Volume 10 Number 4

From The Corner Office By Mitchell Freedman, CPA/PFS

Home ownership is one of the most sought-after goals of my clients, family, friends, and other individuals I have met over the years. They feel that a private home is an American birthright, a place to put down roots, an asset to give them some personal income tax benefits instead of "throwing-away" rent, and an investment to provide them with a substantial return over time. Yes, a home is a personal dwelling that can give you a sense of belonging. It can also provide some tax deductions, which likely will reduce their income tax bill. However, despite the enormous run-up in prices during recent years there is no guarantee that home ownership will prove to be a good investment.

I know that there are readers who will say, "Freedman, you're nuts! Real estate will always increase in value." Well my friends, I'm here to state this isn't always the case. There is no guarantee that any asset will increase in value. In fact, it's during times like now, when people say, "this time it's different," that returning to normalcy and/or reverting to the mean, generally occurs. I have lived in California since 1978 and there have been two major corrections to real estate values during that time. I have observed boom and bust periods with respect to residential real estate all over the country at different times, for different reasons.

Don't get me wrong. I'm not advocating selling the homestead to cash-in the gains that have accumulated in recent years. What I am advising, however, is that if you plan to purchase real estate now, in a rising interest rate environment, during a steep value increase period measured in years, do so with caution and with your eyes wide open. Be prepared for either sub-standard gains or even declines in real estate values. I base my prediction on the simple fact that history always repeats itself, albeit for different reasons. This time the reasons are likely to be higher interest rates, increases in inventories of both new and resale dwellings, and the necessity for the economy to "catch-up" with the very high appreciation that has already occurred.

While I don't predict a precipitous slide in residential real estate values in Southern California, I do feel that over the next one to three years we will see a leveling off of increases and possibly a decline in values as well. So, you may want to live on the farm but don't bet it. You may find that in the future your home equity is not as large as you had hoped.

Tips and Alerts Since You Can't Take It With You (Name Your Beneficiaries) By Karen Cho, CPA

As we don't live forever we must plan for the disposition of our assets. The assets that we have accumulated in our various retirement savings vehicles are subject to complicated rules regarding their distribution to our beneficiaries. In order to obtain optimum tax savings and flexibility we recommend that you designate both primary and contingent beneficiaries for these plan assets. The failure to name beneficiaries could cause a delay in distributions to your designees. More importantly, it can accelerate taxable income to your heirs. We have often noticed that owners of retirement plans designate the irrevocable trusts created by their living trusts as the beneficiaries of the assets because the balance of the estate plan is handled by the trustee of this trust. However, as a result of the Required Minimum Distribution (RMD) rules that were finalized a few years ago this practice might not be right for you. We recommend that a beneficiary be identified and a contingent beneficiary also be named. This gives the primary beneficiary, if it is your child for example, the flexibility to disclaim an interest so that it will pass to his child. The tax savings and tax deferred compounding of income can be quite profound in such instances.

As the nature and resolution of these issues is often complex I recommend that you seek advice about these matters from a competent attorney and/or tax professional. We at MFAC can advise you of your options with respect to your Beneficiary Designations.

Tax Notes A Tax Break for Your Spending By Tom Trent, EA

Thanks to a provision in the American Jobs Creation Act of 2004, taxpayers can now elect to deduct their state sales tax, rather than state income tax, on their Federal tax returns. For many taxpayers, that’s good news. The bad news is that you are going to have to keep records.

Here’s the way it works: There are two ways to calculate the amount. You can use the actual amount of sales tax you paid or you can use tables that have been developed by the IRS. To that table amount you can add the sales tax you paid for boats, cars or most other motor vehicles and other property “or other items specified by the Secretary [of the Treasury].” So far the only thing that has been added to the list is “materials to build a house” and the IRS has not clarified if that means only major construction, or if repair or weekend projects can be included. And before you try to include the amount you paid to your builder, in California at least, the sales tax is considered paid by the builder and passed to you tax-free. On the other hand, you might want to consider buying the materials yourself, rather than having the builder include them in his cost.

Unfortunately, the IRS tables may be significantly lower than the amount you actually paid. For example, a married couple with no children, living in Los Angeles, with $200,000 of income (and that’s where the chart stops) get a deduction of $2,045, which works out to less than $25,000 of taxable goods purchased. Therefore, it is important to keep records to support the amount you spend.

