Source: http://rubinontax.floridatax.com/2005/
Timestamp: 2019-04-21 16:13:18+00:00

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When you file your income tax return, there is a box that taxpayers can “check off” to send $3 of their taxes to the Presidential Election Campaign Fund. This Fund provides funds to candidates to help finance presidential campaigns. When initiated in 1981, 28.6% of taxpayers made the designation. In recent years, this has dropped to 9.1%.
There are various theories discussed for why the participation has dropped. One theory is that the computer/electronic tax preparation software discourages taxpayers from participating, based on default assumptions of “no participation” and inadequate descriptions. According to this theory, the explosion of use of this software has accelerated the decline.
Working with Commisioners of the Federal Election Commission, the Campaign Finance Institute has been able to bring the purported problem to the attention of the tax preparation software producers and tax preparers. In response, two of the major software producers have now agreed to modify their software.
All of the changes will go into effect in consumer product and web updates for Tax Year 2005.
It will be interesting to see if this reverses the slide in taxpayer participation, or whether the decline arises for other reasons (including the reduction in the number of tax filers that actually owe tax and intentional decisions not to participate in public finance of elections).
At times, families often seek to establish their own trust company to serve as fiduciaries of estates and trusts of family members. Such a trust company can reduce the costs involved with using third party trust companies, allows for continuity, management and control of the fiduciary function by a family, and avoids some of the drawbacks to both third party trust companies and individual fiduciaries. Indeed, several well-known trust companies got their start as private trust companies for a family.
Since the trust company is generally established and controlled by senior family members, tax issues arise regarding whether this “related” relationship gives rise to retained control by family members such that the grantor trust rules may be inadvertently brought into play, and that also may result in unintended estate tax inclusion in family members of the trust assets.
In a favorable ruling, the IRS has confirmed that when properly structured (including provisions that exclude family members from participating in discretionary decisions and having adequate trust company “firewall” provisions), the private trust company is not a “related or subordinate” party for purposes of these tax provisions and does not otherwise give rise to undesired grantor trust consequences. Private Letter Ruling 200546052, 11/18/2005.
U.S. taxpayers are generally required to report their ownership interests in non-U.S. bank accounts using Form 90-22.1. At first analysis, one wouldn't think that an interest in a foreign life insurance policy is a reportable account. However, some practitioners have been advised that the Department of Treasury believes that premium payments for insurance policies with cash surrender value or other investment features constitute "deposits" within the meaning of Form 90-22.1. Therefore, if a life insurance policy is a "whole life" or other type of policy with investment value, then it is an "other financial account" subject to reporting. Whether this is a correct interpretation is unknown, but conservative reporting would indicate that such policies should be reported.
When an individual dies, his assets are subject to federal estate taxes based on the value of those assets (subject to reduction for applicable deductions and credits). For this purpose, value is the price that the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
There is precedent that allows for the reduction in value for taxes that would have to be paid when the successor owner sells the subject property. There is also precedent for taking into consideration costs that would need to be expended to sell the subject property.
The Tax Court recently addressed the issue whether the value of IRA account for estate tax purposes should be reduced by the income taxes that will eventually be paid on distributions from the IRA. The logic of the estate's argument was that the IRAs that were involved were not transferable and therefore were unmarketable. According to the estate, the only way that the owner of the IRAs could create an asset that a willing seller could sell and a willing buyer could buy is to distribute the underlying assets in the IRAs and to pay the income tax liability resulting from the distribution. Upon distribution, the beneficiary must pay income tax. Therefore, according to the estate, the income tax liability the beneficiary must pay on distribution of the assets in the IRAs is a “cost” necessary to “render the assets marketable” and this cost must be taken into account in the valuation of the IRAs.
Unfortunately for the estate, the Tax Court did not buy into this argument, and held that the IRA was includible at the value of the securities held in the IRA, withour reduction for future income taxes. Kahn v. Comm., 125 T.C. No. 11 (2005).
-extension for existing favorable capital gain and dividend rates.
Given the substantial differences between the House and Senate versions, what finally makes it into the final bill is anyone’s guess.
WHY BUY IN 2005? As previously discussed, for buyers situated in states that charge sales tax, the ability to deduct sales taxes for federal income tax purposes is due to expire on December 31, 2005. Therefore, unless this deductibility is extended, it is advantageous for those persons to purchase large ticket items in 2005.
