Archive for the ‘General’ Category

Prince’s Million Dollar a Mile Mistake

Originally published in the Cedar Street Times

June 10, 2016

Unless you have been living under a rock, you have certainly heard by now that musician, Prince Rogers Nelson, passed away on April 21, 2016.  Unfortunately, he did no advance estate planning which means it is going to be an expensive, public, and litigious affair that will probably last for years.

I have seen estimates of his net worth in the media ranging from $250-$800 million.  Obviously, there is all the easy stuff to value – cash, stocks, bonds, real estate, and personal property.  But putting a value on things like his future royalties on music sales, video sales, his brand image, licensing of his lyrics or music to other artists to cover his songs, etc. is quite a task.

And what about the purported 2,000 or so unreleased songs he is said to have.  How many hits are in there?  Do you think an appraiser is going to sit in a room and listen to songs or read sheet music and put a value on each of them?  And once they come up with a dollar figure, then they have to discount it to the present value, so they would really need to consult their crystal ball for future interest rates, etc.

At one point in my career I worked with the family of a famous deceased musician, and I can tell you first hand that a lot of future value will be determined by how well his heirs maintain or expand the “Prince business machine” that will continue to promote his music and keep it alive, and keep people buying it.  And if the estate gets split up between multiple heirs that do not know each other, there will certainly be a decrease in value.  The last I checked, there was a sister, three half-siblings, and two people claiming to be his son, one of which is in prison, all vying for a piece of Prince’s estate.  So you might have to work with all of these people to buy the rights you need!

Prince certainly is not the first musician to have his estate valued, and there are accepted norms of how appraisers come to values, but I can tell you this much, whatever number they come to will not even be close to correct!  And there will certainly be a lot of negotiating between IRS appraisers and appraisers hired by Bremer Trust, the wealth management firm appointed to handle his estate.

And by the way, all of this is supposed to be done and estate taxes calculated and paid within nine months…in a perfect world.  The Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return, which will list every single asset in his estate, (right down to the change in his pockets) with descriptions, values, and support for valuations is due January 21, 2017.  It is the mother of all tax returns.

The administrator of the estate can file a six month extension for the return, and the IRS can grant an additional year to pay the tax, but interest will start accruing on any unpaid tax after January 21st.  In situations with reasonable cause, the IRS can grant additional one year extensions for up to four and sometimes up to 10 years to pay the tax.  Although, they could also be assessed additional penalties.  The estate could also do an installment agreement for up to 14 years to pay the tax over time.

The extensions of time to pay, although not granted easily, are  designed to protect the interests of the heirs and the IRS.  With a massive estate and so many unknown quantities and litigation, you would have to have a fire sale to generate enough cash to pay the estate tax within nine months.

So how much estate tax will be paid?

The federal return will provide for a $5.45 million exemption for people dying in 2016.  That assumes that he made no lifetime gifts over the annual exclusion amount (currently $14,000 per person per year, and less in prior years).  It would be silly to assume someone of his wealth made no large gifts to individuals during his lifetime.  From what I have read about Prince, he probably made quite a few.  Any gifts he made in excess of the annual exclusion amounts would reduce his $5.45 million exemption.  For simplicity, though, let’s assume he made none.  So the first $5.45 million is tax free.  The rate of tax then slides from 18 percent on value in excess of $5.45 million to the top rate of 40 percent on everything over $6.45 million.  So for the first $6.45 million of his estate, a tax of $345,800 will be paid, and then 40 percent on everything over that.

Let’s assume his estate ends up being valued at $550 million and there ends up being $50 million in litigation and estate expenses leaving $500 million potentially taxable.  His federal estate tax would be $197,765,800.

Ahh, but Prince lived in Minnesota!  He was unfortunate enough to make his home in one of the 19 states (plus Washington DC) that have their own estate and/or inheritance tax.

