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Featured Article
Each year, Rounsfull & Associates, Ltd. holds its Annual Referral Contest. The client who refers the most new clients to our firm, for preparartion of their individual tax returns, wins a $500 gift certificate to the store of their choice.
This year's winners, Rob and Ann Garrison, chose a gift certificate to Abt Electronics. And to get that new washing machine from Abt, they only had to refer 2 friends.
If Rob and Ann look familiar, it could be because you've seen them at the Noodle Restaurant (they are the owners). Unfortunately, the Noodle in Glenview closed, but they have opened a great new restaurant in Wilmette, Depot Nuevo. So if you enjoy creative latin cuisine (or would enjoy sipping a tasty marquerita from the porch of a beautiful historic building in Wilmette), I recommend you check out their new restaurant.
Our next Annual Referral Contest is already underway. Any new client referred between May 1, 2009 to April 30, 2010 will automatically make you elgible to participate in this year's contest. | |
Clients and Friends:
My son and daughter were asking me questions last night about the "Cash for Clunkers" law that provides incentives for trading in those old gas-guzzlers (according to Edmunds.com, both of my kids' cars qualify). So I reasoned that if my children are asking questions about this law, maybe some of you have questions as well.
So I've included in this month's letter a brief update on some new tax law provisions and court cases:
- Tax Law Updates, including:
....Cash for Clunkers
....COBRA continuation coverage for unemployed
....IRA rollover pitfalls
....Motor Vehicle sales tax deductions
....Business cell phone substantiation
- Disallowance of the cost of a doctorate degree (as an education expense)
- CEO assessed penalty (personally) for unpaid payroll taxes
I've also included a brief article on the stock market's "rally" over the past few months that you may find of interest.
We are always looking for good, new clients, and I wanted to remind all our existing clients, and friends of the firm, that an easy way to refer a friend or business associate to us is to tell them about our Free Tax Return Review service. We will review a potential clients prior year tax returns, and determine if they were filed correctly, or there are any opportunities for tax savings. So if you know of anyone that may benefit from working with us, please let them know about that "free service".
As always, please contact us if you have any questions about these issues, or any concerns you have about taxes or finances.
Bob Rounsfull
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New cash-for-clunkers law. The President recently signed legislation into law that gives a cash incentive for individuals and businesses to trade in older gas-hogging vehicles for new, more fuel-efficient ones. The incentive takes the form of a voucher of $3,500 or $4,500 depending on the type of vehicle traded in and the fuel efficiency of the vehicle purchased. The new vehicle would have to be purchased between July 1 and November 1 of 2009. The $3,500 or $4,500 vouchers are not to be treated as gross income for purposes of the Internal Revenue Code, or for federal or state assistance programs.
Guidance on the limited subsidy for COBRA continuation coverage of unemployed workers. The American Recovery and Reinvestment Act of 2009 (ARRA) provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers. In most instances the employer advances the 65% subsidy to the health plan and then is made whole by way of a payroll tax credit. To qualify for premium assistance, a worker must be involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009. The subsidy is not taxable when received, but higher income recipients-those with modified adjusted gross income above $125,000 ($250,000 for joint filers)-will have to pay back part or all of it at tax return time. This subsidy has been the subject of much guidance including the following:
- In early May, the IRS posted Q&As on its web site providing additional guidance on recovery of the COBRA premium subsidy by way of a payroll credit claimed on Form 941, and clarifying when the subsidy begins and ends. - In late May, the Department of Labor released a form that terminated workers (or their qualifying family members) can use to request expedited review of their being denied the COBRA premium subsidy.
- In early June, the IRS added 19 new Q&As affirming that the premium subsidy will not be reported to the IRS or the recipients on either Form W-2 or Form 1099 and shedding additional light on a number of key topics, such as events treated as involuntary termination for COBRA subsidy purposes, who claims the payroll tax credit for the premium subsidy, and recordkeeping requirements.
IRA rollover pitfall to avoid. Subject to exceptions, withdrawing funds from an IRS before reaching age 59 1/2 triggers a 10% penalty. One way to avoid the penalty is to take a series of substantially equal periodic payments (not less frequently than annually) for the life (or life expectancy) of the IRA owner or the joint lives (or joint life expectancies) of the IRA owner and his designated beneficiary. An individual took advantage of this exception but moved her IRA funds out of equities and into safer certificates of deposit at another institution after the market soured. Unfortunately, in a private ruling, the IRS said that this move triggered the 10% penalty for all years going back to when she started taking the periodic payments. The IRS said that the rollover of the IRA to the new institution was a modification of the periodic payments that triggered imposition of the back penalties under a so-called recapture rule. It didn't matter that the move was inspired by safety concerns or that the individual was willing to take the payments out of the new IRA. Nor would the IRS allow her to correct the situation by placing the funds back into the original IRA. Another taxpayer who took advantage of the periodic payment exception fared better in court. She took additional funds out for her son's education. The IRS said that this was a modification triggering recapture of the penalty. However, the Tax Court said there is no penalty because there is another exception for IRA funds withdrawn before age 59 1/2 for education and the rules allow an individual to qualify for more than one exception at the same time.
