Volume 9 Numbers 3 & 4

From The Corner Office By Mitchell Freedman, CPA/PFS

As of this writing we are in the height of the income tax preparation and filing season.For us, the time compression of the season is both difficult and stressful. For our clients and friends it's a time when you hate to write checks to the taxing authorities and you dislike receiving mail from us. It is also a time when substantial quantities of your personal and financial data leaves your control. Once you have sent your information to us or your tax preparer do you know where it goes and how it is protected? I hope to educate you on that subject in this column.

Are you aware that outsourcing, once only in the realm of manufacturing jobs, now also goes on in service and professional environments too? In fact, there is a virtual explosion of outsourcing of the preparation of income tax returns - to India and other overseas countries. Has your tax preparer informed you that the preparation is being outsourced to a chartered accountant sitting at a computer terminal in Bombay? Have you given permission for this to occur? Were you given the option to say, "No! I don't want you to do that?"

Overseas outsourcing of tax preparation services is growing exponentially, yet, almost nobody knows about it. At this time when identity theft is epidemic are those using outsourcing services doing something wise? Supposedly, your information that is electronically scanned and sent via the Internet to the service provider, is secure and sent in an encrypted manner. Also, the overseas service providers represent that protections are in place to control the information. They say that such protections do not permit the tax preparers to misuse it. Frankly, when I observe that web sites for large financial institutions and governmental organizations are hacked and otherwise compromised I don't believe that such dissemination of information can be adequately secure. Could a disgruntled overseas worker misuse such personal information? Could your information get into the hands of a terrorist organization to help them finance terror? I am not a dooms-day seer, but I do believe these are possibilities.

The above discussion and the questions asked are important - to you, our clients and friends. We at MFAC do not outsource tax preparation or other services. All data is kept securely on our premises and the professional services are performed by our staff here in the U.S.A. If you have any concerns about this issue ask your tax preparer or if you are a client I will be happy to discuss the matter with you.

Tips and Alerts Beneficiary Designations - You'd Better Think About Them By Tom Trent and Karen Cho

When you purchase a life insurance policy, open a retirement plan account such as an IRA, or sign documents for a 401(k) or qualified retirement plan you have to decide who to designate as your beneficiary. For life insurance policies you likely know who you want to leave the money to and you decide accordingly. Your primary and contingent beneficiaries are provided for and you know that if death benefits are to go to a minor that you should consider some form of trust. These of course are rudimentary issues and more complex situations require an individualized review of your personal situation.

When it comes to completing your Beneficiary Designations for retirement plans there are other issues with which you have to deal. Merely naming individuals or the trustee of your living trust may not provide all the options that are available and thus may not be the optimum alternative for your loved ones and heirs. Due to the relatively newly revised Minimum Required Distribution (MRD) rules we suggest that you carefully consider your designations so that you can provide for both your children and your grandchildren if you so desire. The newly extended MRD coupled with the tax deferral resulting from deferring drawings from retirement plans can permit your retirement plan to provide financial security long after you are gone. To perform a review of your retirement plan distribution options and beneficiary designations please contact our office to set up an appointment.

Tax Notes Not All Gains Are Created Equal By Tom Trent, EA

Thanks to the '03 tax act, the tax rate on most long-term capital gains (LTCG) has been lowered to 15% (under certain circumstances 10%). But note that it's most, not all. Gains on "collectibles" are still taxed at 28%. What's a collectible? Under the Internal Revenue Code it’s defined as "any work of art, any rug or antique, any metal or gem, any stamp or coin, any alcoholic beverage, or any other tangible personal property specified by the Secretary." There are, however exceptions for many U.S. or state minted coins, as well as certain high purity precious-metal bullions.

This is something to consider if you're contemplating charitable gifts. When you give appreciated LTCG property, you don't have to recognize (and pay tax) on the gain on the donated property. This "doubles up" your tax benefits: A charitable deduction and avoiding tax on the appreciation. What does this have to do with collectibles? Well, if you have two types of LTCG property; collectibles and stock (or other qualifying LTCG property) you'll get more "bang for your buck" (generally 13% or greater) by contributing collectibles instead of the stock.

