The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

2022 Standard Mileage Rates

The standard mileage rates for 2022 are:

• 58.5 cents per mile for business uses;

• 18 cents per mile for medical uses; and

• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2022

For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2021 is:

• $56,100 for passenger automobiles, and

• $56,100 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2022 Mileage Rate for Moving Expenses

The standard mileage rate for the moving expense deduction is 18 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,

• on active military duty, and

• moving under a military order and incident to a permanent change of station

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses

For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,

• state or local government officials paid on a fee basis, and

• performing artists with relatively low incomes.

Notice 2021-2, I.R.B. 2021-2, 478, is superseded.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

The IRS has encouraged taxpayers to take important actions this month to help them file their tax returns in 2022, including special steps related to Economic Impact Payments and advance Child Tax Credit payments. As a part of a series of reminders to help taxpayers get ready for the upcoming tax filing season, the IRS highlighted a special page the outlines the steps taxpayers can take to make the tax filing season easier.

Advance Child Tax Credit Payments

The IRS advised families who received advance payments to compare the advance Child Tax Credit payments that they received in 2021 with the amount of the Child Tax Credit that they can properly claim on their 2021 tax return. Taxpayers who received less than the amount for which they're eligible can claim a credit for the remaining amount of Child Tax Credit on their 2021 tax return. Similarly, taxpayers who received more than the amount for which they're eligible may need to repay some or all of the excess payment when they file. Additionally, eligible families who did not get monthly advance payments in 2021 can still get a lump-sum payment by claiming the Child Tax Credit when they file a 2021 federal income tax return next year. This includes families who don’t normally need to file a return.

The IRS announced that it would send Letter 6419 in January 2022 with the total amount of advance Child Tax Credit payments taxpayers received in 2021. Taxpayers should keep this and any other IRS letters about advance Child Tax Credit payments with their tax records.

Economic Impact Payments and Recovery Rebate Credit

Individuals who failed to qualify for the third Economic Impact Payment (EIP) or did not receive the full amount may be eligible for the Recovery Rebate Credit based on their 2021 tax information. Accordingly, these individuals will need to file a 2021 tax return, even if they do not usually file, to claim the credit. Further, individuals will also need the amount of their third EIP and any Plus-Up Payments received to calculate their correct 2021 Recovery Rebate Credit amount when they file their tax return.

Charitable Deduction Changes

Finally, taxpayers who do not itemize deductions may qualify to take a charitable deduction of up to $600 for married taxpayers filing joint returns and up to $300 for all other filers for cash contributions made in 2021 to qualifying organizations.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

The IRS has extended the availability of electronic signatures on certain audit and non-audit forms. Through October 31, 2023, taxpayers and their authorized representatives may electronically sign documents and email documents to the IRS. This is an exception to normal policy. Previously, the IRS had allowed e-signatures through the end of 2021.

Audit or Collection

The Service will accept e-signatures during audit or collection for:

• extensions of statute of limitations on an assessment or collection;

• waivers of statutory notice of deficiency and consents to an assessment;

• closing agreements; and

• other statements or forms collected outside standard filing procedures.

The IRS accepts two types of electronic signatures during an audit or collection interaction (1) digital signatures, and (2) imaged signatures. Regarding imaging signatures, taxpayers that do not have a digital certificate may hand sign a document, and then scan or photograph the document and save it in a standard picture format such as JPEG, TIFF or PDF.

Other Forms That Can Be Electronically Signed

Electronic signatures are also allowed through October 31, 2023 for the following forms and purposes:

• Form 11-C, Occupational Tax and Registration Return for Wagering;

• Form 637, Application for Registration (For Certain Excise Tax Activities);

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 706-A, U.S. Additional Estate Tax Return;

• Form 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions;

• Form 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust;

• Form 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations;

• Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts;

• Form 706 Schedule R-1, Generation Skipping Transfer Tax;

• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;

• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;

• Form 730, Monthly Tax Return for Wagers;

• Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons;

• Form 1066, U.S. Income Tax Return for Real Estate Mortgage Investment Conduit;

• Form 1120-C, U.S. Income Tax Return for Cooperative Associations;

• Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation;

• Form 1120-H, U.S. Income Tax Return for Homeowners Associations;

• Form 1120-IC DISC, Interest Charge Domestic International Sales – Corporation Return;

• Form 1120-L, U.S. Life Insurance Company Income Tax Return;

• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;

• Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return;

• Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts;

• Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies;

• Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);

• Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship;

• Form 1128, Application to Adopt, Change or Retain a Tax Year;

• Form 2678, Employer/Payer Appointment of Agent;

• Form 3115, Application for Change in Accounting Method;

• Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts;

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner;

• Form 4421, Declaration – Executor’s Commissions and Attorney’s Fees;

• Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes;

• Form 8038, Information Return for Tax-Exempt Private Activity Bond Issues;

• Form 8038-G, Information Return for Tax-Exempt Governmental Bonds;

• Form 8038-GC; Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales;

• Form 8283, Noncash Charitable Contributions;

• Form 8453 series, Form 8878 series, and Form 8879 series regarding IRS e-file Signature Authorization Forms;

• Form 8802, Application for U.S. Residency Certification;

• Form 8832, Entity Classification Election;

• Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent;

• Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement; and

• Elections made pursuant to Code Sec. 83(b).

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The IRS has issued guidance for employers on the retroactive termination of the COVID-19 employee retention credit against the employer's share of Medicare tax. The Infrastructure Investment and Jobs Act (P.L. 117-58) amended Code Sec. 3134 so that for most employers the credit applies only to wages paid before October 1, 2021. If the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.

