ESTATE TAX LAW CHANGES

The federal estate tax rules are going to change soon. Tax legislation passed into law in 2001 is scheduled to expire on December 31, 2010, and if Congress does not act, we revert back to the pre-2001 estate tax laws starting in 2011. This isn't likely to happen. Some new estate tax legislation should be forthcoming in 2009 that will change the law for 2010 and beyond.

BACKGROUND

When a person dies, there is generally no estate tax if the fair market value of the decedent's net assets is less than a specified amount, called the "estate tax applicable exclusion" amount. Starting in 1987, the exclusion amount was $600,000. The 2001 legislation increased the exclusion amounts. For persons dying in 2006, 2007, or 2008, the exclusion amount is $2,000,000. For 2009, it increases to $3,500,000, meaning that estates valued at less than $3.5 million will not have to pay any estate tax. For persons dying in 2010, the current law states that there is NO estate tax for any estate, no matter how large. And if new tax legislation is not passed, the applicable exclusion amount reverts back to the Year 2000 amount of $1,000,000 for all persons dying in 2011 or later.

POTENTIAL CHANGES

Congress has debated over how to change the estate tax laws. One option would be to repeal the estate tax, meaning that upon death there would be no estate tax for any estate. This option has met with resistance for various reasons, including loss of revenue to the federal government and the social effect of creating family dynasties.

Under the current law, the estate tax is repealed just for Year 2010. This is just not logical. A second option would be to change the law to retain the $3,500,000 applicable exemption amount for all years from 2009 and beyond. This idea has been discussed among members of Congress.

UPDATE - 2009 LEGISLATION IN PROCESS/"PROGRESS"

As of May 2009, many lawmakers are in support of keeping the current (2009) highest estate tax rate at 45% and the current $3.5 million exemption for up to three years. Separate legislation has been introduced to make those levels permanent.

Stay tuned.

Circular 230: As a result of certain perceived abuses, the US Treasury Department has promulgated regulations that require all attorneys and accountants who provide certain written communications to a client to include an extensive analysis and disclosure in such written communications. To comply with our obligations under these regulations, we wish to inform you that this communication does not contain all of such required analysis and disclosure and was not written or intended by us to be used, and may not be used, by any taxpayer for the purpose of avoiding any tax penalty that may be imposed on the taxpayer. In addition, any tax advice contained in this communication may not be used to promote, market or recommend a transaction. If you have any questions on this, please call or send me an email.

2008 Economic Stimulus Act - Code Sec. 179 Expense and Bonus Depreciation

Congress passed the Economic Stimulus Act of 2008 (2008 Economic Stimulus Act), which increased the limitation on expensing depreciable assets and also provides for 50% bonus depreciation on new (original use) equipment for the year it is placed in service. More specifically, the 2008 Economic Stimulus Act provides an increase in the expense deduction limitation under Code Sec. 179 from $128,000 to $250,000 and an increase of the phase-out amount from $510,000 to $800,000.

The increased amounts applied only to the 2008 tax year.

UPDATE FOR 2009

The Economic Recovery and Reinvestment Tax Act of 2009 enacted on February 17, 2009, extended the same 2008 bonus depreciation and Section 179 expense election provisions for 2009 tax years.

You may want to plan your new equipment purchases accordingly. The increased expense deduction will revert back to $125,000 (to be indexed for inflation) for qualifying assets after 2009. Further, the $125,000 deduction (as adjusted for inflation) is scheduled to revert back to $25,000 for tax years beginning after 2011. Similarly, in 2009, the phaseout amount, which begins with every dollar spent over $800,000, reverts back to $500,000, as adjusted for inflation. It is scheduled to revert to $200,000 after 2011.