Due to his residency the estate will also need to file a Form M706, the Minnesota equivalent of the federal Form 706. Minnesota will have a $1.6 million exemption.  The rate of tax then slides from ten percent on value in excess of $1.6 million to the top rate of 16 percent on everything over $10,300,000.  So for the first $10,300,000 of his estate a tax of $1,080,000 will be paid, and $1,600,000 for each additional $10,000,000.  So his Minnesota estate tax will be $79,432,000.

The Minnesota estate tax paid will fortunately be an additional deduction on the federal return.  So 40 percent of $79,432,000 will reduce the federal estate tax bill by $31,772,800, resulting in a $165,993,000 balance.

That will bring his total estate tax bill to $245,425,000, or roughly 49 percent, leaving his heirs with $254,575,000 to split up.

Besides all of the typical and sometimes fancy estate planning that could have been done to avoid costly litigation, and perhaps save tax through things like irrevocable life insurance trusts and other tricks up an estate planners sleeve,  I wonder if he ever simply considered setting up shop 45 miles away across the St. Croix river in Wisconsin?  It might have saved his estate $47 million – that is over $1 million per mile!

Although most people do not have $245 million estate tax bills for their heirs to worry about (or any estate tax at all), planning in advance and understanding the rules surrounding your tax and financial life is always important.  Sometimes even little things, learned early, can make a big difference.  And building a relationship with someone that can keep you on the right track is certainly of value.

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

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Why I am a Tax Accountant?

Originally published in the Cedar Street Times
May 27, 2015

Sometimes people ask me why I am a tax accountant.  This question seems to have different colors to it when asked. Sometimes it is an interest in me – what things I find enjoyable about the profession or how my particular career path led me to where I am.   Sometimes it is an interest in themselves as they are “trying on” my work clothes to see if this field may be of interest to them in some capacity.  And other times it is an interest in the general human condition probing for answers to: “How in the world could anyone in their right mind, voluntarily do what you do?”

Well, I certainly hope I am in my right mind.  Contrary to the stereotypical image of a reclusive, socially awkward bean counter that maybe wears a pocket protector, I actually find most of us do not carry that stigma! Okay, I admit I wear bowties, but these days in a scene where formal business attire inevitably includes a necktie,  I submit to you that a bowtie is more the shtick of a rebel than a conformist.
Let’s see, what else can I tell you to debunk the nerdy, ill-equipped-for-life-but-good-with-numbers typecast. Well, I recently flew across the country to play in a soccer a tournament with a bunch of teammates that I played with in college.  I pretty much built a house with my own two hands (actually four when you count my wife’s) – everything from bending rebar in the foundation to nailing the shingles on the roof.  Oh, and I ride a motorcycle (albeit cautiously).  So you can add sports, construction, and motorcycling to your list of accountant hobbies.
So what part of me is driven to debits, credits and taxes?  Well, there are various skills in my life that I have seen as a recurring pattern ever since I was a child that are applicable.  I have always enjoyed: 1) organizing and classifying information, (like counting coins and bills which was a favorite activity when I first learned to count, or endlessly sorting, organizing and valuing baseball cards in elementary school), 2) solving problems (like figuring out how to turn on all the pull string lightbulbs in our basement in middle school all at once), 3) creating things (like a Christmas light display in high school that soared 35 feet above our rooftop, or writing software code – one of my first jobs out of school).
I was also entrepreneurial growing up.  I can remember when I was in third grade, I located some really neat and colorful mechanical pencils.  I found that I could buy a ten pack for $1 and resell them for 25 cents each making a $1.50 profit on each pack.  I can remember the teacher having to tell everyone to sit down one day because I had a swarm of kids around me buying pencils. I had a few other small retail ventures like that in elementary school and I had a yard and odd job business in middle and high school as well.
Throughout it all, I enjoyed people, and I liked helping people.  That is what really landed me on the tax side of CPA life.  I did financial statement audits about half-time for the first six years or so of my accounting career.  I felt it really used my full skillset as an accountant, which I enjoyed, but I felt more like a necessary evil than someone who was being voluntarily employed to help.  Not many people hire auditors because they want to!  And who likes someone who is basically looking over his shoulder to report any mistakes he is making!
I have enjoyed tax preparation because there is a high degree of interaction with individuals, and I truly feel that I am able to help people, and they are generally very grateful for the help.  Since most everything in our lives (good or bad) has some kind of tax impact at some point, conversations with clients become very personal at times, and there are deep bonds that can form.  I find it is a very honorable and rewarding feeling to be entrusted with an understanding of someone’s personal and financial matters, and to try to help them either save tax or be a general financial (or personal) sounding board.
Plus, while doing this, I get to use the various skills I have enjoyed in my life.  Tax accounting certainly employs organizing and classifying information.  Preparing a tax return or tax plan for an individual, trust, estate or business is almost always a problem solving and creative activity as you try to piece together a mountain of facts and rules to come up with the best scenario you can.
Having my own firm also fulfills my entrepreneurial craving and gives me flexibility of time and the opportunity to do a variety of things, which I also enjoy.  So why am I a tax accountant?  Because I love it!

