Roger Kahan | Tax Tips and Facts

TAX-FREE HEALTH BENEFITS
INVESTING FOR RETIREMENT
BUSINESS REAL ESTATE OWNERSHIP
MAKING MONEY IN A VOLATILE MARKET
BENEFICIARY DESIGNATIONS
WHAT IS IT THAT…
RECOGNITION OF A SHORT SALE
CERTIFIED?
THE CASE FOR DIVERSIFICATION
IMPORTANT FINANCIAL QUESTIONS
INSURANCE REVIEW TIME?
STOCK OPTION TAX MORATORIUM
TAX TIP OF THE WEEK
JOB SEEKING EXPENSES
FORM 1099
A SCAM AIMED AT OLDER AMERICANS
RICH INVESTORS MORE ACTIVE
COVER YOUR ASSETS
IRS IS HOLDING MILLIONS OF DOLLARS
ELDER CARE
MASSACHUSETTS NOW CONFORMS
DEDUCTIBLE LOSSES

TAX-FREE HEALTH BENEFITS

The Massachusetts legislature has approved a new "revenue enhanced" budget. Despite some political volleyball remaining, it seems the new capital gains tax scheme is cast in concrete (though not fully hardened).The tax compromise leaves the old rate reduction plan in effect through April 30, 2002 and establishes a new capital gains rate for transactions made on or after May 1, 2002. The new rates are 12% for assets held one year or less and 5.3% after that. The tax plan also holds the state income tax rate at 5.3%, reduces the personal income tax deduction, and retroactively effective January 1, 2002, ends the deduction for charitable gifts.Just when you thought that they could not make capital gains more complicated, they did. The new plan essentially adds another category to the 5-4-3-2-1-0 rates for the 2002 tax year. Because the transaction date is when the fund company sold the security, not when the distribution is declared, the gain on any security sold by the fund during the first four months of the year will still have to be spread across the six categories, regardless of when the distribution is made by the fund. Therefore, virtually every fund that declares a gains distribution at anytime during the year will have that gain spread across not just the old six categories, but also the new "seventh" category of 5.3%.

Planning for the future is a lot like planting a tree. You've got to do it today if you want your family to enjoy it tomorrow.

INVESTING FOR RETIREMENT

Many clients, after fully funding their 401(k), IRAs and similar accounts, have additional money available for retirement and long-term savings. Mutual funds and variable annuities are two very popular vehicles used for the investment of excess funds earmarked for retirement years. Whether you choose mutual funds or variable annuities to hold these additional retirement funds requires a review and understanding of both the income tax treatment and the non-tax aspects of the two investment options. By understanding the tax and insurance laws, you might find that under the right circumstances, long-term investing in variable annuities may result in a larger portfolio for your retirement and a reduced tax burden for your heirs. With this knowledge, we may be able to help you increase your retirement accounts, reduce your tax obligations and possibly provide greater investment flexibility while increasing your estate for the benefit of your family and heirs.There are many points to be considered. Call and arrange a convenient meeting to discuss the possible benefits of mutual fund investments and variable annuity contracts using your risk tolerance, your time horizon and your love for paying income and estate taxes. The meeting should include your spouse or significant other as well as family members. When you include your loved-ones in the discussion, you make them aware of your plans and dreams for both you and them.For complete information on any of the above investments, including charges and expenses, obtain a prospectus. Read it carefully before investing. The investment return and principal value of an investment may fluctuate so that an investor's shares, when redeemed, may be higher or lower than their original cost.

Planning for the future is a lot like planting a tree. You've got to do it today if you want your family to enjoy it tomorrow

BUSINESS REAL ESTATE OWNERSHIP

Based upon current tax laws, I believe it is better for business property to be held by the shareholder(s) of the business or by the business owner either personally or in a Grantor Trust created on behalf of the shareholder(s) or owner, or by family members of the business owner. The Grantor Trust, if worded properly, acts as a title holding entity with income and the related deductions being reported for tax purposes by the Grantor on his/her own individual income tax return. The Grantor Trust should be established in conjunction with an attorney experienced in this field. If you are contemplating the purchase or construction of real property (land and building or a condo office) for your business, consider the type of ownership carefully. There are many reasons to support this suggestion. Reasonable rental income paid by the business to the owner could be made without the consideration of Social Security or Medicare payroll taxes, such as would be withheld and paid on the gross payroll paid to a shareholder or paid as Self-Employment persons. Currently, the combined rates for Social Security and Medicare taxes or Self-Employment taxes are 15.3%.Additional benefits and tax attributes will be discussed in future editions of TAX TIPS AND FACTS.

