April 2005

MEMBERS’ CORNER
BY STANLEY TEPPER, CPA, MBA

Estate Can’t Claim Income Tax Discount on Retirement Account – Lack of space prevented this article from appearing in last month’s column. It is excerpted from a newsletter of Steven Silverberg, Esq. In determining the estate tax value of retirement accounts, an estate cannot claim a discount to reflect income taxes that would be payable from the accounts, the 5 th Circuit has confirmed.

John David Smith is the executor of the estate of his father, who died in 1997. The estate timely filed an estate tax return and paid tax due of $140,358. The return reported the decedent’s interest in two retirement accounts (valued at $725,550 and $42,809) comprised of marketable stocks and bonds.

In 1999, the estate filed a claim for refund of $78,731 of estate tax on the grounds it overvalued the retirement accounts. Specifically, the estate discounted the value of the retirement accounts by 30% to reflect the income taxes beneficiaries would pay on distributions from the accounts.

The IRS denied the refund and the estate sued in district court, where it lost in summary judgment. On appeal, the Fifth Circuit addressed the estate’s concern over double tax, noting Code Sec. 691(c) already allows the decedent’s beneficiaries an income tax deduction in an amount equal to the estate tax paid on the retirement accounts.

Further, the court pointed out all property owned at death is included in a decedent’s gross estate at its fair market valued, defined as “the price at which the property would change hands between willing buyer and willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.”

Applying the “willing buyer-willing seller” test, the court said, demonstrates a hypothetical buyer of the assets in the retirement accounts would not consider the income tax liability since the buyer is not the beneficiary and would not be paying the income tax.

Source: Smith v. United States , No.04-20194

(5 th Cir. 11-15-04 ; as amended 12-8-04 )

Domestic Workers - They are not considered “employees” if they provide services in a private household that are “sporadic, irregular or intermittent.” So, if you hire a babysitter occasionally or have someone clean your apartment as needed, the worker is an independent contractor, not an employee.

Individual Retirement Accounts - A Florida newspaper pointed out some important matters concerning IRA’s.

The rule of thumb - Unless the IRA you inherit belonged to your spouse; never roll the money into your own IRA. Doing so would trigger income tax on the full amount right away- even though the funds would still be in a tax deferred account. Instead, retitle the IRA so it’s clear that the owner died and you are the beneficiary.

Confusion reigns - Dec. 31 of the year the IRA owner died is important, too, if the owner already was taking “required minimum distributions,” which begin in the year you reach age 70 1/2. If the owner already took the distribution for the year he or she died, it becomes part of the estate. If the owner didn’t take the distribution before dying, you get to do so and keep the money yourself. But you must do so by year-end or get socked with the 50% penalty.

Donation of Art to Charity – The aforementioned newspaper also contained a response to a reader.

Q: I am thinking about donating some valuable art and antiques that have gone up in value over the years. Does it matter what type of charity I choose?

A: Yes. Welcome to what’s known as the related-use rule. The rule generally means the gift must go to a public charity that puts the donation to a use related to its tax-exempt purpose. Otherwise, the donor will be allowed to deduct only the item’s cost.

Here’s an example: suppose someone bought a painting years ago that has risen in value and now donates it to a museum, which proudly displays it on its walls. In that case, the donor typically could deduct the painting’s fair-market value since the donation was made to a qualified institution that put it to a use related to its tax-exempt function.

But suppose someone donates that painting to a local church or synagogue, which sells it. In that case, the donor could deduct only the original purchase price, and not the painting’s current market value.

Virginia Income Tax Returns – Virginia requires that the Federal identification number of each payer (employer, bank, brokerage) be included on the personal income tax return.

Hurricane Tax Relief – Florida residents are eligible for tax relief from the state. Relief is based on 2004 property taxes and the length of time no one could live in the home. The formula starts with the number of days the home was uninhabitable divided by 366 because 2004 was a leap year. The ratio is multiplied by the 2004 tax bill.

Here is how it would work for a $250,000 house with a $25,000 homestead exemption: With a taxable value of $225,000 and an average total of tax rates in the county of about $21 per $1,000, the tax bill would be $4,725.

If the home were uninhabited for 90 days, that would be a ratio of .246 and the relief could total $1,162.

StudentCollege Loans – Research ways of legally reducing your income to increase the amount of financial aid you can qualify to receive at www.finaid.org. Some of the strategies:

• Save money in the parent’s name, not the child’s name.
• Parents furthering their own education at the same time as their children.
• Delay selling profitable investments until after filing the FAFSA.
• Maximize contributions to parent’s retirement fund.
• Prepay your mortgage.

Sales Tax Oddities – In Florida , food for your dog or cat is taxed, but food for ostriches and racehorses is not. Tickets for professional football games are taxed, but skyboxes aren’t. Even limousine services are tax-free.