The guidance applies to employers that:

• paid wages after September 30, 2021,

• either received an advance payment of the credit for those wages, or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021, but

• are ineligible for the credit due to the change in the law.

Advance Payments

Employers that are not recovery startup businesses but received advance payments of the employee retention credit for fourth quarter wages of 2021 can avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns. Failure to repay the advance payment by the due date may result in the IRS imposing failure to pay penalties.

Reduced Employment Tax Deposits

Employers that reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of the employee retention credit but are not recovery startup businesses will not be subject to a failure to deposit penalty for the retained deposits if they:

• reduced deposits in anticipation of the credit, consistent with the rules in Notice 2021-24;

• deposit the amounts initially retained in anticipation of the credit on or before the relevant due date for wages paid on December 31, 2021, regardless of whether the employer actually pays wages on that date; and

• report the tax liability resulting from the termination of the credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.

Failure to Deposit Penalty Waiver

Due to the termination of the employee retention credit for wages paid in the fourth quarter of 2021 for employers that are not recovery startup businesses, the IRS will not waive failure to deposit penalties for employers that reduce deposits in anticipation of the employee retention credit after December 20, 2021.

Reasonable Cause Relief

Employers that do not qualify for relief under this guidance can reply to an IRS penalty notice with an explanation. The IRS will consider reasonable cause relief.

Effect on Other Documents

This guidance modifies Notice 2021-49, IRB 2021-34, 316, and Notice 2021-24, IRB 2021-18, 1122.

The IRS has reminded tax professionals and taxpayers that they can use digital signatures on a variety of common IRS forms and access a secure online platform to view and make changes to their account. The IRS has balanced the e-signature option with critical security and protection needed against identity theft and fraud.

The IRS has reminded tax professionals and taxpayers that they can use digital signatures on a variety of common IRS forms and access a secure online platform to view and make changes to their account. The IRS has balanced the e-signature option with critical security and protection needed against identity theft and fraud. The Service has informed taxpayers that acceptable electronic signature methods include:

• a typed name on a signature block;

• a scanned or digitized image of a handwritten signature that's attached to an electronic record;

• a handwritten signature input onto an electronic signature pad;

• a handwritten signature, mark or command input on a display screen with a stylus device; or

• a signature created by a third-party software.

The IRS will accept images of signatures (scanned or photographed) including common file types supported by Microsoft 365 such as .tiff, .jpg, .jpeg, .pdf, Microsoft Office suite, or Zip. Further, the IRS allows taxpayers and representatives to use electronic or digital signatures on certain paper forms which they cannot file using IRS e-file. The forms are available on the IRS website and through tax professional's software products.

The IRS has also added a new feature this year, which gives taxpayers digital control over who can represent them or view their tax records. The new feature, one of many recent enhancements to the Online Account for individuals, will allow individual taxpayers to authorize their tax practitioner to represent them before the IRS with a Power of Attorney (POA) and to view their tax accounts with a Tax Information Authorization (TIA). Tax professionals may go to the new Tax Pro Account on IRS.gov to digitally initiate POAs and TIAs. These digital authorization requests are simpler versions of Forms 2848 and 8821.

This new digital authorization option will allow the IRS to reduce its current CAF inventory and to focus on authorization requests received through fax, mail or the Submit Forms 2848 and 8821 Online – all of which require IRS personnel to handle. The Security Summit partners remind all tax professionals to review their security measures. IRS Publication 4557, Safeguarding Taxpayer Data (.pdf), provides tax pros with a starting point for basic steps to protect clients. IRS Publication 5293, Data Security Resource Guide for Tax Professionals (.pdf), provides a compilation of data theft information available on IRS.gov, including the reporting processes.

The IRS has reminded taxpayers that they can get extra protection starting in January by joining the Service's Identity Protection Personal Identification Number (IP PIN) program. The IRS has made recent changes to the program to make it easier for more taxpayers to join. The fastest and easiest way to receive an IP Pin is by using the Get an IP PIN tool.

The IRS has reminded taxpayers that they can get extra protection starting in January by joining the Service's Identity Protection Personal Identification Number (IP PIN) program. The IRS has made recent changes to the program to make it easier for more taxpayers to join. The fastest and easiest way to receive an IP Pin is by using the Get an IP PIN tool.

The IRS has urged any IP PIN applicant previously rejected during the identity authentication process to try applying again in 2022. The authentication process has been refined and improved, now enabling many taxpayers screened out in the past to have a better chance of passing the authentication process. Taxpayers are requested to keep in mind these key points about the IP PIN program:

• For 2022, the Get an IP PIN tool is scheduled to launch on January 10. It’s the fastest and easiest way to get an IP PIN. It is also the only option that immediately reveals the IP PIN to the taxpayer. For that reason, the IRS urges everyone to try the Get an IP PIN tool first, before pursuing other options.

• No identity theft affidavit is required for taxpayers opting in.

• The IP PIN is valid for one year.

• Taxpayers should enter the IP PIN on any return, whether it is filed electronically or on paper.

• Anyone with either a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN) who can verify their identity is eligible for the IP PIN opt-in program.

• Any eligible family member can get an IP PIN.

• Taxpayers should never reveal an IP PIN to anyone. The only exception is a taxpayer who uses a trusted tax professional to file their return.

