land)
  • Did the sale of any property above involve a bartering agreement?
  • Are you receiving installment payments on any property sold?
  • Have a home mortgage?
  • Use a portion of your home exclusively for self-employment?
  • Have medical expenses or pay for health insurance?
  • Make substantial contributions to charity, church, etc.?
    • If yes, over $500 in noncash contributions?
  • Suffer a loss from a casualty? (fire, theft, natural disaster)
  • Purchase a car, boat, aircraft, motor home, or home building materials in 2009 or keep receipts on all sales tax items purchased in 2009?
  • Itemize deductions last year and receive a state tax refund?
  • Incur out-of-pocket expenses or use your personal auto on the job?
  • Move to be closer to a new job?
  • Send prepayments to IRS and/or state for your current year tax liability (estimated taxes) or apply an overpayment from 2008?
  • Have any household employees to whom you paid $1,000 or more?
  • Have a qualified Federal fuel tax credit?
  • Contribute to an IRA, SEP, Keogh, or Simple retirement plan?
  • Get claimed (or were eligible to be claimed) as a dependent on someone else’s income tax return?
  • Did your children receive more than $950 and less than $9,500 from interest and dividends that you wish to claim on your own tax return instead of your child’s return?
  • Did you pay child or dependent care expenses?
  • Did you pay qualified postsecondary education tuition and related expenses for yourself, your spouse, or your dependents?
  • Did you cash any U.S. EE or I Bonds to pay for postsecondary education for yourself, your spouse, or your dependents?
  • Did you pay interest on higher education loans?
  • Were you a pre-college educator who purchased books or classroom supplies, for which you were not reimbursed?
  • Were there any births, adoptions, divorces, marriages or deaths in your household?