Circular 230: As a result of certain perceived abuses, the US Treasury Department has promulgated regulations that require all attorneys and accountants who provide certain written communications to a client to include an extensive analysis and disclosure in such written communications. To comply with our obligations under these regulations, we wish to inform you that this communication does not contain all of such required analysis and disclosure and was not written or intended by us to be used, and may not be used, by any taxpayer for the purpose of avoiding any tax penalty that may be imposed on the taxpayer. In addition, any tax advice contained in this communication may not be used to promote, market or recommend a transaction. If you have any questions on this, please call or send me an email.

For calendar year 2009, the IRS adjusted the business standard mileage reimbursement rate to 54 cents per mile.

For 2008, the IRS business standard mileage reimbursement rate started at 50.5 cents-per-mile and effective July 1, 2008 increased to 58.5 cents-per-mile to reflect skyrocketing gasoline prices. It also raised the standard mileage rate for medical and moving expenses from 19 cents-per-mile to 27 cents-per-mile. The charitable standard mileage rate remained at 14 cents-per-mile.

Circular 230: As a result of certain perceived abuses, the US Treasury Department has promulgated regulations that require all attorneys and accountants who provide certain written communications to a client to include an extensive analysis and disclosure in such written communications. To comply with our obligations under these regulations, we wish to inform you that this communication does not contain all of such required analysis and disclosure and was not written or intended by us to be used, and may not be used, by any taxpayer for the purpose of avoiding any tax penalty that may be imposed on the taxpayer. In addition, any tax advice contained in this communication may not be used to promote, market or recommend a transaction. If you have any questions on this, please call or send me an email.

ANNUITIES, FACTS YOU SHOULD KNOW

There has been recent rulemaking regarding the representations required by agents when selling annuities. These rule changes came about primarily because of abuses. While the sale of these products by unlicensed persons has been curtailed to some degree, you should know facts that are often omitted by salespersons.

First though let's define annuities. In general, annuities can be separated into two classes, variable and fixed. Variable annuities often promise a minimum return but the actual return is based on the rate of return on the underlying investments of the issuer. Fixed annuities promise a specific payout over the life expectancy of the annuitant.

Annuities carry surrender charges if redeemed before contractually allowed. This means if the annuitant wants to cash in before maturity, often 20 years, a significant hair cut is taken by the issuer. Surrender charges are rarely discussed until a purchaser wants to redeem the investment. Sadly, insurance contracts are technically written and few read or understand them before signing. One reason for surrender charges is to protect the issuer from risk that the high commissions paid to the salesperson will not be earned out.

Fixed annuities can be suitable for persons who cannot tolerate risk and need a specific amount of income over their remaining life. Yet, they are not risk free. There is risk that the issuer will not be able to meet its contractual commitment, go broke. That's one reason why insurance companies form subsidiaries. There is certain risk that inflation will erode the buying power of payments resulting in the income being insufficient to meet ongoing needs.

It is questionable whether variable annuities are suitable for anyone. They subject the purchaser to market risks similar to those incurred by direct investment. In other words, issuers invest in securities that an investor could purchase outside the annuity, common stocks, bonds, etc. Yet, less of the investor's capital can be put to work due to higher sales commissions and operating costs. Since less capital is put to work, a higher risk profile is required to realize comparable returns.

The financial markets have always been sophisticated. Now they are incredibly more sophisticated. Higher returns result from acceptance of higher risks. An annuitant isn't given the opportunity to select an appropriate risk profile.

It is true that the build up in a variable annuity is tax deferred until distribution. Unless the annuitant elects to annuitize, that is pay out the fund over their remaining lifetime, income is distributed before principal. This means all distributions are taxed before recovery of untaxed principal. If the balance is annuitized, taxation occurs under the general annuity rules based on the annuitant's life expectancy in the proportion of income and principal. That is about the only good news. There are significant income and estate consequences.

For income tax, all taxable distributions are taxed at ordinary income tax rates. Whereas, if the annuitant held the underlying securities, ordinary dividends and capital gains would be taxed at the more favorable capital gains rates.