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

Do You Know What a Mortgage Really Is?

Originally published in the Cedar Street Times
May 6, 2015
You commonly hear people say things like, “I have to pay my mortgage,” or “When is my mortgage due?”  Technically, this is incorrect.  If you were back in grammar school, your teacher would explain that you are using an incorrect part of speech. A mortgage is not a noun; it is a verb.
Mortgage means “to pledge.”  It is the action you take when you pledge the house as collateral when you give the bank a note with the promise to pay them back.  So the bank says, “Hey, if you want to buy this house (or borrow money against a house you already own), we will give you the money if you mortgage the house by giving us legal title to the house until we are paid back, and giving us a note that promises repayment.  If you default on the loan we can sell the house to settle the debt.”  The customer is the mortgagor.  The mortgagee would be the lender.
After the note is paid in full, then the mortgagor reconveys legal title to the property to the mortgagee.   Even though the lender has legal title until paid in full, the mortgagor still retains equitable title.  Equitable title is basically the right to use and enjoy the property.
In about  20 states (including California) we technically do not use mortgages, but instead use deeds of trusts.  This works in a similar fashion except that instead of the mortgagee holding legal title until the debt is paid, a third party (such as an escrow company) holds the legal title until the debt is paid in full.  A deed of trust is an advantage to the lender, as the lender does not have to sue in public court in case of default.  Instead they can do a nonjudicial foreclosure much faster.
So, in reference to the beginning of our article, to be technically correct, you would have to say “I’ve got to pay the note for the house I mortgaged,” or in California, ” I’ve got to pay the note for the house on which there is a deed of trust.”

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

It’s Friday April 15 and Taxes Aren’t Due?

Originally published in the Cedar Street Times

April 15, 2016

If you were (or still are!) a last minute tax return filer, you may have some pleasant news this year – you have three more days to procrastinate!  If you are reading this article on April 15, you might be wondering, “Why is it a normal workday, and my taxes are not due?”

The answer is “Emancipation Day.”  No, we are not talking about emancipation from taxation, but emancipation from slavery.  On April 16, 1862, President Lincoln signed the District of Columbia Compensated Emancipation Act.  This act freed slaves in Washington, D.C., and compensated the prior slave owners for having to give up what was perceived as a financial loss.  This was the only instance were prior slave owners were compensated by the federal government.

The importance of the District of Columbia Compensated Emancipation Act is that it was seen as the first major victory that led to the abolition of slavery.  There had been attempts in the past to accomplish similar feats, but they had all failed.  In fact, when Abraham Lincoln was still a Senator, he tried in 1849 to accomplish this task, but it did not get enough votes to pass the legislature.  Even the decade prior to that saw several failed attempts spearheaded by others.

