August 2004 Online Advisor
What's New in Taxes
Is a Tax-Deferred Exchange Still a Smart Strategy?
Recent laws have created the need to reevaluate some of the tried-and-true tax planning of the past. One common planning strategy involved tax-deferred exchanges, also known as like-kind exchanges or a 1031 exchange.
The like-kind exchange typically involves real estate where one property is traded for another and no tax is paid on the exchange. You need to meet certain deadlines, and usually a facilitator is involved to complete the exchange.
* Compare tax rates. A like-kind exchange, however, may no longer be the best alternative. Instead of deferring the tax, you may want to pay the tax now. The maximum long-term capital gains rate has been lowered to 15%, effective through December 31, 2008. In 2009, the rate is scheduled to go up to 20%.
* Compute depreciation. In an exchange, the basis (tax cost) of the old property must be carried over to the new property. If a large gain is deferred, the amount of depreciation on the new property may be significantly less (because your basis is lower) than if you made an outright purchase of the property at its fair market value.
An example: Let's say you have land worth $1 million that you originally bought for $500,000. You find an apartment building worth $1 million dollars that you would like to have instead.
If you could trade the land for the building using a like-kind exchange, you would pay no capital gains tax on the exchange. Your basis in the new building and land would be the same as your basis in the old land - $500,000. So your yearly depreciation on the new building would be about $14,500 (assuming 80% to building and 20% to land), giving you an annual tax savings of about $5,000 (assuming a 35% tax rate).
Alternatively, if you sold the land and bought the building, the capital gains tax would be $75,000 ($1 million selling price minus original cost of $500,000 times15% tax rate). However, because you paid $1 million dollars for the apartment building and land, the annual depreciation would be twice as high (about $29,000) resulting in a tax savings of $10,000. The net tax cost in the year you sold your land for $1 million would be $65,000 ($75,000 tax minus $10,000 depreciation savings).
* Other considerations. There may be other reasons that a sale and purchase may be more advantageous than doing a like-kind exchange. For example, if you have capital losses that are being carried forward or that you realize in the same year you sell the land, you may be able to offset the gain on the sale of the property.
Each situation needs to be evaluated to see if exchanging
or selling makes more sense. Before you do anything, consider the tax law
changes. They have made planning more important than ever. Before you sign any
documents, give us a call for assistance in checking the numbers on any
proposed deal.
Check Your Credit Card Fees
Credit card companies are making more money than ever from the fees they charge their customers. Six years ago, fees made up 18% of income for credit card companies; last year fees accounted for 35% of their income.
Companies are changing the rules governing the fees they charge. Be aware of this fact, or you may end up with extra charges on your credit card bill even though your payment pattern hasn't changed. Bills are being sent later in the cycle, leaving you with less time to pay before penalties apply, and grace periods are being shortened by some companies. Penalty charges can raise the effective interest rate you pay - in some cases to almost 22%.
Watch for fees charged by the credit cards you use if you want to avoid expensive surprises.
Free Credit Reports
Last year, Congress passed a law requiring the three major credit bureaus - Equifax, Experian and TransUnion - to provide consumers upon request, a free copy of their credit report once every 12 months. While this sounds like a winner, don't wait up for your free report arriving any time soon.
The Federal Trade Commission has decided to roll out the system over time. Here's how it is scheduled to work:
December
1, 2004
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.
March
1, 2005
June
1, 2005
September
1, 2005
Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Puerto Rico, Rhode Island, Vermont, Virginia and West Virginia
Financial Aid Websites
For assistance with financing college, check out these resources:
What You Should Know About Being an Executor
It's a compliment to your judgment and business skills to be named an executor of somebody's estate. Nonetheless, the job also means much work, possibly no pay, and the possibility of being sued for mistakes.
An executor is the person or legal entity that you appoint in your will to settle your estate after your death. The executor serves until an estate closes and is responsible for numerous tasks, such as filing returns for income and estate taxes. Your three major duties, however, will be identifying assets, paying claims, and distributing net assets.
Some assets will be easy to find, but you must also ferret out less obvious assets like securities, bank accounts, and proceeds of insurance policies. All of the estate's assets must be located, collected, and safeguarded until properly distributed.
Paying claims filed against the estate also requires care. Most states require you to give notice to creditors by publishing a statement of the death in the local newspaper. More may be required if a creditor is known. After paying all legitimate claims, you must carry out the distribution of remaining assets to the proper beneficiaries under the will.
A word of caution: As an executor, you can be held liable for mistakes in carrying out your duties. You can hire professionals (lawyers, accountants, etc.) to assist you. Such professionals may not relieve you of your liability, but they will certainly reduce the likelihood of making a mistake.
The complexities of estates vary. Your attorney can assist you in deciding whether or not you should agree to serve as an executor.
Do You Have a
Will?
Fewer people have wills these days, a trend that some experts attribute to an overall slowdown in estate planning and concerns over tax-law changes.
By some industry estimates, less than 1% of Americans are currently subject to estate tax - a fact that may cause taxpayers to be guilty of procrastination. Published reports have alerted taxpayers to the fact that the federal estate tax is set to phase out in 2010, only to return in 2011 unless there is a permanent repeal.
One aspect of a will is
addressing estate-tax consequences, and because this area of the law is in
flux, there is a natural temptation to postpone all aspects of estate planning,
including wills, for fear that they will have to redo
the work later on due to uncertainty over estate taxes. Not having a will
and/or a living trust could be a costly mistake.
Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. - Ronald Reagan (1986)
Just because you do not take an interest in politics doesn't mean politics won't take an interest in you. - Pericles (430B.C.)
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.