Good news for claiming motor vehicle sales tax deduction. For 2009, there is a new deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles after Feb. 16, 2009 and before Jan. 1, 2010. The deduction generally is available regardless of whether you itemize deductions on Schedule A or claim the standard deduction. The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle. This is one area where there is good news from the IRS-an IRS spokesperson says that the dollar limitation is imposed on a per vehicle basis. This means that you can deduct taxes on two or more purchases of qualifying motor vehicles, up to the limit on each one. The IRS has also stressed that qualifying motor vehicle purchases made in states without a sales tax, such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon, can also qualify for the deduction. Taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per unit fee.
Business cell phone substantiation may be eased. An employee may exclude from gross income the business use of an employer-provided cell phone as a working condition fringe benefit. However, because cell phones are so-called listed property, strict substantiation requirements must be satisfied for business cell phone usage to qualify for the exclusion. Moreover, any personal usage of an employer-provided cell phone is a taxable fringe benefit. Thus, the current rules require documentation of the business and personal use of the cell phone. Fortunately, relief may be on the way. The IRS is considering three alternative methods to simplify the substantiation requirements applicable to employee usage of employer-provided cell phones: a minimal personal use method, a safe harbor substantiation method, and a statistical sampling method (or a combination of the foregoing). |
Cost of doctorate in psychology not deductible as education expense
Ortega, TC Summary Opinion 2009-120
In a Summary Opinion, the Tax Court has held that a mental health practitioner and psychological assistant couldn't deduct the cost of getting a doctorate in psychology. Although she worked in the field of psychology both before and after incurring the expenses, the degree qualified her for a new trade or business as a licensed psychologist.
Background. Education expenses are deductible under Code Sec. 162(a) if made by a taxpayer either to maintain or improve skills required in his business or employment or to meet the express requirements of his employer, or the requirements of law or regs, imposed as a condition to retaining his salary, status or employment. ( Reg. § 1.162-5 )
Deductions aren't allowed if the education:
... is needed to meet the minimum requirements for taxpayer's present or intended employment, trade, business or profession ( Reg. § 1.162-5(b)(2) ) or
... is undertaken to fulfill general education aspirations or for other personal reasons, or
... is part of a program of study that will lead to qualifying the individual in a new trade or business. ( Reg. § 1.162-5(b)(3)(i) )
The Tax Court has held that an individual who, through education, improves her skills in an existing trade or business may also become qualified for a new trade or business. If the education in question qualifies the taxpayer to perform tasks and activities significantly different from those she could perform before the education, then the education is treated as qualifying the taxpayer for a new trade or business.
Tax Court disallows the deduction.The Tax Court held that even though Ortega was in the field of psychology before and after the internship, the doctorate fulfilled the statutory requirements for licensing as a psychologist in both New York and Nebraska, met the minimum qualifications for staff psychologist, and qualified her to perform tasks and activities significantly different from those she could perform before the education. Thus, her education qualified her for a new trade or business and, as a result, she couldn't deduct her educational expenses under Code Sec. 162(a) .
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Troubled hospital's CEO who delegated responsibility to CFO was liable for trust fund penalty
Doulgeris v. U.S., (DC FL 8/3/2009) 104 AFTR 2d ¶ 2009-5220
A district court has found that the interim President and Chief Executive Officer (CEO) of a financially troubled hospital was a responsible person liable for a trust fund penalty of $1.9 million. Despite his protestations that he generally left financial decisions to the hospital's Chief Financial Officer (CFO), he was still responsible for seeing that the taxes were paid.
Background. Where an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a "responsible person," i.e., a person who: (1) is responsible for collecting, accounting for and paying over payroll taxes; and (2) willfully fails to perform this responsibility. ( Code Sec. 6672(a) )
Court's findings. The district court concluded that the CEO was a responsible person and liable for $1.9 million in trust fund penalties. The court noted that he had the authority to make payments on behalf of the hospital. The court also pointed out that the CEO had admitted to signing checks totaling over $2.9 million that were used to pay other creditors, rather than the government, even though the CEO knew that the payroll taxes were delinquent. In addition, the CEO had admitted that he had the power to directly transfer hospital funds to the government to make payroll tax payments, and didn't do so.
The court, citing the Fifth Circuit's decision in Mazo v. U.S. (CA5 3/23/1979), 43 AFTR 2d 79-853 , reasoned that delegation of financial responsibility to another person is insufficient to disprove willfulness for purposes of the trust fund recovery penalty. The court found that it was clear that Doulgeris willfully enabled hospital funds to be used for purposes other than paying taxes owed to the government while he knew that such taxes were owing and was able to effect their payment. As a matter of law, he was willful in failing to pay over the payroll taxes for the fiscal quarters in question.
