Tax & Business Strategies Monthly Newsletter - June 2007

Tax Planning Strategies
Electing Out Of & Maximizing the Hope Credit
What Are Your Chances of Being Audited?
Retired Spouse IRA Strategy
Navigating the First-Time Homebuyer Quirks

Business & Management Practices
Business Auto, Light Truck and Van Depreciation Limits Released for 2007
Employing a Family Member
IRS Issues Guidance for Public Inspection Requirement of Tax-Exempt Organizations
Is it a Business or Hobby?

General Information
Most Hybrids Still Qualify for the Full Tax Credit
GAO Finds Ways for IRS to Collect More Taxes
Hardship Withdrawals Liberalized
Gift Taxes

Briefs
Keep the IRS Informed of Your Current Address
Private Activity Bond and AMT

TAX PLANNING STRATEGIES

Electing Out Of & Maximizing the Hope Credit

For taxpayers that strive to maximize their tax benefits, the Hope education credit can be challenging. Generally, students enter college in the fall of their first year, thus making the first year a short one.

If the credit is taken in the first year, the credit would only be allowed for one more tax year since the Hope credit can only be taken in two calendar years (even though the student will probably qualify for the Hope credit in the next two full years). The rules associated with the credit do provide some planning flexibility, so let’s first review the key points:

• The ability to “elect” not to claim the credit in a particular year for a student.

• The Hope credit cannot be claimed for more than two tax years whether or not consecutive, and

• The Hope credit is allowed for the first two years of post-secondary education. (The Hope credit isn't allowed for a tax year with respect to the qualified tuition and related expenses of a student if the student has completed (before the beginning of that tax year) the first two years of post-secondary education at an eligible educational institution.

• If qualified tuition and related expenses are paid during one tax year for an academic period that begins during the first three months of the taxpayer's next tax year (i.e., in January, February, or March of the next tax year for calendar-year taxpayers), an education credit is allowed with respect to the qualified tuition and related expenses only in the tax year in which the expenses are paid.

Since the determination of whether the student is in the first two years of post-secondary education is made at the beginning of each tax year, most full-time students will be considered to be in their first two years of post-secondary education in the first three years of college. This requires planning to maximize the deduction. A taxpayer must carefully match the facts of the situation with the rules associated with the credit to determine the best course of action for the client. The scenarios can be endless. The following are examples of some possible situations:

Student is in the first year and the credit would be small and claiming it would eliminate one year’s credit opportunity. Solution A: The taxpayer could elect out of the Hope credit for that year and preserve the credit for two subsequent years. Solution B: The taxpayer could prepay the tuition for an academic period beginning in January, February or March of the subsequent year, thus increasing the tuition expense for the current year. Although, that would decrease the tuition expense for the subsequent year!

Taxpayer’s AGI will phase them out of the credit. Solution A: This automatically elects them out for that year, preserving the credit opportunity for other years in which they qualify. Solution B: Prepay the tuition for an academic period beginning in January, February or March in the prior year, if possible.

First year of post-secondary education is at a local junior college and subsequent years will be at a more expensive university. Solution: Taxpayer can elect out of the Hope credit in the first year and take it for the more expensive university tuition in any two subsequent years if the student has not completed the first two years of post-secondary education at the beginning of the subsequent years.

Parents are divorced and they alternately claim the student as a dependent. One parent pays the tuition for all years. Solution: Since the credit goes to the one who claims the dependency, the parents could plan the dependency to maximize the credit itself or force the credit to a particular parent.

In the years the Hope credit is not claimed, the lifetime credit can be claimed. Since the requirement for the Hope credit is attending college at least half-time, it is possible that some students may be in their first two years of post-secondary education for more than three years.

As you can see, the situations are endless. However, keep in mind that this requires forward-looking assumptions that might not materialize. The AGI limitations might unrepentantly kick in, the student might drop out of school, etc.

Please call this office if we can be of assistance in helping you establish an education plan for your children. There are other strategies that can be employed as well.


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What Are Your Chances of Being Audited?

The Internal Revenue Service (IRS) recently released its 2006 Data Book, which describes activities conducted by the IRS from October 1, 2005 through September 30, 2006, and includes information about returns filed and taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce.

During Fiscal Year (FY) 2006, the IRS collected more than $2.2 trillion in tax and processed over 228 million returns. Over 80 million returns, including 54.3 percent of individual income tax returns, were filed electronically in FY 2006. Over 108 million individual income tax return filers received tax refunds totaling $243 billion. In FY 2006, the IRS spent an average of 42 cents to collect each $100 of tax revenue.