There are two options have been made available for people who cannot pass the IRS online identity authentication process. One involves filing Form 15227 and the other requires a visit to an IRS Taxpayer Assistance Center (TAC). Further, for processing year 2022, individuals with an adjusted gross income of $73,000 or less and those married filing jointly with an AGI of $146,000 or less with access to a telephone can complete Form 15227 (.pdf) and either mail or fax it to the IRS. Any taxpayer who is ineligible to file a Form 15227 may make an appointment to visit an IRS Taxpayer Assistance Center (TAC). Anyone using this option must bring two forms of picture identification. Because this is an in- person identity verification, an IP PIN will be mailed to the taxpayer after their visit. To find the nearest TAC, taxpayers can use the IRS Local Office Locator online tool or call 844-545-5640.

The Internal Revenue Service is now allowing taxpayers who have had an offer in compromise accepted by the agency to keep their tax refunds instead of the previous policy of having those refunds applied to their outstanding tax debt.

An offer in compromise (OIC) happens when the IRS and the taxpayer settle past due taxes for an amount that is less than the full amount owed. This typically happens when the agency agrees with the taxpayer that the payment in full will create a financial burden.

"For taxpayers facing an economic hardship, the anticipation of a refund may be the safety pin holding together a family’s ability to meet basic living expenses, especially for taxpayers relying on the Earned Income Tax Credit or the Additional Child Tax Credit that Congress intended for subsistence of low-income taxpayers," National Taxpayer Advocate Erin Collins said in a recent blog post discussing the changes, which went into effect in November. She added that it will also help those who are struggling financially because of the COVID-19 pandemic.

The blog notes that the filing of an amended return could cause the refund to be applied to an existing debt rather than being sent to the taxpayer.

Additionally, the agency announced that certain taxpayers will be able to seek an offset bypass refund while OIC decisions are pending, although taxpayers need to be proactive in contacting the IRS if they want an offset bypass refund, as there is no formal form to request it.

A. Mcnulty, 157 TC —, No. 10, Dec. 61,950

Delivery of coins to the owner of a self-directed "Check Book IRA" was taxable income even though she took the coins as manager of the IRA’s LLC. While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets. The fact that the Check Book IRA website said this would not be treated as a taxable distribution did not constitute reasonable cause for escaping understatement penalties.

A. Mcnulty, 157 TC —, No. 10, Dec. 61,950

Delivery of coins to the owner of a self-directed "Check Book IRA" was taxable income even though she took the coins as manager of the IRA’s LLC. While an IRA owner may act as a conduit or agent of the IRA custodian, she may do so only as long as she is not in constructive or actual receipt of the IRA assets. The fact that the Check Book IRA website said this would not be treated as a taxable distribution did not constitute reasonable cause for escaping understatement penalties.

Background

A husband and wife each established a self-directed IRA and directed assets held in the IRA to invest in a single-member limited liability company (LLC). The wife was the manager of the LLC that her IRA invested in. She directed the LLC to purchase American Eagle coins and took physical possession of the coins. The IRS treated this as a taxable distribution in the year she received physical custody of the coins. The husband directed his IRA to invest in these kinds of coins and a condominium through an LLC. He conceded that he received taxable distributions from these transactions but contested understatement penalties for the failure to report the distributions.

Custody

According to the court, IRA owners cannot have unfettered command over the IRA assets without tax consequences. A qualified custodian or trustee is required to be responsible for the management and disposition of property held in a self-directed IRA. When coins or bullion are in the physical possession of the IRA owner (in whatever capacity the owner may be acting), there is no independent oversight that could prevent the owner from invading her retirement funds.

Penalties

Understatement penalties were imposed even though the Check Book IRA website said that taking possession of the property as manager of the LLC would not be treated as a taxable distribution. The court was skeptical about treating viewing the Check Book’s website as seeking professional advice upon which a reasonable person could rely. The taxpayers did not seek or receive any advice from their C.P.A., who prepared their returns, regarding their self-directed IRAs. They failed to disclose the relevant information to their C.P.A. They were both professionals. They liquidated nearly $750,000 from their existing qualified retirement accounts to invest in a questionable internet scheme without disclosing the transactions to their C.P.A.

The Internal Revenue Service is keeping the pressure on high income taxpayers who do not file their taxes as well as other high wealth taxpayers who may otherwise be hiding their earnings to avoid paying taxes.

And while agents are actively pursuing these people, Darren Guillot, Commissioner of the IRS Small Business/Self-Employed – Collection division said the goal is to avoid as much as possible escalating a case to enforcement proceedings.

His message on November 15 to attendees of the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., was a simple one: "Just tell the truth. We want to get you in compliance. We want you to file on time and pay what you owe. Every case is not criminal. We don’t want any case to be criminal, or enforcement or a seizure."

The Internal Revenue Service is keeping the pressure on high income taxpayers who do not file their taxes as well as other high wealth taxpayers who may otherwise be hiding their earnings to avoid paying taxes.

And while agents are actively pursuing these people, Darren Guillot, Commissioner of the IRS Small Business/Self-Employed – Collection division said the goal is to avoid as much as possible escalating a case to enforcement proceedings.

His message on November 15 to attendees of the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., was a simple one: "Just tell the truth. We want to get you in compliance. We want you to file on time and pay what you owe. Every case is not criminal. We don’t want any case to be criminal, or enforcement or a seizure."

HiDeF Sweeps

To that end, he highlighted some of the activities the agency is engaged in that target high income non-filers, which he defined as earning at least $100,000 in income from a third-party source. The agency is employing data analytics to identify these individuals and are engaging these taxpayers through what is called High Income Delinquent Filer (HiDeF) Sweeps, which began in December 2018.

The analytics identified those who meet the income threshold and had at least three years of unfiled returns. The agency then proceeded with unannounced field visits, though those were moved to a virtual environment because of the COVID-19 pandemic.