If the vehicle is a qualified hybrid vehicle, a deduction of up to $2,000 of the cost is also allowed if the vehicle is purchased in 2005. This is a useful deduction since it is "above the line" - it is deductible even if you do not itemize deductions, and is not subject to the phase-out of itemized deductions that applies to higher income taxpayers.
WHY BUY IN 2006? In 2006, a qualified hybrid will qualify for a tax credit from $400 to $3,400, depending on the model. A tax credit (the 2006 and beyond incentive) is better than a tax deduction (the 2005 incentive) of the same amount, since it reduces taxes dollar-for-dollar. A tax deduction only reduces the amount of income subject to tax, and thus does not reduce the tax bill dollar-for-dollar.
SO WHICH YEAR TO BUY IN? A comparison needs to be made in regard to whether a tax deduction of up to $2,000 is better in 2005, or a tax credit for the particular model car for a 2006 purchase of hybrid. Other factors favoring a 2005 purchase are the more immediate tax benefit on a 2005 tax return (instead of a 2006 return), and the above sales tax deduction for 2005 if applicable. One last factor to consider is that the tax credit will only fully apply to 60,000 vehicles from each manufacturer - thereafter, the credit is reduced and eventually eliminated for such manufacturer. A 2006 purchase runs the risk that your desired hybrid model may not qualify for the full credit due to this limit.
After the lottery winner checks to see how much he won, his or her next thoughts turn to what will be left after taxes. Since lottery payouts are taxed as ordinary income, a good piece of each payment goes to the IRS.
Some lottery winners sell their right to payments over many years to a third party buyer. The issue arises whether such sale can be taxed as a sale of a long term capital asset (if the original payout stream was held for long enough) so as qualify for the 15% maximum tax on individual capital gains. These rates can be less than 1/2 of the ordinary income rates.
however, this power of control did not give the personal representative the power to sell the homestead.
Florida persons owning intangible property are subject to an intangibles tax. The tax rate has been reduced for 2006 from $1,000 per $1,000,000 of taxable intangible assets (e.g., stocks and bonds) to $500 per $1,000,000 of taxable intangible assets.
–owning assets in non-Florida limited partnerships that are not managed or controlled in Florida.
A single individual is not taxed on the first $250,000 of his or her taxable intangible assets, and a married couple has a $500,000 exclusion.
The end of the year comes upon us quicker than you would expect. For those who need year end planning, now is the time to get started.
Under Section 1441 of the Internal Revenue Code, U.S. payors of certain types of income to nonresidents (e.g., U.S. source interest, dividends, and rents) are obligated to withhold tax at 30% (or lower treaty rates) when such income is paid to a nonresident. This assists the IRS in collecting these taxes that might not otherwise be paid by foreign persons by shifting the payment obligation to the U.S. payors.
Since September 29, 2004, the IRS has had a program for U.S. payors that have withholding obligation issues. Under the program, the U.S. withholding agent agrees to identify to the IRS areas in which it isn't in compliance with obligations on payments to foreign persons, pays tax, interest, and any penalties, and implements corrective procedures to ensure future compliance. In turn, the IRS agrees not to impose penalties on underpayments that are due to reasonable cause, and will provide the withholding agent with written acknowledgement that its compliance procedures and policies are acceptable.This program was set to expire on December 31, 2005. However, due to the heavy volume of use, the IRS has now extended the deadline of the program to March 31, 2006. Revenue Procedure 2005-71.
Corporate Tax Returns: The Florida Department of Revenue has indicated that it will follow the special tax relief granted by the IRS for filing of corporate income tax returns. The Department will extend the due date for filing the Florida corporate income tax return and tax payments to March 15, 2006. The extended due date applies to taxpayers affected by Hurricane Katrina with original or extended due dates on or after August 29, 2005, taxpayers affected by Hurricane Rita with original or extended due dates on or after September 23, 2005, and taxpayers affected by Hurricane Wilma with original or extended due dates on or after October 23, 2005.
Intangible Tax Returns: The Florida Department of Revenue has extended the filing deadline for intangible taxes until January 18, 2006 for taxpayers with valid extensions in those counties in Florida designated disaster areas, which include: Broward, Miami-Dade, and Monroe Counties and any counties or parishes in Mississippi, Louisiana, Texas and/or Alabama.