The District of Columbia Compensated Emancipation Act served as a precursor to the much broader Emancipation Proclamation, nine months later, that freed all slaves in Confederate territories.  Whereas the District of Columbia Compensated Emancipation Act freed about 3,000 enslaved people, the Emancipation Proclamation freed about three million enslaved people!

The Emancipation Proclamation, although often thought of as abolishing slavery, did not actually do so.  It was a wartime power instituted by Lincoln (not voted on by Congress), and it only freed slaves in the Confederate territories that were rebelling.  There were still four non-Confederate states in the South where slavery was legal, even after the Emancipation Proclamation.  It was not until the 13th Amendment to the Constitution was passed, and then ratified on December 6, 1865, that slavery was officially abolished in the United States.

The District of Columbia Compensated Emancipation Act, although celebrated in various capacities since 1862, did not become an official legal holiday in Washington D.C. until 2005.  The first year the tax return filing deadline was changed was for the 2006 tax returns due April 17, 2007.  Since the Emancipation Day Celebration fell on a Monday, and the IRS deadline is always the next business day if the 15th falls on a nonbusiness day, the due date was bumped to Tuesday the 17th.  That year, only Washington D.C. residents received an extra day, and everybody else still had to file on April 16.

Tax year 2011 was the next conflict, and the first time the whole country received an extra day, and is just like this year where April 15 falls on a Friday.  Whereas, the IRS moves their due date to the next business day when April 15 falls on a nonbusiness day, the Emancipation Day celebration moves to the prior business day.  Since April 16 was a Saturday in 2011, as it is now, Emancipation Day moves its celebration to Friday April 15, and then the IRS turns around and says, “Okay, today is a holiday, so we move our due date to the next business day,” which results in Monday the 18th!  Phew!  And fortunately California says, “We will just do whatever the IRS does,” – a rare but appreciated concession in a state that enjoys nonconformity.

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041. This article is for educational purposes.  Although believed to be accurate in most situations, it does not constitute professional advice or establish a client relationship.

Get Ready for 2015 Taxes

Originally published in the Cedar Street Times

January 8, 2015

 

We are going to take a break from our Back to Basics series to address a few timely issues.

At the beginning of every year, I send each of my clients a tax organizer to assist in gathering all the information necessary to complete the tax returns in an efficient manner.  The tax organizer is customized for the client and includes his or her prior year amounts for comparative purposes (and it serves as a great memory jogger so nothing is left out).

There is also a questionnaire to assist in alerting us to items that may not occur every year, but that may be present in the current year.  I also ask clients additional questions about the status of things like their estate planning, retirement planning, assets, debts, insurance, health care directives, etc. in order to ensure that they are thinking about these important issues each year.

Organizers are a fairly common practice among CPA firms, and for good reason.  They result in more accurate and more efficient tax preparation which should translate into a more accurate calculation of your tax liability, less problems with the taxing authorities, and less cost to you in the long-run.  Some of you may find yourselves saying, “Oh, I never use the organizer.  My CPA knows how I do things, and I have been doing it this way for years, plus my tax stuff is very simple.”

Behind the scenes this translates into moments of, “Oh, yeah, I remember these yellow sheets with the small scribbles from the past – now where did she put the real estate taxes again?”  And then if there is staff involved, there may be an additional conversation, “Okay, now here is what you need to know about how Mrs. Jones organizes her information…”    Since time is a precious commodity, the more of it that is used in the process of assisting you, the higher your bill is going to be.  With some firms, you will see this reflected in your bill each year.  In other firms, your pricing will be more consistent, but will trend higher or lower as a result over a period of years.

Ask yourself, is the firm going to be faster at learning, remembering, and extracting information from hundreds of different client systems with information in different orders, or from one system which is perfectly ordered with its software and that it knows backwards and forwards?  You can minimize the fees related to data collection and entry, and just spend your money on the real value of strategy in preparing the returns.