Don't Get Caught by a "Phishing" Expedition! By Kathleen Huse

I recently received an email from a brokerage firm telling me that I needed to confirm my account information - all I had to do was click on the link in the email and answer a few personal questions. The only problem was that I didn't have an account with that broker. So I deleted the message and didn't give it a second thought until I heard about the latest scam in the world of identity theft. It is called "phishing." Evil computer hustlers send mass emails in the guise of a large well-known financial institution, hoping they can catch people who will give them their Social Security Numbers, credit card numbers, pin numbers - any kind of information that they can use to separate them from their assets.

Many of these messages look like they came from the well-known company they portray themselves to be - they have a counterfeit logo and it looks like the company's website. Others are so shoddy they are almost laughable - I received one with words misspelled in the subject line! These perpetrators threaten that your accounts will be suspended or closed if you do not confirm your account information immediately; or they may say that they just want to "update their records."

Another emerging problem relates to the use of "spyware." Spyware is usually hidden in other programs that you may receive in the mail, download for free off the internet or occasionally receive "bundled" with commercial software. Many of the pop-up ads that bedevil us are the result of spyware, though most are generally considered harmless. The problem is - if those ads are flowing into our computers, what information is flowing out? Spyware has the ability to do anything a program can do, including monitoring your browser history, scanning files on your hard drive, snooping around your applications - even sending your personal information to the spyware's author. That information may then be sold to others or used for the author's own nefarious purposes.

There are several things that you need to do to protect yourself, your computer and your privacy:

• If you feel the need to respond to a suspicious email, find a phone number from your paperwork, such as a statement or application, and call that number. Do not use the link or the phone number that is in the email.

• NEVER send important financial or personal information in an email. The information is not secure.

• Update Windows regularly. You should download every critical update available.

• Many Internet service providers now offer various spam-blocking capabilities with their service and there are numerous free programs available online, the most popular being Spybot and Ad Aware. Make sure you update the programs and use them to scan your computer regularly.

• Install antivirus protection on your computer. It is vital that the program be updated frequently and that you scan your computer regularly. An out-of-date antivirus program is about as useful as (insert your favorite analogy here). The damage a virus can do to your system if left unchecked can be disastrous.

• Keep an eye on your bank, credit card and investment statements for anything out of the ordinary. Do not let two or three months go by without checking.

• If you bank online, make sure you log off before quitting. Avoid using obvious passwords and pin numbers. Never give them to anyone and change them regularly. Be wary performing an online transaction from other than your computer(s). Your friends may be trustworthy, but do you know their computer is secure? And never, ever handle confidential transactions from a public, non-secured wireless network.

If you receive a suspicious email, forward it to the Federal Trade Commission. Their email address is spam@uce.gov. You should also notify the Internet Fraud Complaint Center of the FBI by filing a complaint at www.ifccfbi.gov.

Heard in the Hall

0n January 21-22, 2005 Mitchell Freedman attended the CalCPA Council Meeting in Huntington Beach. On January 24th he was a panelist for a CalCPA "Dollars & Sense" program at ONE generation, a day care center for the elderly, discussing planning for disasters. February 15th he presented another CalCPA "Dollars & Sense" program for the International Association of Business Communicators, discussing investment planning and retirement planning. On March 2nd Mitch was a participant, for the second time this year, in a tax call-in show for KABC7. He was also honored as one of four CPA financial planners selected to provide editorial comment and input for an AICPA Tax Executive Committee paper directed to the United States Congress, which is titled, "Understanding Social Security, the Issues and the Alternatives," in February 2005.

Idea Fitness Journal, a magazine for physical fitness professionals, published two articles written by Mitch in its February and March 2005 issues, titled, "A Taxing Matter," and "Financial Planning for Retirement," respectively. Bloomberg Wealth Manager cited Mitch in an article about care for the elderly in its December ‘04/January ‘05 issue. He was featured in Practical Accountant, in the article "Discovering Financial Planning Engagements." He was also featured in an article titled, "CLU Students Debate Social Security," in the February 4th issue of Ventura County Star. On February 12th Mitch was featured in the leading Filipino newspaper's web site, Balita.com, in an article titled, "Organize Your Paperwork to Reduce Tax Payment."