MAKING MONEY IN A VOLATILE MARKET

Ah-h, the good old days of the ever expanding markets! Long gone are the times when the Dow Jones joy ride kept whisking your investments higher and higher, and diversification seemed to be the only obstacle to the exponential growth of their portfolios. With the bears roaming the hills of the national economy, you are acting more cautiously than ever, providing a perfect opportunity to demonstrate my value as your financial advisor.Past performance does not guarantee future results.

BENEFICIARY DESIGNATIONS

You have a company-sponsored 401(k) plan; or you have a company sponsored retirement plan, or you have one traditional or ROTH IRA, or you have many traditional or ROTH IRA accounts. Your plans and accounts may be with a bank, a credit union, a brokerage house, or some other financial institution.Each of those plans require you to designate at least one beneficiary for payment of benefits in case of your untimely demise. When was the last time you checked to make sure your beneficiary designations are up to date? When was the last time you checked to make sure your administrator still has your beneficiary designation on file? With all of the mergers, buy-outs, consolidations and changes of personnel and computer systems, do you know if their records are up to date? The questions are: Who will get your money?Will it be to whom you intended? Do you think it worth checking?

WHAT IS IT THAT…

Allows part market participation
Guarantees return of principal in a lump sum after 10 years
Grows TAX DEFERRED (under current tax laws)
Protects growth for loved ones
Is backed by a strong company in the business
Is cheaper than a typical mutual fund?
Provides an estate feature
Allows tax free exchanges between funds

If you think this annuity program is expensive, think again! For the right investor (those being long-term growth oriented but nervous) this may be a very attractive alternative. Call to receive more information about a program fit for you.Past performance does not guarantee future results. This product is not FDIC insured - NO guarantee, may lose value. A descriptive brochure is available upon request.

RECOGNITION OF A SHORT SALE

A recent IRS ruling provides guidance on the timing of recognition of gain or loss on a short sale when stock is purchased to close the short sale using the regular-way sale. If you sell a security short (you sell before you buy) and the covering purchase is made in a later year, this regulation required you to recognize a gain in the year you sold and recognize any loss in the year you purchased the covering stock.

CERTIFIED?

Your doctor is certified.Your lawyer is certified.Is your accountant certified?If your accountant isn't a Certified Public Accountant, think twice about where you are getting your advice. Who do you want handling your financial and business matters? If your accountant isn't a CPA, it's time to seek professional help.

For more information, call my office 781.963.RAK-1 or email me at kahan@rak-1.com

THE CASE FOR DIVERSIFICATION

Virtually any investment can have some risk associated with it. The stock market can rise and fall; an increase in interest rates can cause a fluctuation in the bond market. The basic key to successful investing is to reduce that risk while seeking an attractive return on your investments. One of the most effective ways to reduce your risk is to diversify your portfolio - "Don't put all of your eggs in one basket." Spreading your capital among a number of different investments may protect you from a significant drop in any one of them. Likewise, the power of diversification might smooth your returns over time. Review your risk tolerance and your time horizon while you contemplate a rebalancing of your investment portfolio.To gain information on any investment, including charges and expenses, obtain a prospectus. Read it carefully before investing. The investment return and principal value of an investment may fluctuate so that an investor's shares, when redeemed, may be higher or lower than their original cost.

IMPORTANT FINANCIAL QUESTIONS

If you die tomorrow, will there be any Estate Tax to pay?
Do you have a plan set up for your financial independence?
How are you funding your children's education?
When did you last review your entire financial portfolio?
What plans are in place in case of your demise or disability? a) Individual b) Business?
As a businessperson, what is your exit strategy?
Whom do you look to as your Principal Financial Advisor?
Do you have any savings accounts or investments that create taxable income?
What areas of your financial life keep you awake at night or can be improved?
What significant changes do you expect within the next five years?
Do you own annuities?
Would you like an independent review of your insurance coverage?Call me to obtain more information and answers to these questions.

Did you know we do more than just prepare, compile, and crunch numbers? We are not "bean-counters." We can also advise you on estate and business planning and offer financial strategies to meet your goals. As your CPA, we know your needs better than any other professional.