How To Obtain a Refund From a Net Operating Loss (NOL) Carry Back (Excerpted from Accounting Today) – A corporation uses either Form 1139, Corporate Application for Tentative Refund, or Form 1120X, Amended U.S. Corporation Income Tax Return, to receive a refund due to an NOL carry back. An individual uses either Form 1045, Application for Tentative Refund, or Form 1040X, Amended U.S. Individual Income Tax Return, to get such a refund. The refund will be faster if the corporate taxpayer uses Form 1139 or the individual taxpayer uses Form 1045.

A taxpayer cannot file Form 1139 or Form 1045 before filing the return for the NOL year. Form 1139 or Form 1045 must be filed no later than one year after the year the taxpayer sustains the NOL. If a taxpayer does not file Form 1139 or Form 1045, it must file Form 1120X or Form 1040X within three years of the due date, plus extensions, for filing the return for the year in which the NOL is sustained.

Divorce Affects Your Social Security Benefits – A Florida Public Affairs Specialist was quoted in a recent Florida newspaper. About half of all first-time marriages in this country will end in divorce. If you are divorced, you should know how the divorce affects your Social Security entitlement.

Here is a quick overview of Social Security rules concerning divorced spouse’s and widow’s or widower’s benefits.

If you are divorced, you are potentially eligible for benefits on your ex-spouse’s Social Security record if you were married at least 10 years and if you are not currently married (or if you are a widow or widower and remarried after age 60). It does not matter if your former spouse has remarried. You generally will qualify for benefits based on your former spouse’s earnings record only if those benefits would be more than you are due based on your own earnings record.

If your former spouse is still living, you may be due spouse’s benefits based on his earnings record if: 1) you are 62 or older; and 2) your former spouse is at least 62 and eligible for Social Security. Your former spouse does not have to be receiving benefits, only eligible to receive them. Depending on your age, you would be eligible for an amount between one-third and one-half of your former spouse’s retirement benefits, if that amount is more than you are due based on your own earnings record.

If you are a divorced widow or widower, you are due between 70 percent and 100 percent of your ex’s benefits, depending on how old you are when you start collecting benefits. Age 60 is the earliest age a widow or widower can be eligible.

Social Security policies for spousal and survivor benefits are gender-neutral. However, it may interest you to know that the majority of working women are eligible for larger benefit payments based on their own Social Security earnings record while their husbands or ex-husbands are still living.

However, many of those women switch to a higher widow’s rate when their husbands or ex-husbands die.

For more information, you should read the booklet Social Security: What Every Woman Should Know. It is available online at www.socialsecurity.gov/pubs/10127.html or you can request a copy by calling 800-772-1213.

Claim for College Tuition Credit for New York State Residents – According to the instructions accompanying IT– 272-1, if you or the eligible student claim a federal deduction or credit for qualified college tuition expenses, for example, as an adjustment to income on federal Form 1040, as an itemized deduction on federal Schedule A, or as a deduction on federal Schedule C (Form 1040), or when computing the Hope of Lifetime Learning credits, you can still use these expenses to compute this credit .

Architecture and Engineering Firms – were the major beneficiaries of a new law signed by President Bush on October 22, 2004 .

“For the 2005, 2006 tax years, firms will be allowed to deduct 3 percent of their net revenues from projects undertaken in the United States . That percentage increases to 6 percent for tax years 2007, 2008, and 2009. After 2009 it becomes 9 percent. The new tax deduction pertains to revenues derived from architectural and engineering services that are produced by sole proprietors, partnerships, LLCs, subchapter S corporations and C corporations.”

Alternative Methods of Signing for Tax Return Preparers – TSB – M – 05(1)c issued Feb. 1, 2005 advised that the Commissioner of Taxation and Finance has adopted amendments to section 158.12(a) or the personal income tax regulations to eliminate the requirement that tax return preparers must manually sign tax returns or claims for refund. A tax return preparer is now authorized to use the alternative methods described below in signing original tax returns, amended tax returns, claims for refund, and requests for extension of time to file. This will conform New York State policy to the current federal Internal Revenue Service policy authorized by Treasury regulation section 1.6695-1(b) and announced in Internal Revenue Service Notice 2004-54.

Tax return preparers are authorized to sign original tax returns, amended tax returns, claims for refund, and requests for extension of time to file by means of a rubber stamp, mechanical device, or computer software program. These alternative methods of signing must include either a facsimile of the individual preparer’s signature or the individual preparer’s printed name. Tax return preparers utilizing one of these alternative means are personally responsible for affixing their signature to the returns, claims for refund or requests for extension of time to file.

Tax return preparers who use alternative methods of singing must provide all of the other preparer information that is required on the tax returns, claims for refund and requests for extension of time to file, such as the name, address, relevant employer identification number, and the preparer’s individual identification number (social security number or preparer tax identification number).