Beginning of Year Tax Thoughts
Volume 12, Number 1
Issue 549
Last May, President Bush signed the “Jobs and Growth Tax Relief Reconciliation Act of 2003"—the third major tax “cut” bill in three years. This tax relief package granted monetary tax relief to virtually every person who pays Federal income tax but it did absolutely nothing to make the filing process simpler. In fact, the 2003 tax returns will be the most complex returns that have ever been prepared in the history of our Federal income tax system. For example, the use of Schedule D to calculate long-term capital gains and your total tax is much more complex this year because of transitional rates. Many more taxpayers will need to have their Alternative Minimum Tax calculated using Form 6251. While the Act granted monetary relief, it drastically complicated the actual return process.
For individuals, the 2003 Act accelerated previously-scheduled income tax rate reductions, marriage penalty relief, and child tax credit increases retroactively to January 1, 2003. For businesses that buy depreciable property, there was tax relief through the quadrupling of the Section 179 expense allowance for qualified property and a substantial increase in first-year additional depreciation deductions. Investors got a lower capital gains rate of 15% (effective for sales after May 5, 2003 but before 2009) and a reduced tax rate on dividends of 15% (dividends are no longer taxed at regular ordinary income tax rates). The past year has also produced an avalanche of new regulations, rulings, and cases that will be applicable under certain circumstances including new and largely pro-taxpayer IRS regulations interpreting the home sale exclusion, IRS relief for military personnel serving in the Iraqi combat zone, rules providing limited extensions of the period for IRA rollovers and new procedures for obtaining relief from late S corporation elections.
On the troubling (but not surprising) side, recent court cases have held and discussed that amounts paid to S corporation stockholders were actually compensation. S Corporation owners and I need to continue our discussions about “reasonable salaries.”
Self-employed persons (and S-Corporation shareholders) can now deduct 100% of health insurance premiums on the front of their Form 1040. To qualify, neither the self-employed or the spouse can be eligible to participate in another employer’s health plan and it truly does need to be the self-employed’s actual plan in their company’s name (COBRA payments do not qualify). Additionally, the deduction cannot exceed the net profit of the business entity.
This year many people saw increases and/or decrease in the value of their investments. No deduction is ever available when an investment simply goes down in value as long as you still own the item and it has any sort of market value. Increases in the value of investments are not taxable. You actually have to sell an investment to incur a transaction that will bear a gain or loss against the original cost basis. If you sold a stock at a loss and then bought the same stock back within 30 days, the loss is not allowed.
Charitable contributions need to be thought about in that taxpayers should remember that it is always necessary to have a receipt for all donations. If the deduction was over $250, a really good receipt is needed in that a simple cancelled check is not sufficient. Letters on charity letterhead should always be attempted to be received. The value of anything you receive when you make a donation should always be subtracted from the face amount of your donation. Remember that charitable contributions are only gifts made out of love and affection to an authorized, legitimate charity that has 501(c)(3) exemption status for which you have a receipt.
Every now and then I get into a discussion about our need to prepare an honest and ethical tax return. In recent years, taxpayers have been prosecuted (and at a minimum being roped into an extensive and costly audit) for being too careless with returns. Many people do not realize that it is a crime to make false representations on a return (and to furnish me with misleading information that ultimately cannot be substantiated (mileage, business expenses, charity, dependents, medical, and investment cost basis)). Audits, admittedly, have become rare. Only one in 200 people face audits, mostly because of the decrease in the agents, but during 2003, the Internal Revenue Service announced that it will be increasing audits in the future. The way I answer the question with regard to “what are my chances of being audited?” is that I say that we are always going to take off all that we legally can and all that we can substantiate and document and nothing more. To this end, the best tax returns are the ones that have been based on correct information that has not been gathered in a hurried way. This way, your tax audit will not be an audit at all but a quick and easy process of showing them the trail of legitimate and straightforward workpapers—a simple “show and tell” exercise.
David B. Robinson, CPA
Index of Previous Issues of Tax Fax