Direct investments currently receive a step up in basis when the investor dies. That means that regardless of unrealized gain, a security passes to ones heirs with a basis equal to current market value. Not so with annuities. Heirs take them with the same income tax consequences as the annuitant. This difference can be huge in taxable estates.

Of course all annuities are subject to the basic bet. Annuitants outliving their life expectancy win. Annuitants lose who die before.

In summary, annuities of any description should be fully understood and rarely used. They are expensive because they have to fund high commissions and the operating costs of the issuer. There are adverse income and estate tax consequences.

Circular 230: As a result of certain perceived abuses, the US Treasury Department has promulgated regulations that require all attorneys and accountants who provide certain written communications to a client to include an extensive analysis and disclosure in such written communications. To comply with our obligations under these regulations, we wish to inform you that this communication does not contain all of such required analysis and disclosure and was not written or intended by us to be used, and may not be used, by any taxpayer for the purpose of avoiding any tax penalty that may be imposed on the taxpayer. In addition, any tax advice contained in this communication may not be used to promote, market or recommend a transaction. If you have any questions on this, please call or send me an email.

SAVING FOR COLLEGE

As a parent with college-bound children, you are or will be concerned with either setting up a financial plan to fund for future college costs, or if your children are already college age, concerned with paying for current or imminent tuition, room and board, and other education costs.

Grandparents can also participate in helping fund education costs for their grandchildren.

Fortunately, there are a number of tax breaks, highlighted below, that are specifically designed to help you set aside money for college or give you a tax deduction or credit once you start to pay for college.

QUALIFIED TUITION PROGRAMS (QTP) (e.g., Section 529 plans)

A QTP allows you to buy tuition credits for a child or to make contributions to an account set up to meet a child's future higher education expenses. Contributions to these programs are not deductible, but the earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from a QTP are tax-free to the extent the funds are used to pay qualified higher education expenses. Various states, and their agencies, and private education institutions are all permitted to establish QTP's. Distributions of earnings that are not used for qualified higher education expenses are subject to income tax plus a 10% penalty tax.

Section 529 plans are state-sponsored plans. Anyone can make contributions to these plans on behalf of a child (future student), and there are no adjusted gross income (AGI) limitations. Taxable gifts may occur, but for 2008 you are allowed to "front-load" contributions up to $120,000 (married couple) or $60,000 (single person) without gift tax consequences. This may be used as an estate planning tool.

COVERDELL EDUCATION SAVINGS ACCOUNTS (ESA)

You can establish a Coverdell ESA (similar to procedure for setting up an IRA) and make contributions of up to $2,000 per year for each child under age 18. The right to make these contributions begins to phase out when your adjusted gross income exceeds $190,000 on a married-filing joint return ($95,000 for single). If this limit causes a problem, the child could make a contribution to his/her own account, or some grandparents may qualify to contribute on behalf of a grandchild.

The contributions are not tax deductible, but similarly to the QTP's above, the earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from a QTP are tax-free to the extent the funds are used to pay qualified higher education expenses. Any money remaining in the account when the child-student turns age 30 must be distributed out. This amount may be transferred tax-free to a Coverdell ESA of another member of the child's family who hasn't reached age 30. Otherwise, the earnings portion (not any original contribution amounts) of the distribution amount will be subject to tax and penalty.

SERIES EE and SERIES I U.S. SAVINGS BONDS

These bonds offer two tax-savings opportunities when used to finance your child's college expenses. First, you do not have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in (and U.S. bond interest is non-taxable for state tax purposes). Second, interest on "qualified" Series EE and Series I bonds may be exempt from federal tax if the bond proceeds are used for qualified post-secondary expenses.

To qualify for this exemption, the bonds must be purchased by you in your name (not the child's name) or jointly with your spouse. The proceeds must be used for tuition, fees, books, supplies, and other similar costs (not room and board) for you, your spouse, and/or your dependents (as defined for income tax purposes). If only some of the proceeds are used for qualified expenses, then only a portion of the interest is exempt. Qualified expenses include bond redemption proceeds contributed to Section 529 plans and Coverdell accounts on behalf of the bondholders/parents or dependent children.