Due to Hurricane Wilma and extended power outages, we have not been able to do our regular blog posting. We hope to get things back to normal sometime this week. To those of you in South Florida, we wish you a speedy recovery from the storm.
Does your family operate a private foundation? Are you the CPA or attorney for a private foundation? Are you curious about private foundations? The IRS now has a website on the life cycle of a private foundation, with lots of information regarding setting up, operating, and terminating one.
The remaining months of 2005 may provide a last chance opportunity for taxpayers who itemize deductions to deduct state and local sales taxes in lieu of state and local income taxes.
For tax years beginning in 2005, taxpayers may elect to take state and local general sales and use taxes as an itemized deduction, instead of deducting state and local income taxes. Internal Revenue Code Section 164(b)(5). Electing taxpayers may either (a) deduct their actual sales and use taxes or (b) use IRS-published tables and then add to the amount from those tables the actual amount of their sales tax for certain "big-ticket" items—motor vehicles, boats, aircraft, homes (including mobile and prefabricated homes), and home building materials.
This provision primarily benefits taxpayers who live in states without an income tax, but some taxpayers in other states may benefits if they made major purchases during the year and their state income tax is relatively low.
This option to deduct sales taxes is set to expire at the end of 2005. While it may be extended, there is no way of knowing what Congress may do. Accordingly, individuals who are considering the purchase of a big ticket item (such as an automobile) may want to complete the purchase in 2005 to achieve a higher itemized deduction for sales taxes.
Joint bank account cases often make for interesting reading. Here is an interesting case from Florida’s 4th District Court of Appeals, issued on October 19, 2005.
a. Mom opens a bank account with daughter - the account is held as joint tenants with rights of survivorship.
b. Daughter withdraws money from the account for her own use.
c. Mom does not agree to the withdrawal and asks for the money back.
d. Mom dies, and her estate demands the money back from daughter.
e. Daughter argues that since Florida law says that a bank can pay the assets from a joint account to one of the joint account holders without consulting the other, and that since she would have gotten the funds when mom dies, she can keep the money.
Decision: Daughter owes the money back. The Court held that (i) the above Florida law is for the protection of the bank, and does not create legal entitlements to ownership of assets in a joint account, (ii) that daughter would have gotten the money when mom died is irrelevant to what occurs during lifetime, and (iii) authorization to withdraw the funds is not the same thing as authorization to use the funds for personal benefit.
Observation: If daughter had left the money in mom's account until mom died, there's a good chance she would have gotten all the funds!
Under federal tax rules, at times an entity owned by another taxpayer may be "disregarded" for tax purposes. This generally means that all of the tax incidents of the disregarded entity are reported by its owner. The two principal types of disregarded entities are Qualified Subchapter S Subsidiaries and entities that are owned by one owner and are not taxed as a corporation/association under the check-the-box rules (e.g., single member limited liability companies).
The "disregarded" status of such entities may soon disappear for certain tax issues. Under proposed regulations, such entities would cease to be disregarded for employment tax and related reporting purposes, as well as for certain excise tax rules. Since the rules are only proposed, they are not currently applicable. Preamble to Prop Reg 10/17/2005 ; Prop Reg § 1.34-1 ; Prop Reg § 1.1361-4 ; Prop Reg § 301.7701-2.
The Social Security Administration has announced that the wage base for computing the Social Security tax in 2006 rises to $94,200 from $90,000 in 2005, an increase of about 4.67%. This means that the amount of wages subject to these taxes has now increased, and thus the total Social Security taxes of a wage earner who earns at or in excess of the maximum will also be increased. The OASDI tax rate for wages paid in 2006 is set by statute at 6.2 percent for employees and employers, each. Thus, an individual with wages equal to or larger than $94,200 would contribute $5,840.40 to the OASDI program in 2006, and his or her employer would contribute the same amount. The OASDI tax rate for self-employment income in 2006 is 12.4 percent. Note that this increase does not impact the Medicare Hospital Insurance program tax - this tax rate is 1.45 percent for employees and employers, each, and 2.90 percent for self-employed persons - this tax, which is in addition to the above OASDI taxes, has no cap and thus is applied to all wages no matter how high.