Guillot said these personal interactions with agents have been key in collection activities. "It sends a message," he said. "We just want to hear from you. And you certainly are going to hear from us."

He noted that in 2019, there were 9.5 million non-filers and of them, more than 843,000 were high income non-filers. He said the program HiDeF program would be continuing for years to come. For those instances that involve egregious noncompliance and/or potential fraud, the IRS has what is called Operation Surround Sound, a collaboration beween the Office of Fraud Enforcement, Collection and Examination Operations.

These types of cases could involve significantly higher amounts of earned income, as well as foreign holdings and cryptocurrency. And again, Guillot reiterated the advice of "just tell the truth" about what is going on and get back into compliance before it has a chance to become an enforcement action that could entail measures such as levies, asset collections, repatriation of foreign assets and revocation or denial of passports.

Busting Ghost Employers

Guillot also highlighted another target the agency recently began focusing on: ghost employers. These involve employers who provide a W-2 to their employees but do not file the proper forms or pay the money owed to the IRS or the Social Security Administration.

Again, he pointed to the agency’s use of data analytics, which uncovered this scheme, and in a relatively short amount of time, revenue officers were able to help launch a number of criminal investigations. He said the work in this area is going to continue.

Other areas the IRS is focused on include employers who fraudulently applied for COVID assistance to help keep their employees, which he noted that work in this area has stopped hundreds of millions of dollars in payments; tracking transactions of more than $10,000 in cash where no tax returns are filed; and efforts that are focusing on high income earners and under-reporting of income in gig economy segments.

Internal Revenue Service Commissioner Charles Rettig praised the work of agency employees throughout the COVID-19 pandemic but stated that there simply are not enough of them as the agency is slowly working through the backlog the pandemic caused.

Rettig used that as the foundation to call for not only more funding for the agency, but to encourage people to apply for open positions within the agency, especially as it is facing significant employee shortages in the coming years.

Internal Revenue Service Commissioner Charles Rettig praised the work of agency employees throughout the COVID-19 pandemic but stated that there simply are not enough of them as the agency is slowly working through the backlog the pandemic caused.

Rettig used that as the foundation to call for not only more funding for the agency, but to encourage people to apply for open positions within the agency, especially as it is facing significant employee shortages in the coming years.

"I appreciate your patience and understanding and working with us," he said November 16 at the AICPA & CIMA National and Sophisticated Tax Planning Conferences in Washington, D.C., acknowledging how challenging it has been for them to be working with the IRS throughout the pandemic.

One issue has been the backlog in mail, which by July 2020, there were more than 20 million pieces of mail stockpiled Rettig said.

An Extreme Spike In Calls Received

He also noted that during the pandemic, the agency has been receiving a significantly higher number of phone calls. By August 2021, the agency received 246 million calls being handled by less than 15,000 customer service representatives. He said that on March 15, the calls were coming in at a rate of 1,500 calls per second. By comparison, the IRS received 42 million calls in 2019 and 44 million calls in 2020.

The average call in 2021 was also four minutes longer than in previous years, he said.

With that in mind, Retting stated that taxpayers and the tax professionals who help them deserve the timely responses they may not be getting, whether by mail or over the phone, because of workplace protocols that make some of these processes challenging and cause delays and issues between departments within the agency.

However, Rettig noted the constraints of working for the government are keeping the agency from expanding as it would simply do if it was a private firm.

"Level of service is an appropriated item," meaning the IRS simply could not hire more people to man the phones or open the mail without getting more money from Congress to do so. "This should help frame up for you the importance of a properly funded Internal Revenue Service."

He also noted that in the next six years, the agency is going to lose 52,000 employees.

"Our rebuild is critical for you and for the country," he said. "If you ever thought about coming to work for the government, no better way to say it than now is the time. You can make a difference."

If You See Something, Say Something

The other clear message he wanted to pass along to attendees of the conference was to be vocal with the agency about what is going on in the field so the agency can continue to improve. Rettig noted his work as a professional CPA prior to taking on the commissioner’s role and how he remains in regular contact with his professional peers from his time in private practice.

"You should be a part of this," he said, emphasizing that he is easily reachable.

But he also mentioned that he has heard tax professionals that he knows complain in public forums about things without bringing it to his direct attention.

"If I know it and I don’t do something, that’s on me," he said. "Continue to help us help others."

U.S. citizens and resident aliens working abroad may exclude up to $91,400 of their foreign earned income for 2009. Additionally, expatriates may deduct or exclude their foreign housing costs in excess of a base amount. The housing exclusion is for reimbursed expenses while the deduction is for unreimbursed costs.

Earned foreign income

Before being able to claim these exclusions, you must meet some primary requirements. Foreign earned income is an individual's earned income from foreign sources during the time period that he or she has a foreign tax home and either satisfies the bona fide or physical residence test.

Tax home

Your tax home also must be in a foreign country. Generally, the IRS and the courts hold that your principal place of business or employment is your tax home.

Status

Finally, you must be a:

U.S. citizen who is a bona fide resident of a foreign country or countries for a continuous time period including the entire tax year;

U.S. resident alien who is a citizen or national of a country having an income tax treaty with the U.S. and who satisfies the continuous residency requirement; or

U.S. citizen or resident alien physically present in a foreign country or countries for a minimum of 330 days during any consecutive 12 month period.

Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.

With mortgage rates at the lowest level in years, you may be debating whether to refinance your adjustable-rate or higher-interest fixed-rate mortgage to lock in what looks like a real bargain. Although taxes may take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. Sometimes, you can immediately deduct some of the costs of refinancing.