Similar to ESA's, the exemption starts phasing out when your adjusted gross income (AGI) reaches certain levels. For instance, joint return filers in 2008 would start to lose the exemption when AGI exceeds $100,650 and the exemption would be gone entirely when AGI exceeds $130,650 (or $67,100 to $82,100 for single taxpayers).

INDIVIDUAL RETIREMENT ACCOUNT (IRA) WITHDRAWALS

There is no 10% penalty for early withdrawal from a traditional IRA made to pay qualified post-secondary education expenses on behalf of the IRA owner, the owner's spouse, or the owner's dependent. Qualifying expenses include tuition, fees, books, supplies, equipment required for enrollment, and if applicable, special needs services. Room and board can also qualify under certain restrictive conditions.

However, even if the penalty does not apply, a traditional IRA distribution is still includible in the owner's taxable income.

Similar rules apply for Roth IRA withdrawals, except that distributions are not includible in the owner's taxable income.

SCHOLARSHIPS

Under certain conditions, scholarship money is exempt from income taxation. The most important condition is that the scholarship must not be compensation for services (exception for health professions program), and it must be used for tuition, fees, books, supplies and similar items (not for room and board).

COLLEGE FINANCIAL AID

The financial aid application process can be quite complex, but should not be taken lightly. There are two common methodologies for determining eligibility for aid: (i) the federal methodology, which is used to award federal need-based aid, and (ii) the institutional methodology, which is often used to award private financial aid.

Since federal aid is based on financial need, the student's application will be required to disclose the market value of "assessable" assets owned by not only the student, but in many cases the parents' assets (generally if the student is a dependent) and in some cases the grandparents' assets. Some assets not required to be disclosed in most aid formulas would include a principal residence or funds in retirement plans. Also, as an example, assets in a Section 529 plan are considered assets of the account owner (e.g., grandparent, not the child) and as such would most often not be "assessable" assets requiring disclosure in the student's federal financial aid form.

Please inquire concerning additional details if you are interested.

TAX CREDITS AND DEDUCTIONS

When you actually start paying qualified education costs, there are several tax credits and above-the-line tax deductions that may apply to you, depending on your level of adjusted gross income. Qualifying expenses include tuition, fees, books, supplies, certain equipment, room & board for students that are at least half-time, and student loan interest expense.

DIRECT PAYMENTS TO EDUCATIONAL INSTITUTION AS GIFTS

Gifts by a donor to an individual are generally limited to $12,000 per year. However, gift tax does not apply to amounts paid as tuition directly to a qualifying educational institution by a donor for the benefit of the student-individual. This exclusion is available in addition to the annual per-donee gift tax exclusion, and no gift tax return would be required.

Example: Grandparent mails a check to the San Diego State University for the amount of grandchild's tuition bill for next semester.

Circular 230: As a result of certain perceived abuses, the US Treasury Department has promulgated regulations that require all attorneys and accountants who provide certain written communications to a client to include an extensive analysis and disclosure in such written communications. To comply with our obligations under these regulations, we wish to inform you that this communication does not contain all of such required analysis and disclosure and was not written or intended by us to be used, and may not be used, by any taxpayer for the purpose of avoiding any tax penalty that may be imposed on the taxpayer. In addition, any tax advice contained in this communication may not be used to promote, market or recommend a transaction. If you have any questions on this, please call or send me an email.

2007 RULES FOR DEDUCTING CHARITABLE CONTRIBUTIONS

For non-cash charitable contributions, articles of clothing and household items must be in "good" used condition or better in order to be allowed a deduction. We recommend you take photographs of articles to justify "good condition" and that you make a detailed list of items, original cost and estimated purchase date.

Substantiation requirements have become more stringent. You are now required to have a bank record of the transaction or acknowledgement from the charity. Cash in the collection basket at church or the Salvation Army Bucket will no longer be allowed a deduction. Your cancelled check is not sufficient for amounts of $250 or more. You must have an acknowledgement from the charity.

