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2003 Articles Disappearing tax breaks TAX ENDGAME: AMT not just a worry for the wealth Your Money: 1-person 401(k)s a new wrinkle Sale of Stock Options to a Related Person Are Now a Listed Transaction Is my WorldCom stock worthless? Some Still Awaiting State Tax Refunds Perfecting Your Proposal Practical Accountant Tax cuts, jobless aid OK'd
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Disappearing tax breaks By Andrea Coombes SAN FRANCISCO (CBS.MW) CBS.MarketWatch.com suggests that the tax cuts of 2003 may be beneficial to the economy and provide welcome padding to some taxpayers' wallets, but for others those cuts will prove to be a mirage. This is due to the fact that lower tax rates will push more people into paying the Alternative Minimum Tax (AMT). An estimated 2.5 million U.S. taxpayers will be caught in the AMT's noose when they file their 2003 taxes, rising to 3 million in 2004, according to the U.S. Congress' Joint Committee on Taxation. That's up from about 1.1 million in 2001, according to the IRS' most recent figures. According to CBSMarketWatch.com, on its face, the AMT is simple: You pay the higher of the tax owed under the regular income tax system or under the AMT. Lower regular rates make it more likely that your AMT, which doesn't allow as many deductions, will be higher. But there the simplicity ends. If you think the AMT might apply to you, the recommended strategy is perhaps a fate worse than AMT itself: Do tax projections under both systems for 2003 and 2004. Understanding your tax situation for both years will help you determine how to proceed now. The beneficial 15 percent rates apply under the AMT as well as the regular tax code, but the lack of deductions pushes many into the AMT. AMT tax rates are 26 percent on alternative minimum taxable income up to $175,000, and 28 percent on income over that amount. There are those who need not fear. "Anybody who has adjusted gross income less than the AMT exemption probably doesn't need to worry," said Roger W. Lusby III , a partner with Frazier & Deeter LLC , a certified public accounting firm. According to the article, those exemptions, designed to shield middle-income people from the AMT, were recently raised to $58,000 for married couples filing jointly, $40,250 for single filers, and $29,000 for married filing separately. (These exemptions start phasing out for married filers earning $150,000, single filers earning $112,500, and married filing separately taxpayers at $75,000.) The AMT has some nasty surprises. For instance, interest on a home equity loan can only be deducted if the funds were used to buy, build or remodel your home. "For example, let's say I took out a home equity line and I paid $6,000 of interest on that line and I used it for personal purposes," Lusby said. "That $6,000 is deductible for regular income tax purposes but not deductible for AMT purposes." Also, interest on a type of municipal bond known as "private activity" bonds is not tax-free under the AMT, Noard said. These bonds finance public arenas, for example. "People may want to check their portfolios" to ensure this type of interest is not increasing the likelihood of an AMT bill, he said. And, while there is an AMT credit that can be used in future years for some items such as depreciation or the exercise of ISOs, it's hard to take full advantage of the credit, and it's not available for some disallowed deductions such as state income taxes, Lusby said. Also, "that credit carries forward and it can offset your tax liability dollar for dollar, but never below next year's AMT tax," Lusby said. TAX ENDGAME: AMT not just a worry for the wealth By Hank Ezell The Atlanta Journal Constitution weighs in on the subject of AMTs, sometimes referred to as a parallel tax structure or a shadow tax. The AMT is the acronym for alternative minimum tax and was designed to prevent rich people from generating astonishing amounts of deductions and avoiding taxes entirely. According to the Atlanta Journal Constitution, the AMT raises the tax bill of anyone who has to pay it. Another reason to despise it is the fact that you must fill out Form 6251 to find out of you owe AMT. Not to mention the fact that Form 6251 is a tedious 65 lines long. Another reason for fear and loathing: You have to fill out Form 6251 to find out if you owe AMT. Form 6251 gives headaches even to tax professionals. The following questions about AMTs appeared in the article. Q: I'm not rich. Why should I have to worry? A: The Atlanta Journal Constitution states that people with midrange incomes have become vulnerable. It's a bit like educators' complaints about grade inflation, it doesn't take as much effort these days to make an A. Q: Why is it important? A: The AMT may turn things upside down for people who are trying to cut their tax bills. "As a rule, you want to defer income and accelerate deductions," said certified public accountant Roger W. Lusby III , a partner with Frazier & Deeter . "But those people who are subject to the AMT may want to do the exact opposite." Q: Huh? A: Some deductions don't count for AMT purposes, and AMT tax rates are lower than the highest regular income tax rates. AMT taxable income is subject to a flat rate of 26 percent, though wealthy taxpayers pay 28 percent. To calculate the AMT, you have to fill out a regular tax return, then fill out Form 6251 to find out whether you would have to pay any AMT. You essentially have to pay the higher amount, either AMT or regular