That said, maybe it is worth it to you to keep doing it the way you have always done it.  A CPA firm is generally going to be intelligent enough to figure it out and let you know what is unclear or what else may be missing in most cases, it just might cost you a little more, and have a little more risk associated with it.

In addition to the organizer each year, I send clients an engagement letter for services to be provided, a limited tax power of attorney to speed up the process in case we need to resolve an issue on a client’s behalf, and an additional organizer letter.  The organizer letter explains new tax developments over the past year, as well as revisiting issues from prior years that remain important and still somewhat fresh.  This year’s organizer letter was six pages long.  I don’t expect clients to necessarily read it all, but it is laid out in an easier manner to skim the topics and see what might be important to read further.

Here is a high level summary of some of the issues from my organizer letter you may want to be aware of:

  1. The IRS took a clear position this year that businesses sending 1099 forms this January must send them to LLCs as well, unless the LLCs have made a special election to be taxed as a corporation.  Fees for not properly sending 1099s have doubled.
  2. President Obama signed a new law this year that requires anyone claiming education credits or education deductions to have a 1098-T when filing their tax returns.
  3. The PATH Act (Protecting Americans from Tax Hikes) was signed into law on December 18, 2015.  This was the extender bill for this year which we have grown accustomed to getting at the last minute each year from Congress.  Some notable provisions made permanent include the sales tax deduction as an option in lieu of state income taxes, the IRA‐to‐charity exclusion, enhanced child tax credit, enhanced American opportunity tax credit, enhanced earned income tax credit, above‐the‐line deductions for qualified tuition expenses, the section 179 depreciation deduction for up to $500,000, built‐in‐gains holding period of 5 years for s‐corporations, and enhanced exclusion of gain on sale of small business stock. The qualified tuition deduction, mortgage insurance premiums deductible as interest, and exclusion of income for debt on discharged principal residences where extended through 2016. Bonus depreciation and first‐year bonus depreciation on automobiles was extended through 2019.
  4. Do not do more than one indirect rollover from one retirement plan to another in any 365 day period (not calendar year based), or you will face penalties.  Indirect rollovers are where the retirement plan custodian issues you a check directly, and then you have 60 days to deposit the money with another retirement plan custodian or consider it a distribution.  (You can still do unlimited direct rollovers from one trustee to another.)
  5. Several tax return due dates are changing affecting 2016 returns (not 2015 returns) – due dates for partnerships move to March 15, c-corporations move to April 15, and FinCen 114 for foreign bank accounts move to April 15 and are now eligible for a six month extension.
  6. The new capitalization and repair regulations of 2014 were modified to allow taxpayers to have a capitalization policy of $2,500.  This means businesses can now deduct any item $2,500 or less as an expense without having to include it on a depreciation schedule or take a section 179 deduction for it.  You do not even have to have a written policy to this effect, but you do have to make an annual 1.263(a)-1(f) election on your returns each year to do this.
  7. Watch for 1095-A, B, and/or Cs this year as they will be much more prevalent and will be needed in the preparation of your tax returns to ensure you meet the health care insurance requirement.  Last year was lax.  This year the noose has been tightened.  If you did not have health insurance for all or part of the year, be aware, some exemptions from the health insurance mandate require you to apply to Covered California to get an exemption for use in your preparation.  In other words – get moving!

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041.

Back to Basics Part XXIX – Form 8822 Change of Address

Originally published in the Cedar Street Times

December 11, 2015

If you are like most people, whenever you change addresses you will almost certainly notify the United States Post Office so they can forward any mail that is still being delivered to the old address.  Although you may have notified people and businesses prior to and just after your move, you will inevitably have those that are off your mental radar, and do not get notified.

Since people generally only file their taxes once a year, and it is sometimes an experience they want to forget (although never in my office, I am sure!), the IRS and any state taxing authorities often end up in the off-the-mental-radar list!