Boom in refinancing

Escalating home prices in many parts of the country have motivated many homeowners to refinance their existing mortgages. Many people are refinancing to secure cash for home improvements or to pay debts. These are often called "cash-out" refinancings because you receive cash back from the lender based upon the difference between the old and new mortgages.

Example. You have an existing mortgage of $195,000. Your home is valued at $325,000. You refinance and take a new mortgage for $225,000. You receive $30,000 from the lender and use the money to pay for home improvements.

Cash-out refinancings account for more than one-half of all refinancings. Some estimates pegged the value of "cash-out" refinancings at more than $100 billion in 2001.

Original mortgage points

The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a mortgage. Generally, for individuals who itemize, points paid by a borrower at the time a home is purchased are immediately deductible as interest if they are charged solely for the use or forbearance of the lender's money. Points for this purpose include:

• Loan origination fees;

• Processing fees;

• Maximum loan charges; and

• Premium fees.

Amounts paid for services provided by the lender, however, are not deductible as interest. These services include:

• Appraisal fees;

• Credit investigation charges;

• Recording fees; and

• Inspection fees.

Refinancing points

Unlike points paid on an original mortgage, you cannot immediately deduct points paid for refinancing. However, if refinancing proceeds are used to refinance an existing mortgage and to pay for improvements, the portion of points attributable to the improvements is immediately deductible.

With interest rates so low, many homeowners are refinancing for the second or even third time. If you are refinancing for a second time, you may immediately deduct points paid and not yet deducted from the previously refinanced mortgage.

Example. You refinanced your home mortgage several years ago and used the proceeds to pay off your first mortgage. Your refinancing mortgage (loan #2) was a 30-year fixed-rate loan for $100,000. You paid three points ($3,000) on the refinancing. Because all of the loan proceeds were used to pay off the original mortgage and none were used to buy or substantially improve your home, all of the points on the refinancing loan must be deducted over the loan term. This year, you refinance again (loan #3) when there's a remaining (not-yet-deducted) points balance of $2,400 on loan #2. You can deduct the $2,400 as home mortgage interest on your 2003 return.

Deducting interest

Generally, home mortgage interest is any interest you pay on a loan secured by your home. The loan may be a first mortgage, a second mortgage, a line of credit, or a home equity loan.

The interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. Usually, this information is available from lenders. You may deduct points only for those payments made in the tax year.

Example. You paid $2,000 in points. You will make 360 payments on a 30-year mortgage. You may deduct $5.65 per monthly payment, or a total of $66.72, if you make 12 payments in one year.

Refinancing is anything but simple. There may be additional complications if there are several mortgages on your home or if you own a vacation home as well as a principal home. Please contact this office if you are considering refinancing now or in the near future.

If you want to withdraw funds from either your company retirement plan or your individual retirement account, there is a 10% additional tax (penalty) if you make withdrawals before the age of 59 ½. There is an exception to this rule if you make withdrawals from your account of a series of "substantially equal periodic payments."

If you want to withdraw funds from either your company retirement plan or your individual retirement account, there is a 10% additional tax (penalty) if you make withdrawals before the age of 59 ½. There is an exception to this rule if you make withdrawals from your account of a series of "substantially equal periodic payments."

Three methods

The IRS allows three acceptable methods of calculating "substantially equal periodic payments":

1. The required minimum distribution method: Under this method, the annual payment withdrawn from your account each year is determined by dividing the amount in your retirement account by a number from a designated life expectancy table. Under this method, the annual dollar amount of each payment is redetermined on a year-by-year basis.

2. The fixed amortization method: The annual amount you withdraw from your retirement account for each year is determined by dividing your account balance into equal amounts over a specified number of years from a chosen life expectancy table and a chosen interest rate. Under this method, the annual payment that you withdraw from your account remains the same each year.

• Note: The life expectancy tables and interest rates for Methods 1 and 2 are provided by the IRS.

3. The fixed annuitization method: Using this method, the annual payment that you withdraw from your account each year is determined by dividing the account balance by an annuity factor. This annuity factor is taken from a table provided by the IRS. Under this method, the annual payment remains the same each year.

Current problem

If you are taking a series of substantially equal periodic payments and you change the amount you withdraw at any time in during the first five years, the IRS will go back and impose the penalty for early withdrawals against you. If you calculated your payment using Method 1 this is not a problem. Many people who started taking a series of substantially equal periodic payments in the last few years are encountering a problem. The amount they are withdrawing is based on a retirement account with a higher value than they currently have due to the decline in the stock market.

When they continue withdrawing this high amount out of their retirement accounts each year they end up in danger of depleting their account too soon. The IRS is giving all taxpayers in this position a one-time opportunity to change their calculation method to Method 1.

If you have questions about how you calculate annual payments in order to avoid the penalty for early withdrawal from your account, please feel free to contact this office.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Deductible investment expenses

Investment interest. A significant source of investment-related costs is investment interest expense. Investment interest paid related to the generation of taxable investment income is generally deductible on Schedule A of Form 1040, however certain limitations may reduce the amount deductible. For example, your deduction for investment interest paid may not exceed your net investment income. "Net investment income" is arrived at by subtracting your investment expenses (other than interest expense) from your investment income. Interest paid in excess of that amount determined to be deductible can be carried over and deducted in subsequent years (after application of these rules, of course).

Other investment expenses. Qualified investment expenses (other than interest) can be claimed as miscellaneous itemized deductions on Schedule A of your federal Form 1040 and are generally subject to the 2% threshold imposed on miscellaneous itemized deductions. If you itemize your deductions on your return, to the extent that these and other miscellaneous itemized deductions exceed 2% of your adjusted gross income (AGI), they are deductible from income.