While not new law, charitable contributions of goods exceeding $5,000 must be accompanied by an appraisal from a "qualified appraiser." Call us for guidance before completing these gifts.

For contributions of vehicles, the deduction generally may not exceed the actual sales price by the charity. The charity will give the donor a Form 1098-C showing the sales price. There are conditions whereby fair market value can be used. Call us for guidance in unusual cases.

The law continues to require taxpayers to reduce amounts deducted by the fair value of goods or services received. Substantiation by the charity is generally required for amounts in excess of $75.

Circular 230: As a result of certain perceived abuses, the US Treasury Department has promulgated regulations that require all attorneys and accountants who provide certain written communications to a client to include an extensive analysis and disclosure in such written communications. To comply with our obligations under these regulations, we wish to inform you that this communication does not contain all of such required analysis and disclosure and was not written or intended by us to be used, and may not be used, by any taxpayer for the purpose of avoiding any tax penalty that may be imposed on the taxpayer. In addition, any tax advice contained in this communication may not be used to promote, market or recommend a transaction. If you have any questions on this, please call or send me an email.

Welcome, Clients and Fellow Taxpayers.

After much ado, we have finally launched an informative and functional website.

Please feel free to access the website periodically for an overview of tax tips and planning ideas and recent law changes. Plus, we'll throw in a football quiz question from time to time.

Rather than sending hard copy letters in the future, we intend to update the website with current tax articles and tidbits to keep you informed. With that in mind, please check out the list below for a sample of tax issues that will be effective for the calendar year 2008.

1. Applicable for calendar year 2008 only, 50% bonus depreciation and significantly greater Section 179 expense amounts are allowed on qualifying equipment purchases.

2. The federal tax rate may be ZERO PERCENT on some or all of your qualifying dividend income and capital gains generated in 2008 through 2010. The main limitation is that the zero percent rate applies only to your qualifying dividends and capital gains that do not increase Taxable Income (including qualified dividend income and capital gains) above $65,100 for "married filing joint" taxpayers, and above $32,550 for "single" taxpayers. In some cases, taxable income can be "controlled" and proper tax planning could save you significant tax dollars.

3. You may have good reason to convert some or all of your traditional IRA funds to a Roth IRA. However, until calendar year 2010, this conversion will only be allowed if your Adjusted Gross Income (AGI) is below a certain level -- $100,000 for "married filing joint" taxpayers.

4. The IRA funding limit goes up to $5,000 for calendar year 2008, plus an additional $1,000 "catch-up" is allowed for those of us at least age 50 by 12/31/08 ($6,000 total).

5. The tax law will be forcing income generated by your dependents who are up to 23 years old to be treated under the punative "kiddie tax" rules.

Circular 230: As a result of certain perceived abuses, the US Treasury Department has promulgated regulations that require all attorneys and accountants who provide certain written communications to a client to include an extensive analysis and disclosure in such written communications. To comply with our obligations under these regulations, we wish to inform you that this communication does not contain all of such required analysis and disclosure and was not written or intended by us to be used, and may not be used, by any taxpayer for the purpose of avoiding any tax penalty that may be imposed on the taxpayer. In addition, any tax advice contained in this communication may not be used to promote, market or recommend a transaction. If you have any questions on this, please call or send me an email.

NFL DRAFT 2009 and "THE CURSE"

This first story is the most incredible "coincidence", and it motivated me to put together this newsletter. It connects this year's draft to the curse thrown on the Detroit Lions by Hall of Fame QB Bobby Layne after the 1958 NFL season. The pre-draft analysis and draft coverage did touch upon this topic, but it was for the most part glossed over. I want to delve into some of the details, because this is mind-boggling.

