May 2005 Online Newsletter

What's New in Taxes

IRS Raises Its Interest Rates

The IRS will charge 6% interest on individual and corporate tax underpayments for the second quarter of 2005 (April 1 through June 30). Large corporate underpayments will be assessed interest at 8%.

On tax overpayments, the IRS will pay individuals 6% and corporations 5%. The interest paid on corporate overpayments exceeding $10,000 will be 3.5%.

All of the rates are one percentage point higher than rates for the first quarter of 2005.

How to Help Your Child Buy a Home

In today's market, young people often cannot afford to buy their first home. If you're considering helping your son or daughter buy a home, you can choose to make an outright gift, provide or co-sign a loan, or become a part owner. Each choice has its own tax consequences, so select the option that best suits your overall tax and financial needs.

* Make a gift. If you want to make a gift to your child, you can give up to $11,000 per year, per person completely tax-free. You don't need to file a gift tax return, and your child won't have to report the gift on his return. (Gifts are generally not taxable for income tax purposes.)

If you are married and your spouse joins in the gift, you can effectively pass up to $44,000 each year to your married child and his or her spouse. (Consult with us before making gifts exceeding $11,000 per person.)

* Cosign a loan. If you're not in a position to make an outright gift to your child, consider helping with a loan. If your child's income is too low to qualify for a home loan, you can cosign the mortgage. There may be gift tax consequences to co-signing, and you will be responsible to the mortgage company if your child can't make the payments. To maintain your credit rating, ask the mortgage company to send you a copy of any late-payment notices.

* Lend the money. Another option is to lend money directly to your child. If the loan is to carry interest, it should be recorded as a lien on the property to preserve the interest deductions for your child. Be careful about low- or no-interest loans. The IRS will treat the parents as having received interest income if the loan is over $100,000, or if the loan is between $10,000 and $100,000 and the borrower has investment income exceeding $1,000 per year. If your loan is under $10,000, the IRS shouldn't tax you on uncollected interest.

* Consider co-ownership. Yet another option is to co-own the property with your child. Typically, the parent makes the down payment and the child pays the mortgage payment, utilities, taxes, and other ongoing expenses. The home is jointly owned, and the family agrees on a split (often 50/50) of the appreciation in value when the home is sold.

If the child makes all the mortgage and tax payments, there should not be current tax consequences to the parent. When the home is sold, the child may qualify for the home-sale exclusion for gain on his ownership portion, and the parent would be taxed on the gain on his share of ownership.

If you would like to discuss this topic in greater detail, give us a call.

What's New in Financial Strategies

New Supreme Court Ruling Protects IRAs in Bankruptcies

The U.S. Supreme Court issued a unanimous decision in April that will protect individual retirement accounts (IRAs) from creditors in bankruptcy proceedings. Until this decision, company pensions and 401(k) plans were protected under federal law, but IRAs were not.

The Supreme Court reversed a lower court's decision which had held that IRAs were not protected because individuals could withdraw money from their IRAs at any time. The Supreme Court ruled that the 10% early withdrawal penalty serves as a substantial deterrent that keeps taxpayers from accessing IRA funds before age 59½. Therefore, IRAs are in the same category as other retirement plans and should be protected from creditors when bankruptcy is filed.

Who Owns Your Life Insurance Policy?

Life insurance is a valuable tool for estate planning. By having adequate life insurance to pay estate taxes, you can leave more to the next generation. The pitfall is that if you have any "incidents of ownership" in the policy, proceeds from your life insurance will be included in your estate and could be subject to estate taxes. "Incidents of ownership" include the right to cancel or assign a policy, revoke an assignment, use the policy as collateral for a loan, borrow the cash value, or change a beneficiary.

* Who should own your policy? Life insurance policies can be owned in many forms: directly by you, by your spouse, by your children, or by a trust. Setting up an irrevocable life insurance trust during your lifetime to own the policy, or having a family member other than you own the policy, can prevent having the proceeds included in your taxable estate.

Removing life insurance from your estate means your heirs could save taxes of up to 47% on the proceeds of the life insurance.

* Can you transfer ownership? If you transfer an existing policy to a trust or an individual, the proceeds will still be included in your taxable estate if the transfer has taken place within three years prior to your death. Depending on the value of the policy and other factors, the transfer may escape gift tax (and the generation-skipping tax).

The drawback to transferring ownership of your life insurance policy is that you no longer have control over the policy, including the ability to change beneficiaries.

* Smart planning will save taxes. Proper planning for the ownership of your life insurance is essential. Keeping life insurance out of your gross estate will leave more to your beneficiaries if your estate is large enough to be taxable. Contact us if you would like details about this and other strategies that could reduce taxes on your estate.

Chuckle of the Month

A large company, feeling it was time for a shakeup, hired a new CEO.

This new boss was determined to rid the company of all slackers. On a tour of the facilities, the CEO noticed a guy leaning on a wall. The room was full of workers and he wanted to let them know that he meant business!

The new CEO walked up to the guy leaning against the wall and asked, "How much money do you make a week?"

A little surprised, the young fellow looked at him and replied, "I make $300 a week. Why?"

The CEO then handed the guy $1,200 in cash and screamed, "Here's four weeks' pay. Now GET OUT and don't come back."

Feeling pretty good about himself, the CEO looked around the room and asked, "Does anyone want to tell me what that goof-off did here?"

From across the room came a voice, "Pizza delivery guy from Domino's."

- Anonymous

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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.