The list of investment expenses approved for inclusion as miscellaneous itemized deductions (by the IRS or the courts) is a long one -- and one worth reviewing by you as a taxpayer, as unexpected ways to reduce your taxable income can be found. Some of the investment expenses that have been determined to be deductible as miscellaneous itemized deductions subject to the 2% floor include:

• Investment counsel or advisory fees, including managers or planners.
• Subscriptions to publications offering investment advice.
• Legal expenses for the maintenance, conservation or management of investment property.
• Legal expenses incurred in recovering investment property or amounts earned by such property.
• Guardian fees and expenses incurred in the production or collection of income of a ward or minor or in the management of the ward or minor's investments.
• Clerical help and office rent connected with the management of investments and/or the collection of the income they generate.
• Accounting fees for keeping investment income records.
• Depreciation of home computers used to manage investments that produce taxable income.
• Costs of premiums and other expenses for indemnity bonds for the replacement of missing securities.
• Dividend reinvestment plan (DRIP) service charges, such as charges for holding the shares acquired through the plan, collecting and reinvesting cash dividends, keeping individual records, and providing detailed statements of accounts.
• Proxy fight expenses if incurred in connection with a legitimate corporate policy dispute
• Investment expenses connected with the purchase, sale or ownership of securities
• Fees paid to a broker, bank, trustee, or other investment-related agent to collect interest or dividends on taxable investments.
• Losses on non-federally insured deposits in an insolvent or bankrupt financial institution, if the loss is treated as an ordinary loss by the taxpayer but is not treated as a casualty loss; and subject to a $20,000 limit on losses from any one institution.
• Allocable investment expenses of privately offered mutual funds.
• Custodial fees.
• Safe deposit box rent so long as the box is used for the storage of (taxable) income-producing stocks, bonds, or papers and documents related to taxable investments^.
• Travel costs incurred in making trips away from home to check on your property or to confer with investment advisors about your income-producing investments. But be careful -- if your investment property is in Vail or Maui, make sure your records establish that your trip was primarily made to check on your investment, not to take a personal vacation.

The expenses generated in connection with the management of investment property are deductible even if the property isn't currently producing income -- so long as the property is held for the production of income. And expenses incurred in reducing additional loss or to prevent anticipated losses with respect to investment property are also deductible.

Nondeductible investment expenses

What kinds of investment-related expenses are not deductible? A nonexclusive list of such expenses includes:

• Fees charged by a broker to acquire securities. These costs are instead added to the basis of the securities. Similarly, fees paid on the sale of securities reduce the selling price.
• Fees for establishing or administering an IRA, unless billed and paid separately and apart from the regular IRA contribution.
• Expenses related to tax-exempt investments.
• Trips to attend seminars or conventions connected with investment or financial planning.
• Trips to stockholder meetings. Although an exception has been made where a taxpayer with significant holdings traveled to a meeting to protest specific practices that were hurting his investment.
• Home office expenses, unless investing is actually the taxpayer's business.

Remember, for purposes of the rules governing investment expenses, rental and royalty income-related properties are not considered. These investments are subject to their own rules and reporting requirements, and are not included in the category of investment expenses limited by the 2% threshold.

While this discussion related to the tax treatment of investment-related expenses may appear comprehensive, other limitations and exceptions exist that may apply to your tax situation. For more information regarding how you can make the most of your investment-related expenditures, please feel free to contact the office for assistance.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

When it comes to legal separation or divorce, there are many complex situations to address. A divorcing couple faces many important decisions and issues regarding alimony, child support, and the fair division of property. While most courts and judges will not factor in the impact of taxes on a potential property settlement or cash payments, it is important to realize how the value of assets transferred can be materially affected by the tax implications.

Dependents

One of the most argued points between separating couples regarding taxes is who gets to claim the children as dependents on their tax return, since joint filing is no longer an option. The reason this part of tax law is so important to divorcing parents is that the federal and state exemptions allowed for dependents offer a significant savings to the custodial parent, and there are also substantial child and educational credits that can be taken. The right to claim a child as a dependent from birth through college can be worth over $30,000 in tax savings.

The law states that one parent must be chosen as the head of the household, and that parent may legally claim the dependents on his or her return.

Example: If a couple was divorced or legally separated by December 31 of the last tax year, the law allows the tax exemptions to go to the parent who had physical custody of the children for the greater part of the year (the custodial parent), and that parent would be considered the head of the household. However, if the separation occurs in the last six months of the year and there hasn't yet been a legal divorce or separation by the year's end, the exemptions will go to the parent that has been providing the most financial support to the children, regardless of which parent had custody.

A non-custodial parent can only claim the dependents if the custodial parent releases the right to the exemptions and credits. This needs to be done legally by signing tax Form 8332, Release of Claim to Exemption. However, even if the non-custodial parent is not claiming the children, he or she still has the right to deduct things like medical expenses.

Child support payments are not deductible or taxable. Merely labeling payments as child support is not enough -- various requirements must be met.

Alimony

Alimony is another controversial area for separated or divorced couples, mostly because the payer of the alimony wants to deduct as much of that expense as possible, while the recipient wants to avoid paying as much tax on that income as he or she can. On a yearly tax return, the recipient of alimony is required to claim that money as taxable income, while the payer can deduct the payment, even if he or she chooses not to itemize.

Because alimony plays such a large part in a divorced couple's taxes, the government has specifically outlined what can and can not be considered as an alimony expense. The government says that an alimony payment is one that is required by a divorce or separation decree, is paid by cash, check or money order, and is not already designated as child support. The payer and recipient must not be filing a joint return, and the spouses can not be living in the same house. And the payment cannot be part of a non-cash property settlement or be designated to keep up the payer's property.