The fact that the USPS will forward your mail for up to a year after your move does assuage the need to update the taxing authorities since filing a new return with an updated address will also effect the same change.  Plus it seems the IRS and FTB (here in California) have an uncanny ability to track you down anyway, if you owe them money!

All of this said, you may not want to risk your private tax information and Social Security number  being delivered to the new people in your old house by mistake.  Not to mention, you may have action items that require attention within 30 days of the letter date.  Mail forwarding can sometimes take a good chunk of that time, or maybe it never makes it to you if accidentally delivered to the old address.

So what are your options?  Well, you could call the taxing authorities, but be prepared to wait.  These days I tell clients to find a time where they can put the phone on speaker, make some popcorn and watch a movie while they wait.

This is a sidebar discussion – but here is the reason for the long wait times…the IRS is considered a discretionary program in the US budget and it is funded by annual appropriations by Congress.  The IRS budget has been cut by about $1.2 billion in total over the course of the past five years (approximately 10 percent) according to the GAO.

You may recall the IRS revealed in 2013 that its nonprofit audit department had been targeting certain political groups.  Well, that did not help!  This caused an uproar and Congress has been unwilling to increase the IRS budget.  In fact it decreased it further since 2013.  By examining the disproportionately large declines in taxpayer services according to statistics at the IRS, in relation to their ten percent budget cut, it is speculated that the IRS reaction to Congress has been to focus its internal funding cuts on taxpayer services (think phone support, etc.) in order to gain sympathy in the public eye for more funding.  So taxpayers are caught in the middle of political chess.

Whenever I speak with the IRS representatives, I always try to be as courteous and supportive as possible while trying to get the information needed.  Although you may be frustrated with such a long wait, it is not the fault of the representatives answering the phone, and they are probably feeling pressure and get tired of talking to upset people all day.  Courtesy can go a long way sometimes.

Anyway, back to address changes – the easiest way is to mail a Form 8822 Change of Address to the IRS (FTB Form 3533 for California). The Form 8822 is a simple one-page form which you can download off the internet.  You essentially list your name and Social Security number, your old address, and your new address.  You sign and date it, and mail it in.  California FTB Form 3533 is pretty much the same except they manage to stretch it into two pages in order to cover business entities as well.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Back to Basics Part XXVIII – Forms 8814 and 8615 – Reporting a Child’s Investment Income/Kiddie Tax

Originally published in the Cedar Street Times

November 27, 2015

 

In order to prevent people in higher tax brackets than their children from shifting money into their children’s names in order to pay tax at a lower rate, “Kiddie Tax” rules were enacted.  The government also allows you to simplify reporting in some cases where filing a separate return for children with a small amount of income is burdensome.

The quick summary is that if your child has less than $1,050 of unearned income (and assuming there is not enough earned income to trigger a filing requirement), there will be no tax paid on the unearned income, and nothing to file.

If there is over $1,050 and $2,100 of unearned income, the amount will be taxed at the child’s rate.  In this case , the child can file his or her own tax return or the parent has the option of filing a Form 8814 – “Parent’s Election to Report Child’s Interest and Dividends” to avoid filing a separate return for the child, and just report the tax on the parents’ return.

If the child has over $2,100 of unearned income, the parent can still file either way, but the amount over $2,100 will be taxed at the parents’ rate.  If the parents elect to file on their return using Form 8814, the calculation to tax at the parent’s rate for the income over $2,100 is included on that form.  If a return is filed for the child, instead, then a Form 8615 – “Tax for Certain Children Who Have Unearned Income” will need to be filed with the child’s return to perform the additional tax calculations.

In order to qualify to File Form 8814, your dependent child would have to be under age 19 (or under age 24 if a full-time student during at least five months of the year) to qualify.  A quirky rule to watch out for is if you have a child with a January 1 birthday.  In this case, on December 31 of each year they are considered to be another year older.  So if your child turned 18 on January 1, 2015, the child would be considered 19 at the end of the day on December 31 and thus not under age 19 for tax year 2015. (They are the only birthday that gets the short-end of the stick!)