Also for 2006, the limit on the income tax exclusion for elective deferrals of wages, that is - the maximum amount an employee may defer into 401(k) plans, 403(b) annuities, SEPs, and the federal government's Thrift Savings Plan, increases from $14,000 to $15,000. The limitation on the annual benefit under a defined benefit pension plan increases from $170,000 to $175,000. The limit on annual additions to a participant's defined contribution pension account increases from $42,000 to $44,000.
A deduction for college tuition is scheduled to go off the books unless Congress extends it. You may want to prepay in 2005 tuition not due until early 2006 if that lets you increase your tax savings from the expiring deduction.
The Energy Tax Incentives Act of 2005 provides a new tax credit for making certain energy-saving improvements around the house. But the new credit is not available until 2006, so you may want to hold off on the improvements if possible.
On January 1, 2006, the deduction for buying a hybrid automobile converts to a tax credit that's probably more valuable to auto buyers than the deduction. So if you are thinking about buying a hybrid, you may want to delay your purchase until 2006.
The Katrina Emergency Tax Relief Act of 2005 allows some taxpayers to claim bigger charitable deductions than in the past because the Act lifts restrictions that limited the deductions. But it's only a temporary reprieve; the restrictions return after December 31, 2005. So, if the restrictions apply to you, you may want to consider accelerating your charitable donations from 2006 to 2005.
A popular method of gifting to charities is to contribute an automobile that would otherwise be sold or traded in. Unfortunately, there was a perception that taxpayers were putting a value on the contributed automobile that was oftentimes much higher than what the charity could get for the car when it sold it.
Under new rules that take effect this year, the deduction for “qualified vehicles” (motor vehicles, boats and planes that aren't inventory or held for sale in the ordinary course of business) contributed to charity for which the claimed value exceeds $500 is dependent on the charity's use of the donated property. If the charity sells the vehicle without any “significant intervening use” or “material improvement,” or transfers it to other than a needy person at a price significantly below fair market value in furtherance of its charitable purpose, the donor's charitable deduction can't exceed the charity's gross proceeds from the sale. The IRS has released new Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes to report such transfers.
Code Section 501(c)(3) organizations are generally exempt from federal income taxes, and contributors receive a tax deduction for their contributions.
In an interesting case, an individual sued a hospital and related health care entities, claiming damages for failing to provide “mutually affordable medical care” to indigent or uninsured patients without regard to their ability to pay, as purportedly required for the Code Section 501(c)(3) status of the health care entities. The individual alleged that due to the defendants' tax-exempt status under the Internal Revenue Code, the Defendants entered into an express or implied contract with the United States, the Commonwealth of Pennsylvania, and local government bodies and agreed to provide affordable medical care to all hospital patients, to abstain from “humiliating” debt collection practices, and to prevent any private entities from deriving a profit from Defendants' healthcare operations.
While an interesting argument, it was not a good argument, and the case was dismissed. FELICIANO v. THOMAS JEFFERSON UNIVERSITY HOSPITAL, 96 AFTR 2d 2005-XXXX, (DC PA), 09/28/2005.
Generally, individuals making substantial charitable deductions cannot use the charitable income deduction to eliminate all of their taxable income. A 50% limit applies to qualified contributions to the appropriate taxable entity- the maximum charitable deduction allowed is 50% of the adjusted gross income of the taxpayer (without regard to net operating loss carrybacks). Lower percentage limits may apply based on the type of property contributed and the type of entity that receives the contributions.
As part of the Hurricane Katrina Emergency Tax Relief Act of 2005, this 50% limit is suspended for cash contributions made to publicly supported charities. This will apply only for contributions made through December 31, 2005. Interestingly, there is no requirement that the recipient charity be engaged or involved in hurricane relief efforts.
-gifts to domestic organizations that directly expend funds abroad in furtherance of their exempt purpose.
Shareholders of Subchapter C corporations (that is, corporations that have not elected Subchapter S status) are subject to tax on dividends distributed from the corporation (to extent of the undistributed earnings of the corporation). To avoid or defer this tax, shareholders do a lot of things to get access to the money but not pay the tax. One common mechanism is for the shareholder to borrow the money from the corporation so that it is not treated as a dividend distribution. Shareholders that do this need to cross their i's and dot their t's - have a written promissory note, a reasonable rate of interest, have security for the debt, and other evidence of arms-length debt to overcome an IRS that is interested in characterizing the loan as a dividend distribution.