INSURANCE REVIEW TIME?

When was the last time you reviewed your liability and catastrophic insurance coverages? You know you should review both coverages and premiums at least every three years. This risk and its related cost is usually the least item looked at by a businessperson. Since you have not looked at it in quite a while, now is the time to call in your insurance agent to review coverage and to quote the renewal or change of existing coverages. It would also be wise to ask two other insurance agents or companies to review the same coverages and quote prices. You may be very pleasantly surprised to see what is wrong with your existing coverage. Be sure to tell your current insurance agent that you will be soliciting two other quotes so he/she knows where he/she stands. It just may make that person's pencil sharper.

STOCK OPTION TAX MORATORIUM

The Treasury Department and the IRS will extend the moratorium on FICA and FUTA taxes for incentive stock options (ISOs) and options under employee stock purchase plans (ESPPs). Under Notice 2002-47, the IRS will not assess FICA or FUTA taxes, or impose federal income tax withholding, on the exercise of any statutory stock option or the disposition of any stock acquired by exercising a statutory stock option. This moratorium will remain until the IRS reviews comments on recent proposed regulations and issues future guidance, which would apply only on a prospective basis.

DON'T FORGET: "IT'S NOT WHAT YOU MAKE THAT COUNTS; IT'S WHAT YOU KEEP!"

TAX TIP OF THE WEEK

I am now writing TAX TIP OF THE WEEK that is periodically distributed over the Internet to a select list of people. Items may also appear in the printed monthly version. If you would like to be included in the weekly electronic distribution, just send me ( mailto:kahan@rak-1.com ) your e-mail address with the subject of: "TTW subscribe" and please include your name, city, and state of residence in the content of the message. We cannot accept a new name without a location. Thanks.

Did you know we do more than just prepare, compile, and crunch numbers? We are not "bean-counters." As a CPA and as an Investment Advisor Representative for US Financial Advisors, LLC, we can also advise you on estate and business planning and offer financial strategies to meet your goals. As your CPA, we know your needs better than any other professional.

JOB SEEKING EXPENSES

An emailed question: I am interviewing for a medical residency position. I've interviewed at 22 different programs. All of the expenses have been paid for through money from a non-government loan made available for this purpose. Are any of the expenses deductible?Thanks, Jason Jason. Individuals may deduct all expenses incurred in seeking employment in the same trade or business regardless of whether or not the search is successful. Expenses are not deductible if an individual taxpayer is seeking employment in a new trade or business even where employment is secured. An individual seeking his/her first job or switching his trade or business, or a person with a long period of unemployment will be denied a deduction. Of course, if the job seeking costs are deductible, there are limitations and restrictions.

Roger

FORM 1099

DON'T FORGET: "IT'S NOT WHAT YOU MAKE THAT COUNTS; IT'S WHAT YOU KEEP!"

In your business or as a self-employed person, do you pay an independent contractor, lessor, or mortgagor? If you pay rent, royalties, non-employee compensation, interest or dividends, you may be required to send a Form 1099 to each recipient. The Form 1099 is to be mailed to the recipient by January 31 of the following year and a copy is to be sent to the Internal Revenue Service by February 28. Remember to obtain the correct name, address and Federal Identification Number of all "1099" people or businesses. You could use a Form W-9 to request this information. For those refusing to give you the requested information, you should consider withholding the payment for services until you receive it. Missing or incorrect Forms 1099 could result in penalties being assessed against you. For more information, call my office and we will send you the list of the current reportable income and the minimum reportable amounts. If you need to file 1099's, I can take care of it for you. Call my office and find out more.

A SCAM AIMED AT OLDER AMERICANS

Beware of this scam aimed at older Americans. Most of the $40 billion in hard-earned cash lost to con artists each year is lost by victims over 65. Here's one to watch for: A scam artist obtains the names of victims who have recently mailed in a sweepstakes entry, then calls, claiming to be a Customs Service official stationed at the Canadian border. The scam artist says the victim has won $100,000, but the check cannot be released because $20,000 in taxes is owed. If the victim will send a mere $1,000 to the address provided, though, the check can be released. Many victims willingly send in the $1,000, or more.

If you are pleased with our services, please tell others. If you are not pleased with our service, please tell us; that way we can please you.

RICH INVESTORS MORE ACTIVE

A recent study shows that wealthy clients are becoming savvier about investment opportunities, and that is leading to a more collaborative relationship between them and their advisors concerning financial planning.