Alternative? Not Really...Minimum? Not Even By Tom Trent, EA

Internal Revenue Service Commissioner Mark Everson is the latest victim of the Alternative Minimum Tax (AMT). Recently, Mr. Everson admitted that he had prepared his returns and was surprised to find that he and his wife were forced to pay AMT for the first time. Maybe he should have called us. This past December, while doing year-end tax planning for our clients, we observed more and more of them being either threatened by or subject to AMT. In some cases, AMT was inevitable. In others, we were able to do some planning and either escape AMT or at least mitigate its effects. It also meant spending a great deal of time educating clients and answering their questions. Because of all this, we decided this subject would make a timely and informative topic for this issue's feature article.

First, some background: In the late 1960's, a series of hearings were held by Congress bringing to the forefront scandalous revelations that rich people were avoiding taxes. Then Treasury Secretary Joseph Barr produced a "list of shame," identifying 155 wealthy Americans who, in spite of making over $200,000 (21 of them making over $1,000,000), had paid no income tax in 1967. To address this situation, in 1969 Congress amended the Internal Revenue Code, giving birth to the Alternative Minimum Tax, which imposed a minimum tax on taxpayers who lowered their taxable income by legal but, to Congress "distasteful" means.

Unfortunately, a system which was originally intended to exact a minimum amount of tax from 155 taxpayers taking advantage of complex tax shelters and big-yield deductions (a "class tax"), has devolved to the point where it reaches "ordinary" middle-class taxpayers (a "mass tax"). Tragically, many of the same breaks given to taxpayers in the massive tax acts of the last few years will cause even greater AMT liability than ever. It is estimated that the number of taxpayers subject to AMT will grow to approximately 30 million by 2010!

AMT is a separate tax system, with its own rules regarding income and deductions, which parallels the "regular" income tax. After calculating both, you pay whichever is higher. What are those differences? While the AMT calculations can be extremely complex, briefly it works as follows: Beginning with taxable income (as computed for regular tax purposes), you add back certain items that are considered "preferences." These include taxes, miscellaneous itemized deductions (including employee business expenses) and personal exemptions. Those are the common items. Depending on your individual circumstances, there may be others, such as the tax break for incentive stock options, which isn't allowed for AMT. In all, the form on which AMT is calculated lists 21 different preference items, plus another "catch-all" line for "Other adjustments." After making these adjustments, you may get to subtract an exemption amount that varies with your income level. Whatever is left is taxed at 26% or 28% (depending on the amount) to arrive at AMT.

How can you minimize your exposure to AMT? The most important key to eliminating, or at least lessening, its impact is planning. Our business management clients get frequently updated tax projections, where we monitor for, among other things, AMT. We encourage our other clients to consider the value of mid-year and near-year-end projections to determine whether AMT is an issue. Once you know there is exposure to AMT, decisions can be made to defer expenses or accelerate income (if controllable) to try to alleviate the impact. It's also important to include AMT planning when considering any major business and investment decisions, lest AMT unravel certain tax advantages you're counting on to make a deal work.

Heard in the Hall

After the devastating wild fires in Southern California Mitch Freedman was contacted by numerous media outlets to discuss the financial issues related to disaster recovery. He appeared on the "Power Lunch" segment of CNBC on October 28, 2003. On the same date he was interviewed by CNNfn. On November 6th and 7th he appeared on K-CAL 9 news and he appeared on Fox 6 in San Diego on November 11th and 12th. He was also featured in an article in the San Diego Union Tribune on November 2, 2003 discussing these issues. California CPA cited Mitch in its December 2003 issue discussing this subject in an article titled, "California's Heroes."

Mitch wrote an article for the November/December 2003 issue of Planner titled, "Help Older Clients and Enhance Your Practice..." His article "...The Battle with Financial Elder Abuse," appeared in the March 15, 2004 issue of Accounting Today. Practical Accountant, featured him in the November 2003 issue in an article about financial planning practice. The November 24th issue of Accounting Today featured Mitch in an article discussing the Personal Financial Specialist (PFS) credential. The Journal of Accountancy featured Mitch in its December 2003 issue on the subject of improving financial literacy.