The IRS examined nearly 1,283,950 individual income tax returns in FY 2006, more than double the number examined in FY 2000. Examinations of business tax returns grew for the second year in a row, reaching over 52,000 in 2006.

What are the chances of being examined? Based on nearly 1.3 million audits of the 132.2 million returns filed, the odds of being audited are about .98%, which is a little more than double the prior year. Because it is so susceptible to fraud, 517,617 returns claiming the Earned Income Tax Credit (EIC) were audited, which accounted for over 40% of the returns audited.

The IRS, through its various information-reporting requirements for payers and businesses and computer-matching programming, has become very sophisticated in conducting correspondence audits, which are more cost-effective for the IRS and amounted to over 76% of the audits. The balance amount and bulk of the audits were conducted by revenue agents, tax compliance officers and tax examiners.

The following table shows the chances of being examined in fiscal year 2006 as compared to fiscal year 2004. The figures include correspondence examinations, office examinations and field examinations. The data is classified by types and amounts of income, types of returns, etc.

Should you receive a notice of audit, call this office immediately. Let us deal with the issues, since we know what to expect, are familiar with the tax laws, and understand tax lingo.

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Retired Spouse IRA Strategy

When one spouse works and the other does not, tax law allows the non-working spouse to base their contribution to an IRA on the income of the working spouse.

This tax benefit is frequently overlooked when spouses have been working and basing their individual contributions on their own income for years, retire and fail to recognize the opportunity to make IRA contributions for a retired spouse. Even if the working spouse has a pension plan at work and his or her income precludes him or her from making an IRA contribution, the non-working retired spouse can still make a contribution based on the working spouse’s income.

However, be careful since traditional IRA contributions, both deductible and nondeductible, are not allowed in the year an individual turns 70-½ and all subsequent years. This restriction does not apply to Roth IRA contributions.

There are some AGI limitations if the working spouse has a retirement plan at work, so please call this office to make sure you qualify before making the contribution.


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Navigating the First-Time Homebuyer Quirks

Except for some special exceptions, when a taxpayer withdraws funds from an IRA or a Qualified Plan before attaining the age of 59½, the taxpayer will incur a 10% early withdrawal penalty in addition to paying tax on the distribution.

One of the exceptions allows each taxpayer who qualifies as a "First-Time Homebuyer" to make a $10,000 penalty-free withdrawal from an IRA to purchase a home. At first glance, one would assume the exception (1) only applies to the first home a taxpayer ever purchased, (2) the funds cannot come from another qualified plan such as a 401(k) plan, and (3) the home purchased must be for the taxpayer(s).

Although this penalty exception applies to IRA withdrawals only, there is nothing to prevent a taxpayer from transferring or rolling over funds from a qualified plan, such as a 401(k) plan, self-employment plan, SEP, 403(b), etc., into an IRA and then taking the distribution from the IRA to achieve a penalty-free distribution.

Since the legislation was designed to assist individuals to get into the housing market, one would assume that a taxpayer’s “first home” means just that. However, that is not the case, as the tax code is far more liberal. A first-time homebuyer is a taxpayer (and spouse, if married) that has no ownership interest in a main home in the two-year period preceding the acquisition of the home.

In fact, the home does not even need to be the taxpayer’s own home, since the exclusion also permits the taxpayer to use this special exclusion for the purchase of a first-time home for the taxpayer’s or spouse’s child, grandchild, parent or other ancestor so long as the home meets the definition of “first home” for the relative. Thus, the exclusion permits a taxpayer to use the exclusion to help a qualified relative.

If married, this exception applies to both spouses separately; thus, each could withdraw up to $10,000 ($20,000 combined) from their individual IRA accounts and avoid the early withdrawal exception. This is, however, a lifetime exclusion; so when added to all the taxpayer’s prior qualified first-time homebuyer distributions, if any, the total distributions cannot be more than $10,000.

Even though a first-time homebuyer withdrawal might be penalty-free, it is still taxable. In addition, the distribution must be made within the 120-day period preceding the home’s acquisition.

Individuals should tap into their retirement funds only when there are no other viable options. Please call this office before implementing the “first-time homebuyer” strategy, so we can predetermine the tax liability for the withdrawal and make sure that no other options are available.

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BUSINESS & MANAGEMENT PRACTICES

Business Auto, Light Truck and Van Depreciation Limits Released for 2007

IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2007, and the annual income inclusion amounts for such vehicles first leased in 2007.