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Client's Corner
A Wall of Worry
An old and particularly annoying Wall Street adage holds that "a bull market climbs a wall of worry." It's nettlesome for a couple of reasons: (a) it's undeniably true, but (b) it still doesn't tell you when or even if your worry is misplaced.
Perhaps you'll prefer the late John Templeton's more elegant (and more complete) formulation: "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." Any way you state it, this fundamental truism suggests that markets often go up quite a bit when many or most people are still firmly convinced that they have no business doing anything of the kind.
The plain fact is that it's easy to be pessimistic when the economic data are dreadful and the market is falling. A crashing economy feeding the flames of a crashing market just feels right to most people. Regardless of what we end up deciding to do (or refrain from doing) with our portfolios in response to the bad economy/bad market feedback loop, at least we feel that we understand what's going on.
It's when the economy and the market seem to be seriously diverging that our anxiety levels start rising again. At such times, it's not just that we don't know what to do. It's that what's going on doesn't seem to make any sense. This summer, investors may very well feel themselves to be in just such a pickle.
Gross domestic product is-or certainly was at last report-still falling. Despite massive federal stimulus that has no precedent by any measure since World War II, unemployment continues not just to rise but to soar. States are teetering on the brink of insolvency; California was recently paying its bills with IOUs. Home foreclosures are still rising, and home prices still falling. Even though a couple of the more successful banks have noisily repaid their TARP money, the banking system as a whole remains on life support.
Two of the three major auto makers have gone bankrupt; they are now largely owned by the government and their unions, and have thus transferred their huge unfunded pension liabilities to the taxpayers-who are also, through the nationalization of Fannie Mae and Freddie Mac, on the hook for the vast preponderance of the shaky mortgage debt in this country. And, oh yes, we have recently been giving very serious consideration to nationalizing health care in some form or fashion, with deficit and tax consequences no one seems to be able authoritatively to quantify.
All of this would make perfect (and perfectly awful) sense, except for one very bothersome fact. To wit, the stock market, at this writing in late July, is soaring. And that's the verb, friends: soaring. It's not rallying, it's not recovering, it's not creeping back. Up 44% (on a closing basis) in a heck of a lot less than five months? Excuse me: that's soaring, or else there's no such thing. There is surely a wall of things legitimately to worry about. And this market is certainly doing a bang-up job of climbing it.
People who rode out the horrific market decline of 2007-09-because we knew from bitter experience that we didn't know where to get out, and would never know where to get back in, so we might as well just stay put-may regard this apparent contradiction with a certain amount of bemused detachment. (We paid in blood for that luxury, and you'd better believe we're going to enjoy it.)
But the bad economy/rising market dichotomy can only be of very pressing concern to people who either removed their long-term investment capital from equities during the decline, or who have been holding back considerable new money-money which must at some point be committed to equities-waiting for some clear signal that the economy has meaningfully (and lastingly) turned. That's historically the problem with either getting out of, or standing back from, a falling market: you get to be gratifyingly right for a relatively little while (in the context of an investing lifetime), but then you're under the gun to be right a second time, with regard to getting back in.
The psychological pressure of that second decision is compounded, of course, by the largely self-imposed burden of regret at having "missed it." How can I get back in the 970s on the S&P (this line of thinking runs) when I didn't in the 670s...or the 770s...or the 870s...even when I kept reading that things might still be bad, but that they didn't seem to be quite as bad as they were back when snow was on the ground. With my luck, I'll get back in here in the 970s, and it'll go right back down again...
This is a formula for paralysis. The way to break out of it-with the empathetic coaching of your financial advisor-is to begin thinking of the problem not in terms of the market but in terms of your goals. If you're like most of us, money market yields are not going to get you where you need to go. They're probably not going to be enough to secure a long retirement full of dignity and independence; they're probably not going to get your granddaughter through college; they're probably not going to keep your mother in a decent nursing facility, and they're probably not going to fund meaningful legacies to the people you love and must leave behind in the world.
Try to formulate the problem as follows: every day you stay in cash at money market rates of interest is probably a day when you get further from, rather than closer to, the ability to fund your most cherished financial goals. Accepting that stark realization, rather than remaining mired in the bottomless anxiety of when and where to get back in the market, may-if you let it-move you toward a sensible long-term investment decision.
Warren Buffett, perhaps the greatest equity investor who ever lived, said, "The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values."
He said that in the issue of Forbes magazine dated August 6, 1979-just about thirty years to the day before you'll be reading this. It may interest you-and, much more to the point, it may help you more comfortably to reach a good decision-to learn that on that day the S&P 500 closed at 104.
© 2009 Nick Murray. All rights reserved. Used by permission.
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