Tax and Financial Articles

Warren Buffett’s billionaire friendly tax return

October 13, 2011 by todd · Leave a Comment

Warren Buffett sent this letter to Congressman Tim Huelskamp disclosing some key figures from his 2010 Form 1040:

Adjusted Gross Income (line 37): $62,855,038
Taxable Income (line 43): $39,814,784
Federal Income Tax (line 60): $6,923,494

When you include the $15,300 in payroll taxes, Buffett’s effective income as a percentage of taxable income is only 17.4%.

Buffett will not disclose his full tax return, but the majority of Buffett’s income is most likely made up of Qualified Dividends and Long Term Capital Gains, both of which are taxed at a rate of 15%.

Also noteworthy is the large difference between Adjusted Gross Income and Taxable Income. The difference is his itemized deduction totals – probably a combination of charitable donations and investment interest.

Tagged: Warren Buffett

Donating a Used Car to Charity

July 14, 2011 by todd · Leave a Comment

One of the unpleasant aspects of buying a new car is the inconvenience involved with getting rid of your old car. One option that many people consider is donating their old car to a charity. The donation approach saves you the trouble of trying to sell the car, and many charities offer the added convenience of picking up the car at your home.

The other benefit of donating your vehicle is of course the potential tax deduction. It is important to bear in mind, however, that the amount of the deduction you will be allowed to claim is subject to special limitations. In some cases, the deduction you can claim might be less than what you think the car is actually worth.

If the charity sells the car, the deduction will be the actual sales price of the car, as long as the charity does not materially improve it prior to the sale. The thing to keep in mind is that these sales are often at auction or in bulk sales, and as a result, they typically result in sales below the “Blue Book” value.

If the charity uses the car in its operations or materially improves the car before selling it, your deduction will be based on the car’s fair market value at the time of the donation. In that case, fair market value is usually set according to the “Blue Book” listings for used cars published by the National Automobile Dealers Association or another established used car pricing guide. However, if the car is in poor condition, because it needs substantial repairs or is unsafe to drive, and the pricing guide only lists prices for cars in average or better condition, the guide will not be able to establish the car’s value. Instead, you must establish the car’s true market value by any reasonable method.

If you do decide to donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction. If the charity sells the car, you will need a written acknowledgement from the charity containing your name and tax ID number, the vehicle ID number, a certification that it was sold at arm’s length to an unrelated party, the gross proceeds of sale, and statement that the deduction cannot exceed the proceeds. The charity should provide you with this acknowledgement within 30 days of the sale.

If, instead, the charity uses (or materially improves) the car, the acknowledgement needs to certify the intended use (or improvement) and the intended duration of the use, along with a statement that the car will not be sold before completion of the use or improvement. In this case, the acknowledgement should be provided within 30 days of the donation.

And finally, it is important to remember that the value of the deduction to you will be less than the cash you are likely to earn if you sell the car. If the sale price of a car is $3000, and you are in the 25% tax bracket (and you itemize your deductions), the cash value of the tax deduction will only be $750. Therefore, if your sole objective is to maximize your financial well-being, then donating a vehicle will not be in your best interest. If on the other hand, you value the convenience of the car donation process and are interested in helping out a charity, and you view the tax deduction merely as an added bonus, then a car donation might be right for you.

Tagged: Auto donations

Is Disability Income Taxable?

June 8, 2011 by todd · Leave a Comment

The answer to that question is – it depends.

The key question is: Who paid for the benefit? If the income is paid directly to you by your employer, it is taxable to you just as your ordinary salary would be.

Frequently, the payments are not made by the employer but by an insurance company under a policy providing disability coverage or, under an arrangement having the effect of accident or health insurance. If this is the case, the tax treatment depends on who paid for the insurance coverage. If your employer paid for it, then the income is taxed to you just as if paid directly to you by the employer. On the other hand, if it’s a policy you paid for, the payments you receive under it are not taxable.

Even if your employer arranges for the coverage, i.e., it’s a policy made available to you at work, the benefits are not taxed to you if you (and not your employer) pay the premiums. For these purposes, if the premiums are paid by the employer but the amount paid is included as part of your taxable income from work, the premiums will be treated as paid by you. In these cases, the tax treatment of the benefits received depends on the tax treatment of the premiums paid.

For example, let’s assume that your salary is $1,000 a week ($52,000 for the year). Additionally, under a disability insurance arrangement made available by your employer, $10 a week ($520 for the year) is paid on your behalf to an insurance company. Your annual income is reported as $52,520, the $52,000 of salary plus the $520 in disability insurance premiums. Under these facts, the insurance is treated as paid for by you. So if you become disabled and receive benefits under the policy, the benefits are not taxable.

What if the facts above are the same except that the amount paid for the insurance coverage qualifies as excludable under the rules for employer-provided health and accident plans? In this case, your annual income would be reported as $52,000, your salary only, and any benefits you receive under the policy are taxable.

In view of the above, when you deciding on how much disability coverage you need to protect yourself and your family, you should take the tax treatment into consideration. If you’re buying the policy yourself, you only have to replace your “after tax” (“take-home”) income because your benefits will not be taxed. On the other hand, if your employer is paying for the benefit, keep in mind that you will lose a percentage of it to taxes. If your current coverage is insufficient, you may wish to supplement the employer benefit with a policy you take out on your own.

———————————————————————————————————————————————-

Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients in Palm Beach County, including Palm Beach Gardens, Lake Worth and Tequesta, as well as throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Tagged: Disability income

Inherited Property: What’s the Cost Basis?

June 8, 2011 by todd · Leave a Comment

Prior to 2010, the tax law provided that any property received as an inheritance would receive a “stepped-up” basis. What this meant was that a beneficiary’s cost basis was generally the fair market value of the asset as of the date of death of the owner. For example, let’s assume that your great uncle passed away in 2009 and left you 1000 shares of XYZ Company. Your uncle purchased these shares many years ago at $1 per share and the market value on the date of his death was $100 per share. If your uncle had sold these shares prior to his death he would have realized a large capital gain. Would you be now subject to the same taxable gain when you sold the stock? The answer is no. As the recipient of the stock as a bequest, your cost basis is stepped-up to $100 per share. So if upon receipt of the stock you immediately sold it at $100 per share, you would have no capital gain. The gain has escaped taxation forever.

What if your uncle made you a gift of the stock prior to his death? In this case, the “step-up” in basis (from $1 to $100 per share) would be lost. Property that has gone up in value acquired by gift is subject to the “carryover” basis rules: the donee takes the same basis the donor had in it (just $1), plus a portion of any gift tax the donor pays on the gift.

Because there was no estate tax in 2010, separate rules apply to property inherited from someone that died last year. In general, the carryover basis rule would apply, meaning that the property received would not be stepped up to date of death values. However, the law allows for a “stepped-up” basis for $1,300,000 in appreciated estate assets. (Note- a higher amount is allowed for assets passed to a surviving spouse).

Also note that the fair market value basis rules apply to inherited property that’s includible in the deceased’s gross estate, whether or not a federal estate tax return was filed, and those rules also apply to property inherited from foreign persons, who aren’t subject to U.S. estate tax. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his inheritance. So it is critical that you consult your tax advisor before changes are made to the ownership of assets owned by your parents or other relative.

———————————————————————————————————————————————-

Schanel & Associates, PA, Certified Public Accountants, located in Jupiter, FL, provides tax, accounting, and consulting services to clients throughout Palm Beach County, including Palm Beach Gardens, North Palm Beach and Juno Beach, and throughout South Florida and the United States.