Here goes:

QB Bobby Layne played for the Detroit Lions from 1950-1958, leading his team to three NFL championships (1952, ‘53, ‘57). Late in 1957, Layne broke his leg and his replacement Tobin Rote finished the season and led the Lions to victory in the title game. The success of QB Rote "inspired" the Lions' front office to platoon the two QB's. Bobby was not thrilled about this, and to make a long story short, the Lions blind-sided him by trading him to Pittsburgh after the 1958 season. Layne was stunned and hurt; he later remarked that he considered it "a pretty crude way to brush him off after all of those years." Thusly, he was alleged to have cursed the Lions - Detroit "would not win for 50 years." He was also quoted as saying, "I'd like to win a championship for the Steelers and for myself to shove down Detroit's throat."

You get the idea; he wasn't happy, and the 50-year "Curse of Bobby Layne" began.

Curse? You doubters will say coincidence, but the statistics provide "concrete proof".

After 1958, Detroit didn't make the playoffs until 1970, and that was a 5-0 loss, the lowest scoring playoff game of all time.

The Lions' next playoff game wasn't until 1982; they sported a 4-5 record in a strike-shortened season and lost 31-7 in the first round to Washington.

To summarize, that is 7 points scored in the playoffs in 25 years.

In 1983, reliable kicker Eddie Murray missed a last second FG to lose to San Francisco 24-23 in the first round of the playoffs.

Since 1958, the Lions have only won one playoff game (1991).

(I'll list some other interesting stats and "proof" later in this newsletter, but let me get on with the real story connecting all of this to the 2009 NFL draft).

Well, it has now been exactly FIFTY years and the curse should be over. You all remember the 2008 winless Lions (0-16), sporting the worst record of all time in the fiftieth and last year of the curse. What will change the Lions' fate?

Detroit selected QB Matthew Stafford (Georgia) with the first overall pick in the draft. Could he be the savior? Maybe, given a few years.

The eerie conclusion to this buildup is that Stafford played quarterback at the same high school as Bobby Layne, at Highland Park in suburban Dallas. Whoooooooaa!!

Stafford is aware of the connection, "That story is cool. It really is a crazy story. Even if it's not true, to draft a kid from the same high school that Bobby Layne went to? You can't write that script any better. I'd love to be a part of turning that franchise around."

Almost as eerie is the historical fact that Highland Park went nearly 50 years between state titles. They won in 1957 (same year as last Detroit title) and the high school's next title was in 2005 while Stafford was playing QB.

Another interesting twist is that Detroit has added teeth to its new Lions logo, making the leaping lion appear fiercer. Helmets now feature the new logo on each side. It's the most significant change since 1961, when the logo was originally placed on the helmets.

FIRST FOOTBALL QUIZ QUESTION (Autumn of 2007)

The forerunner of the NFL was the American Professional Football Association (APFA), which began in 1920. The name of the organization was changed to the National Football League in 1922. Who was the first president of the APFA?

Hint #1: It was not George Halas, but he did attend the organizational meeting for the APFA.

Hint #2: He played for the 1920 Canton Bulldogs (Canton, OH - where the Pro FB Hall of Fame is located).

Hint #3: He was an athlete (and this may give it away, ........... maybe the best athlete of all time)

ANSWER:

He was arguably the best all-around athlete of all time, Jim Thorpe. This was in part necessary in order to lend credibility to the league, since professional football at this time was in a state of confusion due to three major problems - dramatically rising salaries, players jumping from one team to another, and the use of college players still enrolled in school.

George Halas became the player-coach of the Decatur Staleys in 1921. He moved the team from Decatur, IL to Cubs Park in Chicago. The team name changed to the Chicago Staleys (A.E. Staley paid Halas $5,000 to keep the name for one more year). The Staleys proclaimed themselves the APFA championship with a 9-1-1 record, as did the Buffalo All-Americans at 9-1-2 (there was no championship game). In 1922, Halas' team name changed and would forever stay as the Chicago Bears. Halas signed Red Grange to the team in 1925, at which time the NFL had 20 teams.