If you are pleased with our services, please tell others. If you are not pleased with our service, please tell us; that way we can please you.

COVER YOUR ASSETS

If you died tomorrow, would the "taxman" be your biggest beneficiary? For many entrepreneurs, that question and its answer may be shocking. That's because those who postpone the task of estate planning may expose their families and their companies to enormous financial risks. Estate taxes, which can reach up to 55% (or higher in some states), can kill even the most promising of fast-growing businesses by forcing heirs to sell prematurely to meet tax liabilities.You say you don't have time to worry about that now? Then you may well be missing out on some of the best estate-planning strategies, which often need to be set in place early to work effectively.When you clarify your estate-planning goals, you protect your family in the event of your death. You may find ways to reduce the estate-tax bite while allowing the family to retain control of the company.

IRS IS HOLDING MILLIONS OF DOLLARS

The Internal Revenue Service has millions of dollars in refund checks that have been returned by the US Postal Service due to incorrect names or addresses, or because taxpayers moved and did not leave a forwarding address. If you were due a refund, but have not yet received it, call IRS at 1-800-829-1040.If you moved since filing your last tax return, you should file a Form 8822, Change of Address, with the local office of the IRS serving your old address. Remember, the "last known address" in the Internal Revenue Service files is all that is needed to comply with the law. This means that anything mailed to your last known address, but is not forwarded to you, is still considered legally mailed to you AND officially received by you.

ELDER CARE

A while ago, I was discussing long-term care with a client, but he just could not talk about it. The client ended up waiting too long to begin a program. During our various meetings, he was diagnosed with a terminal disease, and was no longer eligible for long-term care insurance. We know delaying is common when it comes to planning for elder care issues. While causing a temporary relief of a person's discomfort, delaying a decision can cause massive financial problems. Long-term care costs in a nursing home can range anywhere from $45,000 to $100,000 per year, depending upon the level of services you require. Assisted living could cost as little as $25,000 each year.You basically have three options when it comes to long-term care. You can go on Medicaid if you are at what is called the poverty level, purchase long-term care insurance or you can self-insure. Medicaid, the state administered program for low-income people, has many restrictions and limitations. To self-insure your long-term care program could devastate your estate planning and your heirs' benefits. The safest way to prepare for the financial risk of long-term care is to obtain sufficient insurance coverage. There are many choices and benefits available to this form of protection. For more information, please call me

MASSACHUSETTS NOW CONFORMS CONFORMS WITH FEDERAL TAX AND PENSION LAW

Massachusetts state income tax laws now conform to federal income tax laws with respect to 401(a), 401(k), 403(b) and 457 plans and 529 plans!?This legislation will permit Massachusetts taxpayers to take full advantage of "EGTRRA."? The conformity provisions of the legislation are effective as of January 1, 2002.

Remember: "A failure to plan is a plan to fail." (Anonymous.)

DEDUCTIBLE LOSSES

If you leave a deposit or pay for something in advance and the party holding your money goes defunct before you get anything in return, you may be able to deduct a non-business bad debt. This loss is treated as a short-term capital loss, deductible to the extent of capital gains plus the lesser of $3,000 or the excess of capital losses over capital gains. Any remaining loss can be carried over.

Remember: "A failure to plan is a plan to fail." (Anonymous.)

Roger A. Kahan is a Certified Public Accountant, Business Advisor, and Wealth Care Professional with an office in Stoughton, Massachusetts, serving the tax and financial needs of individuals and small to medium sized businesses almost anywhere in the United States. And with the advent of the Internet, his professional consultation extends into several other countries.

Roger is always seeking additional clients and professionals wishing to save money and better manage their own, a friend, a relative, or a client's personal or business life. Do you know of someone that could use our professional services? If so, please give us his or her name, address, phone number and tell us if we can use your name in an introductory letter or phone call. Thank you.

No one is required to pay more in taxes than the law demands. If you pay too much, you have fewer resources to meet your other financial goals. I can help find tax deductions and credits, and help you plan so your taxes will be as low as possible. I can also assist you with business and estate tax planning.

The information contained in this publication has been obtained from sources I believe to be reliable at the time of writing, but I do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by me of the purchase or sale of any securities or other investment. This material, or any portions thereof, may not be reproduced without prior written permission of Roger A. Kahan, CPA.