There are also complicated recapture rules that may need to be addressed in certain tax situations. When alimony must be recaptured, the payer must report as income part of what was deducted as alimony within the first two payment years.

Property

Many aspects of property settlements are too numerous and detailed to discuss at length, but separating couples should be aware that, when it comes to property distributions, basis should be considered very carefully when negotiating for specific assets.

Example: Let's say you get the house and the spouse gets the stock. The actual split up and distribution is tax-free. However, let's say the house was bought last year for $300,000 and has $100,000 of equity. The stock was bought 20 years ago, is also worth $100,000, but was bought for $10,000. Selling the house would generate no tax in this case and you would get to keep the full $100,000 equity. Selling the $100,000 of stock will generate about $25,000 to $30,000 of federal and state taxes, leaving the other spouse with a net of $70,000. While there may be no taxes to pay for several years if both parties plan to hold the assets for some time, the above example still illustrates an inequitable division of assets due to non-consideration of the underlying basis of the properties distributed.

Under a recent tax law, a spouse who acquires a partial interest in a house through a divorce settlement can move out and still exempt up to $250,000 of any taxable gain. This still holds true if he or she has not lived in the home for two of the last five years, the book states. It also applies to the spouse staying in the home. However, the divorce decree must clearly state that the home will be sold later and the proceeds will be split.

Complications and tax traps can also occur when a jointly owned business is transferred to one spouse in connection with a divorce. Professional tax assistance at the earliest stages of divorce are recommended in situations where a closely held business interest is involved.

Retirement

When a couple splits up, the courts have the authority to divide a retirement plan (whether it's an account or an accrued benefit) between the spouses. If the retirement money is in an IRA account, the individuals need to draw up a written agreement to transfer the IRA balance from one spouse to the other. However, if one spouse is the trustee of a qualified retirement plan, he or she must comply with a Qualified Domestic Relations Order to divide the accrued benefit. Each spouse will then be taxed on the money they receive from this plan, unless it is transferred directly to an IRA, in which case there will be no withholding or income tax liability until the money is withdrawn.

Extreme caution should be exercised when there are company pension and profit-sharing benefits, Keogh plan benefits, and/or IRAs to split up. Unless done appropriately, the split up of these plans will be taxable to the spouse transferring the plan to the other.

Tax Prepayment and Joint Refunds

When a couple prepays taxes by either withholding wages or paying estimated taxes throughout the year, the withholding will be credited to the spouse who earned the underlying income. In community property states, the withholding will be credited equally when spouses each report half of their income. When a joint refund is issued after a couple has separated or divorced, the couple should consult a tax advisor to determine how the refund should be divided. There is a formula that can be used to determine this amount, but it is wisest to use a qualified individual to make sure it is properly applied.

Legal and Other Expenses

To the dismay of most divorcing couples, the massive legal bills most end up paying are not deductible at tax time because they are considered personal nondeductible expenses. On the other hand, if a part of that bill was allocated to tax advice, to securing alimony, or to the protection of business income, those expenses can be deducted when itemizing. However, their total -- combined with other miscellaneous itemized deductions -- must be greater than 2% of the taxpayer's adjusted gross income to qualify.

Divorce planning and the related tax implications can completely change the character of the divorcing couple's negotiations. As many divorce attorneys are not always aware of these tax implications, it is always a good idea to have a qualified tax professional be involved in the dissolution process and planning from the very early stages. If you are in the process of divorce or are considering divorce or legal separation, please contact the office for a consultation and additional guidance.

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

A. Unfortunately, you're not alone in your "seasonal" approach to considering your tax situation. Many people have a once-a-year relationship with their tax professional, which can result in the improper handling of important tax documents and sometimes-costly financial decisions. When it comes to handling your tax situation during the year, you will find that a little common sense will go a long way.

Here are some general common sense tips to handling all things tax-related pre- tax season and during the "off-season":

Don't assume all your tax paperwork is correct. Check Forms W-2s and 1099s for accuracy. Many W-2s and 1099s are prepared by data processing companies that merely process your tax information as raw data. Mistakes have been known to occur. Although your employer or financial institution should be checking these forms for accuracy, it's a good idea to double-check these forms against payroll stubs and monthly statements from the payer. If you find a discrepancy, notify your employer as soon as possible to the error corrected and reported to the appropriate taxing authorities.

Gather possible ALL relevant tax documents for your tax preparation. Don't avoid taking legitimate deductions out of fear of "raising red flags" that may cause your return to be audited. Filing a complete and accurate return is required and is your best defense against an audit.

Don't make decisions solely on potential "tax breaks". All good investment or business decisions should be able to stand on their own before tax breaks are considered. A change in the tax law can be disastrous (and costly) when you are stuck in an affected investment (can you say "abusive tax shelter"?).

Seek planning advice from a tax professional. Probably the best investment decision you can make is to seek out the services of your tax professional. In most cases, the amount you are charged for good tax advice is a fraction of the resulting tax savings.

Consult with a tax professional before responding to IRS notices. If you receive a notice from the IRS (or any taxing authority) do not automatically assume that it is accurate and mail them a check. Many notices are inaccurate or merely require additional explanation. Tax professionals have the knowledge and experience to recognize areas where additional explanation or documentation may reduce or eliminate the assessment stated on the notice.

If audited, consider your appeal rights. Although the IRS auditor may not bring it to your attention, the end of an audit is be no means the end of the road for your tax case. Appealing an audit decision can many times put your case in front of a more experienced agent who may better understand the issues and your position on them.