Unearned income is defined as interest, tax-exempt interest, dividends, capital gains distributions from mutual funds, net capital gains from sales, rents, royalties, taxable Social Security or pension benefits,  taxable scholarships, unemployment income, alimony, and the like.    Note that capital gains distributions come from mutual funds, and they represent your share of the buying a selling inside the mutual fund which you have no control over.  The short-term sales actually get reported as dividends, and the long-term sales get reported as capital gains distributions.  Net capital gains would be the aggregate of your  gains and losses from the direct sale of a particular stock or bond, or the mutual fund itself in your account.

As summarized earlier, if your child has over the $1,050 of unearned income, you may wish to simplify and not file a separate return for the child.  The parents may elect to file (with the parents’ tax return) a Form 8814 – “Parents’ Election to Report Child’s Interest and Dividends” if  the child’s only unearned income was from interest, dividends, and capital gains distributions (note that rents, scholarships, unemployment, etc. are not included) and his or her gross income is less than $10,500.   Otherwise you have to file for the child. There are a few other requirements as well which you can read about in the instructions to the form.  The first $1,050 will not be taxed, but the rate on the child’s income between $1,050 and $2,100 will be ten percent.  The amount of tax is transferred from the bottom of the Form 8814 and added to the parent’s tax on Line 44 of Form 1040.

Keep in mind, that in some cases, you are better off still filing the child’s tax return even though you have the option to report it on your return, due to other tax incentives and credits the child may be eligible to receive.

If the child has over $2,100 of unearned income, the parents can still elect to file the child’s return with their return.  If they decide to file a separate return for the child using Form 8615 – “Tax for Certain Children Who Have Unearned Income,” the form will take the parent’s taxable income and add to it the child’s taxable income.  Using this combined amount the appropriate tax bracket is used to determine the additional tax related the child’s portion of the income.  This amount is added to Form 1040 Line 44 of the child’s return as additional tax, and the Form 8615 is attached to the child’s tax return.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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What Does a Tax Accountant Do After the Last Return is Filed on April 15th?

Originally published in the Cedar Street Times

April 17, 2015

 

As I am writing this article, it is the evening of April 15.  Phew!  I decided to take a break from the Back to Basics series to pen a sigh of relief.  Every tax season has its own unique flavor, its own sense of flow and timing, and its own trials and tribulations, but one thing they all have in common is an end date!  “End date,” is a rather soft term as there are lots of extended returns to complete during the rest of the year, but the most intense time is over.  Sometimes people assume we all have our airline tickets in hand and head off on vacation the very next day.  Only once have I tried this…we left for a vacation on April 18th – but it was just too rushed!  The reality is that there will still be a flurry of activity over the next few weeks finishing up returns that were close to completion.   But the majority of extended returns will be completed later when missing information rolls in.

Sometimes early filers think that only lazy people extend their returns (!), but that is far from the truth.  There are many people who are waiting on required information that is beyond their control, and that information may not show up until the summer or even the fall.  And occasionally, you will have legitimate situations where required information does not come until after the extended due date in October!  For some people, filing an extension allows them to work on their tax details when their business or personal life is slower.  And yes, there are the procrastinators as well!  But whatever the reason, it is necessary to have extenders, as there is no way tax preparers could prepare every tax return in America by April 15th – especially when Congress is still changing the rules well into January in some years, and then not requiring reporting to taxpayers until late February or March in some situations.  Even with extensions, I would love to see America move to a system that spreads return due dates throughout the year, perhaps based on birth dates, or something of that nature.  It would be better for taxpayers, for the taxing authorities, and for tax preparers.  Maybe I need to run for Congress.