income tax. Under the AMT rules, you add back to your income a number of the deductions you got to take under the regular rules. For most taxpayers, the biggest ones include a portion of medical and dental deductions, state and local income taxes, real estate and ad valorem taxes, and any part of a home equity loan that you didn't use to buy, build or improve your home. Q: Who needs to worry about the AMT? A: "People need to figure out their AMT obligation if they exercised incentive stock options, had large depreciation deductions or got a large portion of their incomes from long-term capital gains," said Lusby . Other factors include high state and local income tax bills --- more of a problem in New York, say, than in Georgia --- lots of unreimbursed business expenses or a large number of exemptions for children. Q: Who doesn't need to worry? A: You're probably safe, Lusb y said, if your adjusted gross income is less than AMT exemptions. That's $58,000 for married filing jointly, $40,250 for singles and $29,000 for married filing separately in 2003. The exemption is the AMT's replacement for personal exemptions claimed on regular income tax calculations. This will make more sense, sort of, when you get to line 29 of Form 6251. Q: What should I do? A: According the Atlanta Journal Constitution, if you think you might be caught by the AMT rules and you don't like surprises, you'll have to do a dry run on both tax calculations. If you use tax software, such as TaxCut, TurboTax or CCH's CompleteTax, the process will be somewhat streamlined. Go to www.taxsites.com/software.html for access to software Web sites. If it appears you will owe a substantially higher amount under AMT rules, you need to consider taking the whole thing to a CPA or other tax adviser. Make an appointment right now. Your Money: 1-person 401(k)s a new wrinkle By Hank Ezell The Atlanta Journal Constitution featured an article concerning personal 401(k)s. The example the article begins with is Tom Cooksey. Cooksey wanted to invest his retirement money in real estate, which is what he knew best. He also wanted to separate himself from investments like WorldCom, where much of his early retirement savings disappeared. As an independent contractor, Cooksey was able to take advantage of a 2001 change in the tax law that allows a sole proprietor to open his own, one-person 401(k) plan. Such plans must be adopted by the end of the calendar year. Before, only companies could fund a 401(k) and take advantage of the deductible contributions and tax-sheltered growth. The 401(k) was previously acknowledged mainly as a perk for employees of large companies. However, personal 401(k) plans are expected to grow in popularity as the word gets out. "It can help a person put a lot more dollars aside for retirement," said Roger W. Lusby III , a certified financial planner with Frazier & Deeter . "That's important, because all the studies show most us have not saved enough for retirement." According to the Atlanta Journal Constitution, the main attraction of the solo 401(k) --- compared to individual retirement accounts is that you can stash away more money. The annual maximum contribution to a solo 401(k) is the lesser of $40,000 -$42,000 if you are age 50 or over or a percentage of your income. Rick Meigs, founder and president of www.401khelpcenter.com. claims these plans are not just for rich people. "People setting them up often have a business on the side," he said. "They can put aside a substantial portion of that side income." Additionally, the article points out that the plan owner can change the amount he or she contributes in any given year, escaping the strictures of some other plans. "If you pick the right vendor, you can get a pretty wide range of investment options," said Meigs. That can include investments like real estate, which are out of bounds for some other plans. The downsides to solo 401(k)s as stated by the Atlanta Journal Constitution are the fact that you need help setting them up and that they are relatively costly. Average costs for the required professional help ranges from $500 to $2,000 a year. The solo 401(k) plans are designed for one person only; consequently, they are not for companies that expect to expand their labor force. ON THE INTERNET > www.401khelpcenter.com has lots of information, including an extensive list of money managers. > Go to www.individualk.com/IndividualK/theMath.jsp for formulas to figure out how much you can contribute.Sale of Stock Options to a Related Person Are Now a Listed Transaction By Roger W. Lusby, III, CPA, CMA, AEP On July 1, 2003, the Treasury Department issued regulations and Notice 2003-47 in an attempt to halt the number of "tax solutions" being marketed to executives allowing them to defer tax on gains from the sale of their non-qualified stock options. The regulations are effective July 2, 2003. Many articles have been written lately discussing the various types of tax solutions that were being marketed primarily by the large accounting and law firms to executives with "in-the-money" stock options. (See The Wall Street Journal 2/5/03 and Bloomberg News, "Ernst & Young Steered Clients to Tennessee Tax Shelter Firm", by Miles Weiss, July 11, 2003). The tax solutions often involved a variation of the theme whereby an executive sold non-qualified stock options at fair market value to a family controlled entity in exchange for a long-term note. The family controlled entity would exercise the stock options and sell the underlying stock at little to no