Taking a little time during the year to consider your tax situation and invoke a little common sense can pay off with substantial tax savings and the avoidance of unnecessary expenditures. If you need any additional assistance throughout the year, please do not hesitate to contact the office for guidance.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Over the past few years, the rules governing stock options have become increasingly complicated. More than ever, it is important that employees who receive stock options have a good understanding about how they are taxed -- on receipt of the option, at its exercise, or pursuant to the sale of the underlying stock -- as well as the potential consequences of their decisions regarding the timing of the taxation of those options.

NSOs vs ISOs

The most common type of stock option that employees receive is called a nonstatutory stock option (NSO). The other, less common type of stock option is generically referred to as an incentive stock option (ISO). ISOs are governed by very specific rules and are subjected to strict statutory requirements; NSOs, on the other hand, are subject to more general rules and guidelines.

Incentive stock options (ISOs) give the employee the right to purchase stock from the employer at a specified price. The employee is not taxed on the ISO at the time of its grant or at the time of the exercise of the option. Instead, he or she is taxed only at the time of the disposition of the stock acquired through exercise of the option. Note, however, the exercise of an ISO does give rise to an alternative minimum tax item in the amount of the difference between the option price and the market price of the stock.

Note. The IRS temporarily suspended the collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

NSOs also give the employee the right to purchase stock from the employer at a specified price. When and how an NSO is taxed depends on several factors including whether the underlying stock is substantially vested, and whether or not the fair market value of the stock is readily ascertainable.

Vesting. If an employee receives options from his employer, the tax consequences depend on whether the stock is vested. Stock you receive from your employer is "substantially vested" if it is either "transferable" by the employee or it is no longer subject to a "substantial risk of forfeiture". Property is "transferable" if you can sell, assign or pledge your interest in the option without the risk of losing it. A "substantial risk of forfeiture" exists if the rights in the property transferred depend on the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a certain condition related to the transfer.

Readily ascertainable fair market value. An NSO always has a readily ascertainable fair market value when the option is publicly traded. When an option is not publicly traded, it can have a readily ascertainable fair market value if its value can be measured with reasonable accuracy. IRS rules spell out when fair market value can be measured with reasonable accuracy.

Generally, an employee who receives an NSO that has a readily ascertainable fair market value is subject to special tax rules under the Internal Revenue Code that apply to property received by a taxpayer in exchange for services when the option is granted. Under these rules, the option must be included in the employee's income as ordinary income in the amount of the fair market value in the year the option becomes substantially vested. If the employee paid for the option, he recognizes the value of the option minus its cost. The employee is not taxed again when he exercises the option and buys the corporate stock; he is taxed when the stock is sold. The gain or loss recognized when the employee sells the stock is capital in nature.

No readily ascertainable fair market value. Employees who receive NSOs from privately held companies are most likely to receive an NSO without a readily ascertainable fair market value. In general, when an NSO does not have a readily ascertainable fair market value, taxation occurs at the time when the option is exercised or transferred. The employee will recognize ordinary income in the amount of the value of the stock when it becomes substantially vested minus any amounts paid for the option or stock. The gain or loss recognized when the employee sells the stock is capital in nature. However, employees who have NSOs without a readily ascertainable fair market value also have the ability to elect to have the transaction taxed differently,

Section 83(b) election: Elector beware

Employees who exercise options that did not have a readily ascertainable fair market value when they were granted may elect to report income from the stock underlying the option at the time of the exercise rather than waiting until the stock is substantially vested. This election is referred to as a "Section 83(b) election" and is non-revocable. Once the election is made, any later subsequent appreciation when the stock becomes substantially vested would not be includible in income.

As you can see, the rules and tax laws related to stock options are indeed complicated and require some advance planning in order to avoid a big tax "gotcha". If you are contemplating entering into any transactions that involve stock options, please contact the office for additional guidance.

A number of charities use the Internet to solicit funds, allowing potential donors to make contributions online. You can even create an account in a special type of planned giving instrument: a donor-advised fund. What are these funds, and are they right for you?

A number of charities use the Internet to solicit funds, allowing potential donors to make contributions online. You can even create an account in a special type of planned giving instrument: a donor-advised fund. What are these funds, and are they right for you?

A popular alternative to making outright gifts at one extreme and private foundations at the other has been the "donor-advised charitable fund." To make these funds work, however, the donor must protect his or her right to an immediate charitable deduction.

Nature of donor-advised funds

Donor-advised funds are similar to private foundations in many ways and can allow you a certain degree of control over how your contributions are invested and distributed, all without the expenses associated with setting up and running a private foundation.

Upon a contribution to a charity, the charity opens up an account in the donor's name in a special fund. The donor can recommend where the funds are invested, how and when the income is distributed, and to what charities. However, the charity managing the fund need not follow the donor's recommendation and it has ultimate say as to the disposition. Many donor-advised funds require an initial contribution of $100,000, although as they have grown in popularity, some funds offer a minimum contribution of $5,000 or less. In addition to being offered on the Internet, many donor-advised funds are offered by banks and brokerage houses.

Proceed with caution

Contributing to a donor-advised fund in which your wishes are respected, although perhaps not legally enforceable, may provide you with the extra degree of tangible participation that can make your charitable contributions more meaningful to you. Such charitable giving, however, does require some research to make sure that the IRS recognizes your initial contribution as a charitable deduction. Before making a substantial initial contribution, you also should investigate other ways to give, from designated gifts to setting up your own private foundation. Please feel free to contact the office for a consultation.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.