All of this said, I always take April 16th off as a personal day.  It just helps to decompress.  So what am I doing?  I am taking my three-year-old son, Elijah, in the morning to his first gymnastics class.  We will then rendezvous with Mommy and nine-month-old Claire at an increasingly familiar dining establishment Elijah calls “Old McDonald’s,” and learn about Mommy and Claire’s time at Parents’ Place in Pacific Grove.   In the afternoon, the kids will go to daycare for a few hours while Mommy works.  (I half-cringe, every time I use the word “kids” in reference to my children as I had a Political Science teacher in college that wouldn’t tolerate that reference and would always let us know that kids are baby goats.  But as one of my English professors in college also said, once you know and understand grammatical rules, then are you free to break them!  I like the word “kids,” and I’m sticking to it…besides, a nine-month-old eats anything it can put in its mouth anyway – very goat-like.)

This leaves Daddy all by himself for an afternoon!  If it is a nice day, I may take the motorcycle out and cruise down the coast, or maybe play a round of golf.  Of course, I will bring my wife some flowers, but I won’t be doing taxes!

We will take a vacation, but not until May, when we head down with some friends and take our “baby goats” to graze in Disneyland for the first time!  That should be fun!  We will also fit in a third birthday party for my son who turned three on April 3rd.  For some reason, Daddy was not able to fit a party into his schedule in early April…sorry, but you are going to have to get used to it kid – besides you were the one that decided to be born two-and-a-half weeks early even though I clearly explained all of this to you while you were in the womb!  Elijah loves fire trucks, so we want to extend a special thank you to the people at the Pacific Grove fire station who have agreed to host a bunch of three-year-olds!

Prior articles are republished on my website at www.tlongcpa.com/blog .

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Confidentiality, Privilege, and Taxes

Originally published in the Cedar Street Times

August 22, 2014

Pretty much anybody that watches crime shows on television knows about attorney-client privilege.  This is how murderers can admit the details of their crimes to their attorneys and the communication is protected from discovery by the courts.

But what about tax related communications with your accountant?  Unfortunately, there are not a lot of television shows featuring taxpayers admitting the gory details to their accountants on how they swindled the IRS.  That said, prime time dramas are probably not the best place to learn about the legal and accounting world anyway!

Misinformed people will sometimes think they can sit down with their CPA and contrive ways to scheme the IRS, or that they can openly discuss all the income they took in under the table and did not report.  Communications with a CPA are confidential due to professional standards, but they usually do not qualify for evidentiary confidentiality privilege in a court of law.  This means the CPA should not disclose the information to other parties without your permission, but if questioned in a court of law, the information would have to be disclosed.  The other problem a CPA would have knowing the skeletons in your closet, is that a CPA (or any preparer) cannot knowingly file a false return.

So you may think you should hire a tax attorney to prepare your returns in order to get privilege.  That actually won’t work either.  One of the main tenets of attorney-client privilege is that if you do not treat the information as confidential and you disclose it to a third-party other than your attorney and his or her associates, then you have lost your privilege.  Since tax returns are inherently a third-party communication for disclosure to the taxing authorities, it has been ruled that tax preparation services are not afforded attorney-client privilege.  In fact, there have been interesting cases where attorneys have lost their attorney-client privilege because they included estate tax preparation as part of their engagement with the client.

Tax advice, however, is a different story.  For engagements that strictly involve tax advice, and not tax preparation, attorney-client and accountant-client privilege is extended.  Accountant-client privilege has more limitations than attorney-client privilege as defined in Internal Revenue Code section 7525.  Most notably is that accountant-client privilege does not extend to criminal matters before the IRS or Federal courts, nor does it apply to tax shelters designed for tax evasion.

As previously discussed, the disclosure of information to a third-party generally waives the attorney-client privilege.  An exception to this rule is if the attorney needs the assistance of another professional (such as an accountant) in order to render legal advice to the client.  A Kovel letter (based on the 1961 case) can be drafted and signed by the accountant and attorney which essentially extends the attorney-client privilege to the accountant.  The accountant is then, in essence, working for the attorney and not the ultimate client.  This does provide additional protections, but it still would not provide protections for tax return preparation.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.