gain. The executive would only realize a taxable gain on the sale of the stock options as the long-term note was paid by the family controlled entity. (For more detailed information on this technique, see "Intrafamily Installment Sales of Nonqualified Stock Options", by James R. Hamill, Ph.D. and Roger W. Lusby, III, The Tax Adviser , July 2000, p. 494). Notice 2003-47 and the new regulations clearly state that these transactions, or transactions that are substantially similar, are now identified as "listed transactions" that are subject to disclosure by both the executive and the family controlled entity, and to the list-keeping and registration requirements. In Notice 2003-47, the IRS announced its intent to challenge these transactions on the following grounds: Specifically, the IRS position is that the sale of stock options to a family controlled entity, which is governed by §83, has no economic substance and is not an arm's-length sale. Taxpayers asserted that the transaction was an arm's-length sale because the family controlled entity paid fair market value for the stock options, which was usually determined under the Black-Scholes method. Final and temporary regulations were also issued in conjunction with Notice 2003-47 providing that a stock option sale or other disposition to a related person will not be treated as a transaction that closes the application of §83 with respect to the option for purposes of Reg. §1.83-7. If these regulations are upheld, they will effectively prevent an executive from claiming tax deferral on the sale of stock options to any related person. And executives that utilized these tax solutions will now need to decide whether or not to disclose the transaction. Is my WorldCom stock worthless? Q: My wife and I own a number of WorldCom or MCI shares of common stock. I have heard that when it comes out of bankruptcy, that in many/all cases the stock is worthless. Is that true in this case? We acquired in a 104k/IRA. I am told that the loss on the stock is not deductible from federal and state income taxes. Would appreciate being enlightened on the above. John Tidd, Canton Roger W. Lusby III is a certified public accountant with Frazier & Deeter in Atlanta . His answer: A: WorldCom has gone into bankruptcy, so the stock is virtually worthless. The company may emerge from bankruptcy, but I doubt that the common stock shareholders are going to receive much value, if any at all. If WorldCom stock was held within an Individual Retirement Account or other retirement plan, then none of the losses are tax deductible. Remember, with retirement plans, your money taxable only when you take distributions out. With the WorldCom stock being valueless, it just means it will never be coming out, because there's nothing to come out. Some Still Awaiting State Tax Refunds Reported by Denis O'Hayer 11 Alive News reports that some Georgia taxpayers are still trying to get their refunds from the state government three months after the April 15 tax-filing deadline. The state has struggled to speed things up for years, but the overhaul is not complete. Certified public account Jim Frazier said a few clients have already called to say their state income tax refunds still haven't arrived. Based on past experience, he expects a few more calls. “We have inquiries from clients with large refunds. We would define large as $10,000 and up that are going six, eight, 12 weeks, sometimes as long as three to four months,” he said. He sent letters to the state revenue department last fall and said tax officials then responded quickly and politely with refund check. However, they never explained the delays. “There's either a hold in the system that says if the refund is of a certain size, either look at the return or if the refund is of a certain size, drag your feet,” he said. According to 11Alive News, Revenue Commissioner Bart Graham, who has been in office for just three weeks, promised that new financial reporting in his department will ensure all refund get the same treatment and refunds get to taxpayers faster. “The department has done things over the last three or four years to increase its technology offering for imaging equipment, for better staffing,” he said. While the state government is trying to get taxpayers' checks faster, the top money people in state government are saying the budget crisis at the capitol is not going away. Graham, however, insisted any cuts in his office will not slow down refunds. “Most of what we do is statutorily required to do. You really can't cut a program, you can assign it to another division, but you can't get rid of it,” he said. Frazier , however, said politicians can be tempted to borrow from taxpayers. 11Alive News checked with 15 Metro Atlanta accounting firms and about half said refunds are faster now and that firms are getting fewer complaints. Perfecting Your Proposal By Howard W. Wolosky The Practical Accountant featured an article concerning how to refine client proposals. When competing for an engagement, many accounting firms have a similar belief that all they have to do is show their qualifications. A belief that the inherent value of the services that they provide will be seen. They don't take into account that there are five other firms who believe the same thing about themselves. Erinn Keserica , director of marketing at Frazier & Deeter LLC , an Atlanta-based accounting firm, points out that proposals are often boilerplate giving an overview of the firm and its qualifications, rather than going into its unique