Health Care Reform Act Upheld

By now of course you've heard that the U.S. Supreme Court has upheld the key provisions of the Affordable Care Act, or "Obamacare." In an unexpected twist, the Court ruled that the controversial individual mandate is constitutional, but under the government's power to tax, rather than to regulate commerce.

We don't need to go into the details of the ruling itself -- just turn on your television, and somewhere, somebody is opining on it right now! But we do want to remind you the Court's decision means several new taxes will go into effect as scheduled:

       On January 1, 2013, the Medicare tax will go up by 0.9% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).

       Also on January 1, there will be a new "Unearned Income Medicare Contribution" of 3.8% on investment income, for those earning more than $200,000 ($250,000 for joint filers).

       Beginning on January 1, 2014, there will be a new $2,500 limit on tax-free contributions to flexible spending accounts, and employers with more than 50 employees will face a penalty of $2,000 per employee for not offering health insurance to full-time employees. 

       Finally, the threshold for deducting medical and dental expenses rises from 7.5% of adjusted gross income to 10%. This will make these expenses even harder to deduct without help from advanced strategies like Health Savings Accounts or Medical Expense Reimbursement Plans.

So, while the constitutional issues may be settled, several planning challenges certainly remain. We'll be following developments carefully in order to help you navigate these new challenges. If you have any questions, don't hesitate to call us at (704) 544-7600.

Ed Lloyd & Associates, PLLC • Charlotte NC CPA Firm

Tax Reduction, Preparation, Accounting & Wealth Management Services 

call 704-544-7600
Please visit ELCPA.com today!
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To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Less Rich. Less Famous. Less Tax.

Last week, we brought you a story from those party animals at the IRS Statistics of Income Division about an annual report on the 400 highest incomes in America. It turns out they're a very successful bunch — for 2009, they earned an average of $202.4 million and paid an average of $40.9 million in tax. This week, we're going to talk about a different group of taxpayers. Less rich, less famous, but maybe more successful in their own way.

Back in 1969, Treasury Secretary Joseph Barr was shocked to discover that 155 Americans had earned over $200,000 that year, yet paid nothing in tax. Zip. Zilch. Nada. ($200,000 isn't bad money now — back then, it had about the same buying power as $1.2 million today.) Washington huffed and puffed, then passed the "Alternative Minimum Tax," or AMT. In 1970, the new tax surprised 18,464 unhappy taxpayers. No one could have foreseen it growing into a complete "parallel" tax system, a many-headed Hydra that millions every year.

Fast-forward to today. With the AMT firmly in place, the IRS has just released a 61-page report revealing that in 2009, 20,752 taxpayers earned over $200,000 and paid — you guessed it — zero tax. (Aren't you glad you've got us to go through those 61-page IRS reports?) That's one out of every 189 Americans earning above that amount. And the number of nontaxable high-income returns is growing fast — five years earlier, there were just 2,833 tax-free winners.
How do they do it? The IRS identified "four categories that most frequently had the largest effect in reducing taxes":

1. Tax-exempt interest: Municipal bond interest income is exempt from federal and most state income taxes (although income from "private activity" bonds is subject to AMT). If you're paying significant tax on interest income, we can help you decide if municipal bonds can help cut your tax.
2. Medical and dental expenses: These are deductible to the extent they top 7.5% of your adjusted gross income (going up to 10% next year, unless the Supreme Court strikes down that part of the Affordable Care Act). Medical deductions include far more than just the obvious doctors, dentists, and prescriptions. If you suffer from arthritis, for example, you might write off the cost of a swimming pool your doctor prescribes to relieve your symptoms.
3. Charitable contributions: Charitable gifts let you do well for yourself while you do well for others. They're deductible up to 50% of your adjusted gross income. We can help you make the most of your gifts, especially noncash contributions and appreciated property.
4. Partnership and S corporation net losses: "Pass-through" entities let you report business losses on your personal return. We can help you decide if these are right for your business.

There you have it. Four ways to turn $200,000 into zero tax — and 20,752 stories to help inspire you. We're pleased that you take time to read these weekly emails. But it's not enough just to give you the news. Our real job is to help you put it to use to pay less tax yourself and now is the time for tax planning. And don't forget, we're here for your family, friends, and colleagues too! 

Ed Lloyd & Associates, PLLC • Charlotte NC CPA Firm

Tax Reduction, Preparation, Accounting & Wealth Management Services 

call 704-544-7600
Please visit ELCPA.com today!
Join Us On - Facebook   -  Linked In

To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

A Big Ouch - Documenting Charitable Deductions

The English novelist and playwright Henry Fielding once wrote that "a rich man without charity is a rogue; and perhaps it would be no difficult matter to prove that he is also a fool." But sometimes you can be rich, charitable, and foolish, all at the same time. And that can make for some really expensive mistakes.

Joseph Mohamed is a California real estate broker and appraiser who's made a fortune buying, selling, and developing real estate. In 1998, he and his wife Shirley set up a charitable remainder trust for the benefit of the Shriners Hospitals for Children, the Sacramento Food Bank & Family Services, and the Pacific Legal Foundation. Then, in 2003 and 2004, he donated six California properties to the trust: four adjacent street corners in Rio Linda, a 40-acre subdivided parcel south of Sacramento, and a shopping center in Elk Grove.

Mohamed prepared his own taxes for those two years — definitely not standard operating procedure for someone in his shoes. When it came time to fill out Form 8283, "Noncash Charitable Contributions", he skipped the instructions because "it seemed so clear that he didn't think he needed to." The form said the description of the donated property could be "completed by the taxpayer and/or appraiser." And Mohamed was an appraiser, right? Of course he knew what his own properties were worth. How hard could it really be? He attached statements to his returns explaining how he valued the two biggest parcels. Then he deducted $18.5 million for the gift, satisfied that he had done all he needed to substantiate his write off.

It turns out, though, that the IRS wants a teensy bit more than just your say-so before handing out eighteen million in benefits. In fact, they have some pretty specific rules for deducting any gift of property worth more than $5,000. You need a "qualified" appraisal, made no sooner than 60 days before the gift and no later than the due date of the return reporting the gift itself. It has to be signed by a certified appraiser — not the donor or the taxpayer claiming the deduction. And the appraisal has to include specific information about the property itself, your basis in the property, and how you acquired it in the first place.

The IRS started auditing Mohamed's 2003 return in April, 2005. You can probably imagine how charitably inclined they were toward his self-appraisal. So Mohamed went out and got independent appraisals showing the properties were worth over $20 million — two million more than he deducted. And the trust actually sold the 40 acres south of Sacramento for $23 million. You would think that would be enough. But you would be wrong. The IRS held firm, and the case wound up in Tax Court.

Last month, the Court issued their 26-page opinion in Mohamed v. Commissioner. They ruled that none of Mohamed's appraisals were "qualified" under Section 1.170A-13(c)(3)(i) and shot down his entire deduction. The Court confessed that "We recognize that this result is harsh — complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions — all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions." But, the Court continued, "the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules."

So, ouch. Big, big ouch. (Insert expletive here.) Eighteen million bucks worth of deductions, lost because someone didn't dot the i's and cross the t's. Six million in actual tax savings, down the proverbial drain. We realize it sounds self-serving to tell you to come to us before you make a big financial move. But Joseph Mohamed's case emphasizes how important this really is. You may not have millions riding on doing it right. But are you really willing to risk tax benefits you truly deserve by doing it yourself? 

Ed Lloyd & Associates, PLLC • Charlotte NC CPA Firm

Tax Reduction, Preparation, Accounting & Wealth Management Services 

call 704-544-7600
Please visit ELCPA.com today!