Note, however, that the lack of proper documentation is not always fatal to loan treatment should the IRS contest the issue. In a recent Tax Court case, the IRS's determination that a software developer/consultant had constructive dividends from advances which his closely owned consulting corporation made to him or on his behalf, and which were used for new home purchase and various personal expenses, was rejected - the taxpayer proved that the advances were nontaxable loans. Although advances weren't memorialized in any formal loan documents, weren't subject to any fixed repayment schedule, and weren't secured, loan treatment was still supported by facts taxpayer made reasonable interest payments, repaid a relatively substantial portion of the loan principal, had reasonable prospects of repaying balance, and had expressly agreed with another shareholder to use the funds as loans. Nariman Teymourian v. Commissioner, TC Memo 2005-232, 2005 RIA TC Memo ¶2005-232 (2005).
a. The top 1 percent of U.S. taxpayers, who earn a minimum annual income of at least $300,000, paid more than a third of personal income taxes in 2003.
b. The top half of all U.S. taxpayers accounted for all but 4 percent of the 2003 individual income tax receipts.
c. The top 10 percent of taxpayers, with an income of at least $95,000, were responsible for two-thirds of personal income taxes paid for the year.
The next time you hear that a proposed tax cut will only cut the taxes of the richer half, well that's because they are the only ones paying taxes to begin with!
Does the $125,000 Homestead Exemption Cap Apply in Florida?
Inside and outside of bankruptcy, an individual’s homestead is exempt under Florida rule from the reach of his or her creditors (with some exceptions). In the recent Bankruptcy Act, Congress limited this protection in bankruptcy to the first $125,000 of value of a homestead if the debtor has owned the homestead for less than 1,215 days. Or at least, that is what everyone originally thought.
An opinion of an Arizona bankruptcy court (In re McNabb) held that the $125,000 cap did not apply in states such as Arizona (and by implication Florida) where state legislatures have officially "opted out" of the Federal scheme of exemptions found in the Bankruptcy Code. This opinion was based on a literal reading of the statute, which apparently was not well drafted and left the door open for this interpretation.
The bankruptcy courts in Florida have now entered the fray. In a recent ruling, Judge Mark of the Southern District of Florida decided that the cap did apply - the opposite finding of In re McNabb. How this issue will be ultimately resolved is unknown (including resolution through the passage of a Congressional "glitch" bill), but Judge Mark’s ruling is clearly not heartening to Florida debtors who have not owned their homesteads for the requisite 1215 days.
Updating its forms from 15 years ago, the IRS has issued sample charitable remainder unitrust forms for use by practitioners in drafting effective split-interest charitable trusts. Generally, a charitable remainder unitrust is a trust that provides for the payment of a fixed percentage of a trusts assets on an annual or more frequent basis to one or more individuals, followed by the transfer of the remaining trust assets to one or more qualified "charitable" organizations. It allows taxpayers to enjoy the income/cash flow from assets while stil obtaining valuable tax benefits due to its charitable nature.
Rev. Procs. 2005-54 through -59.
Generally, anyone who believes a decedent owes him or her property must file a claim against the decedent’s death within 90 days of publication of a notice to creditors. Florida law allows for an exception where fraud exists, estoppel applies, or there is insufficient notice of the creditors period.
In a recent case, a decedent transferred property in a joint account to an account in his own name before his death. The joint tenant, his wife, did not file a timely claim against the estate. She came up with two principal defenses to her failure to file a timely claim.
The first was that under the "trust exception," a claim did not need to be filed. The trust exception generally provides that if the decedent was holding property in trust for someone, a timely probate claim need not be filed to obtain that property by the beneficiary. However, the Appeals Court recognized that the "trust exception" has been restricted to express trusts, and no longer applies to constructive or resulting trusts and would not apply in this case.
The wife also tried to claim that this situation is not a claim against an estate, but simply a determination of who owns property. The Appeals Court did not accept his argument either, finding that many creditor issues regarding property are really claims of unlawful possession or theft and should be cast as claims against the estate.

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