Vehicles subject to these annual depreciation limits include those with a gross unloaded weight of 6,000 pounds or less and broken into two categories; (1) Passenger vehicles and (2) light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis). The 2007 limits for these two categories are:

For Autos:
• $3,060 for the placed in service year;
• $4,900 for the second tax year;
• $2,850 for the third tax year; and
• $1,775 for each succeeding year.

For Light Trucks and Vans:
• $3,260 for the placed in service year;
• $5,200 for the second tax year;
• $3,050 for the third tax year; and
• $1,875 for each succeeding year.

The rates shown assume 100% business or investment use. They must be reduced proportionately if business/investment use of a vehicle is less than 100%. Certain non-personal-use vehicles are exempt from the luxury auto limits regardless of their weight. Exempt vehicles generally include vehicles used for transporting persons or property for compensation or hire and qualified non-personal use vehicles, such as a truck or van that has been specially modified and is used a de minimis amount for personal use.

The annual depreciation limits apply to a combination of the normal depreciation and Section 179 expense deduction. Vehicles in excess of the 6,000-pound gross unloaded weight limitations are not subject to these annual depreciation limits and may use the maximum annual depreciation and, except as noted below for certain heavy SUVs, can utilize the Section 179 expense deduction up to its annual limit ($112,000(1) for 2007).

(1) Also subject to the annual investment limit of $450,000 for 2007. This limit requires the Section 179 deduction to be reduced when the total cost of qualifying property placed in service in any given year exceeds the investment limit.

Heavy SUVs — Are vehicles built on a truck chassis and rated at more than 6,000 and less than 14,000 pounds gross vehicle weight. Even though they are exempt from the annual depreciation limits, they are restricted in the amount of Section 179 expense deduction that can be utilized. Not more than $25,000 of the cost of a heavy SUV placed in service after Oct. 22, 2004 and used 100% for business may be expensed under Code Sec. 179. The balance of the heavy SUV's cost may be depreciated under the regular rules that apply to 5-year MACRS property (e.g., a 20% first-year depreciation allowance if the half-year convention applies for the placed in service year).

Lease Income Inclusion Tables - A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that auto lessees can't avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction. The income inclusion amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year. There is one table for automobiles and another for light trucks and vans. (Faith there are 2 PDF files for these tables in the folder)

If you are contemplating a business vehicle purchase this year and wish to maximize the tax benefits, please call for an appointment.


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Employing a Family Member

Employing a Child - By employing a child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child and reducing the self-employment income and tax of the parents (business owners) by shifting income to the child. Since the salary paid to a child is considered earned income, it is not subject to the rules that apply to children under the age of 18. The maximum standard deduction available to the child in 2007 is $5,350. Therefore, the standard deduction eliminates all tax on that amount of income if the child is paid $5,350 in compensation. If the business is unincorporated, wages paid to the child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing the child, but the parent-employer may provide him or her with fringe benefits, such as group-term life insurance and qualified pension plan contributions.

The child may also make deductible contributions to an IRA of the lesser of earned income or $4,000. By combining the standard deduction and the maximum deductible IRA contribution, a child could earn $9,350 of wages and pay no income tax. If the child balks at contributing his or her hard-earned money to an IRA, the parent might consider giving him or her part or all of the IRA contribution as a gift.

Employing a Spouse - Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction. The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse. While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee. These wages are subject to income tax.

Please keep in mind that when a family member is employed in a family business, the wages should be reasonable for the work performed and that the services performed are necessary to the business.


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IRS Issues Guidance for Public Inspection Requirement of Tax-Exempt Organizations

The Tax Code requires tax-exempt organizations to make available for public inspection and copying certain annual returns, reports and applications for recognition of exemption and notices of status.

• The annual returns must be made available by an organization for inspection during regular business hours by any individual at the principal office of such organization and,

• If such organization regularly maintains one or more regional or district offices having three or more employees, at each such regional or district office.

• Also, an organization must provide, upon request of an individual made at such principal office or such a regional or district office, copies of annual returns to such individual without charge other than a reasonable fee for any reproduction and mailing costs.

With the passage of the Pension Protection Act of 2006, a new requirement was added to the public disclosure requirements, and the IRS was directed to prepare regulations regarding this requirement. Until such time that the new regulations are finalized, the IRS has provided interim guidance.

Interim Guidance - The IRS in Notice 2007-45 has released interim guidance on a new requirement that Section 501(c)(3) organizations that file unrelated business income tax returns (Forms 990-T) make those returns available for public inspection and copying. Taxpayers may rely on this notice to comply with the new requirement until regulations are revised.

