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The link on this page is to tax report, a bi-monthly newsletter on U.S. taxes I purchase for use by clients and friends. I have reviewed many of the newsletter products offered to CPAs, and I believe tax report is the best on product on the market. It is neither so simplistic that one does not have to think about the issues presented, nor is it so complex that the issues pertain on only a small segment of my clients. Like any off the shelf product, however, it is a compromise.
Where the content of the current issues commands additional comments, I will make them here.
January 2006
Page 1
Pretax or Roth? I have been surprised at how often clients have asked question in the past month. The article contains a good discussion, but one important point is almost buried. A 401(k), or any other type of retirement account, is designed for long-term saving for eventual retirement. Sometimes circumstances a person with withdraw funds before retirement, but this can be very expensive money to access before retirement. If you think you may need the funds for a new home or to start a business, you are usually better off not participating in the retirement plan. A long-term approach will save you money.
The brief discuss on joint ownership of property is an extended discussion, which I won't do at this time. Joint ownership will usually defeat a well designed estate plan, and could cost your heirs more in the long term. This is a major problem in opening bank and security accounts with husband and wife, as most institutions will automatically create the account as joint with right of survivorship. Washington is a Community Property state, and the cost and hassle of probate in Washington are minimal. Let's talk before your use joint ownership with right of survivorship. The implications are much greater than implied in the article.
Page 2
Borrowing from your Company. The concepts in the article deal primarily with borrowing from a corporation that is known as a C corporation, or a corporation that has not made a S Corporation elections. If those terms do not make sense, give me a call and we can discuss them.
Most of my business clients that operate in the corporate form have an S Corporation election in place. For the S Corporation, borrowing still has its implications, such as unplanned capital gains, non-deductible interest and payroll taxes. Always use caution when borrowing from your own company.
For Sale: Mutual Fund Shares. Most mutual funds track and report the tax basis or cost of shares sold. Most funds that I have seen use the Single-category average basis method. While this method may result in a different gain or loss that the other methods, the difference is usually not worth the cost of record keeping for the other methods. Why pay $150 in fees to save $25 in taxes?
The article does bring up a problem I have with some mutual fund representatives. The key to growing an investment in mutual funds is to reinvest dividends. When the time comes, however, to withdraw funds to pay for retirement, it is time to stop reinvesting dividends and to use those dividends to fund the withdrawals. If the dividends are reinvested, not only are you paying taxes on the dividends, but every withdrawal is also a sale transaction that will generate a needless capital gain or loss.
Page 3
Should You Use the Standard Mileage Rate? This again is a good discussion, but it deals with 2005. Be sure to check out the What's New page in this website for the 2006 Standard Mileage Rates. The article does not discuss the limitations with respect to luxury automobiles. While newer vehicles often provide an advantage in using actual vehicle costs, that advantage my not be as great at it appears do the limitation on deprecation or deducting lease costs on luxury automobiles.
Frequently overlooked by many taxpayers us use their vehicle in their business and use the standard mileage rate is the the business portion of the vehicle loan interest is deductible in addition to the standard mileage rate.
Page 4
Production Deduction Details. Wow! This is technical stuff, but before you ignore it, consider the possibilities. This deduction is the latest in a series of export subsidies that have been ruled to be illegal by the World Trade Organization. To make it legal, it now applies to all taxpayers, not just to exporters. And if you have a creative mind, some activities not normally considered manufacturing might qualify. For example, I have a dentist client who makes his own dental crowns. At this stage, I believe he is a manufacturer who qualifies for the deduction.
Deducting Nursing Home Costs. If you are paying the medical costs of your parents, the article says, "you'll want to find out whether your parent can qualify as your dependent for purposes of the medical expense deduction." The test for dependency for deducting medial expenses is different from the definition of dependency for claiming a personal exemption. Don't assume you parent won't qualify simply because he or she does not qualify for a dependency exemption deduction.