differentiation factors or addressing the clients' needs and concerns. Saying “I'm great for you” is not enough, and the smart firms are changing their proposal process both in form and substance. Firm and Client Centric Lisa Tierey, director of marketing for a Pennsylvania-based accounting firm indicates the importance of the physical aspect of proposals. Her company's proposals are in clear folders with both the firm's and prospect's logos, and graphics being widely used. Closer Scrutiny There are also significant changes in the process. Julie Tucek, marketing director of an accounting firm headquartered in Chicago , reports that partners used to handle requests for proposals setting the fees without really investigating the situations. Now each proposal opportunity goes through an evaluation team comprised of herself and two partners. Before any proposal is made, Tucek indicates the team decides, “Does it make sense to bid? What do we need to price it at to win?” Branding Lyne Noella, president of Lyne Noella Marketing, a Minneapolis-based marketing strategy and consulting firm serving accounting firms nationwide, indicates it is important that the proposal material reflects the firm's brand. “A prospect should be able to identify your firm's brand without looking too closely,” she concludes. She does caution about automatically using a client's logo in a proposal as she indicates, “some companies are very proprietary about using their brand or logo.” Keserica also believes in the importance of branding. “In terms of brand images, we try to use elements consistently throughout all of our pieces whether in the first folder with marketing collateral piece, in the firm brochure, or in the firm proposal,” she says. No Stone Unturned The article brings to light that because proposals now tend to focus more on the prospects, a great deal more investigative work should precede their preparation. Roger Lusby III , partner with the Atlanta accounting firm of Frazier & Deeter , indicates, “Most of our face time is spent up-front asking questions and gathering information.” Most firms widely use the Internet for research, especially with regard to the industry issues. Substantial information about the prospect can often also be found on the Internet. Lusby indicates his firm likes to find out which other firms are proposing. His reasoning is, “Within our differentiating factors, we will address why we are stronger than the other firms without mentioning them by name. We know they will be pitching a particular strength, we want to be able to counter that in our proposal as well.” The Proposal and its Presentation Lusby also favors a summary. “We now try to include a one-page executive summary that really talks more about the client and why Frazier & Deeter might be uniquely qualified to handle their work.” Lusby reports that his firm always tries to figure out why they are best suited to handle the engagement, and explain that in a clear manner in the proposal. He also loves to tantalize the prospect significant dollars. The proposal also always addresses the ease in making the transition to Frazier & Deeter . Marketing personnel tend not to go on proposal presentations unless they have a specific role to play, although Keserica indicates she will go to initial meetings with potential clients to help pull out the drivers and motivations for why they are switching accounting firms. A Preferred Route for Some Roger Lusby, III , partner with the Atlanta accounting firm of Frazier & Deeter , states, “What we prefer is to get a nice referral into a client and go in and meet them and basically get the engagement without having to do a formal proposal.” Tax cuts, jobless aid OK'd By David McNaughton Extra Cash: Stores and economists hope taxpayers will spend that money. The Atlanta Journal Constitution featured an article on the new tax relief bill, expected to be signed by President Bush this weekend. The bill will award parents with checks of up to $400 for each child they claimed a credit for on this year's income tax returns. The first checks should hit the mail in mid-July, the Treasury Department said Friday. According the Atlanta Journal Constitution, many workers will see bigger paychecks starting in July due to lowered income tax rates, but the extra cash won't take most people very far. For someone who makes $100,000 a year, it will mean about $40 more a week, said Martin Nisenbaum, director of personal income tax planning at a Big Four accounting firm. The article attests tax payers who sell assets will also get a break because their profits will be taxed at lower rates. Investors who receive corporate dividends won't have to pay as much tax either. The tax bill is meant to boost the economy, just as the tax-cutting legislation of 2001 was intended to do. The changes of two years ago included rebates. At that time, nearly every taxpayer got a rebate check for as much as $300 for singles and up to $600 for couples. The article points out that there will be competition for the extra cash, as you can expect to see rebate-related banners in all of the stores and special promotions to get people to spend that extra money. “My advice is to pay down any high interest rate debt,” said Roger W. Lusby III , a certified public accountant with Frazier & Deeter in Atlanta. In accordance, the Consumer Credit Counseling Service in Atlanta puts paying off debts at the top of its list along with saving some of the rebate. back to top |
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