Notice 2007-45 clarifies several issues:

• All organizations that file Form 990-T must make the return public, regardless of whether the organization is otherwise subject to the public disclosure requirements. For example, churches that file Forms 990-T are subject to this requirement.

• The disclosure requirement applies to state colleges and universities (and their wholly-owned subsidiaries) that receive determination letters confirming that they are exempt under Section 501(c)(3). It does not apply to institutions that are subject to unrelated business income tax solely by virtual of Code Section 511(a)(2)(B), however.

• An organization that filed Form 990-T for 2006 only to request a telephone excise tax refund is not required to make that return available for public inspection and copying.

• The guidelines on making annual returns available, set forth in Section Treas. Reg. Section 301.6104(d)-1 generally apply, except that the definition of annual information return includes Form 990-T.

• Charities that make Form 990-T widely available in accordance with Treas. Reg. Section 301.6104(d)-2 do not need to comply with an individual request for a copy of the return, although they must make it available for public inspection.

• The provisions of Treas. Reg. Section 6104(d)-3 apply to a request for a charity's Form 990-T that is part of a harassment campaign.

Caution - This is an abbreviated summary of Notice 2007-45 and is meant only to call it to the attention of individuals associated with Tax-Exempt Organizations. For additional information, please call this office.

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Is it a Business or Hobby?

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, the following factors are considered:

• Does the time and effort put into the activity indicate an intention to make a profit?

• Does the taxpayer depend on income from the activity?

• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

• Has the taxpayer changed methods of operation to improve profitability?

• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

• Has the taxpayer made a profit in similar activities in the past?

• Does the activity make a profit in some years?

• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts and S corporations. It does not apply to corporations other than S corporations.

Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of these three categories:

• Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.

• Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

• Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

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GENERAL INFORMATION

Most Hybrids Still Qualify for the Full Tax Credit

Taxpayers who purchase new qualified hybrid motor vehicles may claim a tax credit that varies in amount with the car model, but the credit begins to phase out after the manufacturer sells a fixed number of hybrid vehicles. Based on manufacturer sales figures, the IRS has announced that the full hybrid credit remains available through at least June 30, 2007 for qualified hybrid vehicles manufactured by Ford, GM and Honda.

• Ford Escape 2WD, Model Years 2005, 2006 and 2007 — $2,600
• Ford Escape 4WD, Model Years 2005, 2006 and 2007 — $1,950
• Ford Escape 2WD Hybrid Model Year 2008 — $3,000
• Ford Escape 4WD Hybrid Model Year 2008 — $2,200
• Mercury Mariner 4WD, Model Years 2006 and 2007 — $1,950
• Mercury Mariner 2WD Hybrid Model Year 2008 — $3,000
• Mercury Mariner 4WD Hybrid Model year 2008 — $2,200
• Chevrolet Silverado Hybrid 2WD, Model Years 2006 and 2007 — $250
• Chevrolet Silverado Hybrid 4WD, Model Years 2006 and 2007 — $650
• GMC Sierra Hybrid 2WD, Model Years 2006 and 2007 — $250
• GMC Sierra Hybrid 4WD, Model Years 2006 and 2007 — $650
• Saturn Vue Green Line, Model Year 2007 — $650
• Saturn Aura Model Year 2007 — $1,300

Toyota Credits Reduced - Toyota (which also manufactures Lexus products) had already passed the 60,000-vehicle limit based on sales reported for the calendar quarter ending June 30, 2006. As a result, the credit for qualified hybrid passenger vehicles or advanced lean burn technology motor vehicles manufactured by Toyota began to phase out on Oct. 1, 2006. For Toyota hybrids, there is a 50% credit reduction for sales from Oct. 1, 2006 through Mar. 31, 2007; 75% credit reduction for sales from Apr. 1, 2007 through Sept. 30, 2007; and no credit for sales on or after Oct. 1, 2007. Thus, the credits for Toyota vehicles are as follows:

i

Business Owners – Business owners are reminded that the credit for the portion of a hybrid vehicle used in business is treated as a General Business Credit. Thus, where vehicles are used for both personal and business use, the credit is allocated between a personal credit and a general business credit.

The advantage to the general business credit allocation is that any unused credit for the year carries to other tax years and is deductible against the alternative minimum tax, which is not true for the personal credit portion.

If you are anticipating the purchase of a hybrid vehicle, it may be appropriate to consult with this office prior to the purchase. This allows you to verify the amount of credit that is available and helps you figure out how that hybrid credit will fit into your specific tax situation.

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GAO Finds Ways for IRS to Collect More Taxes

At the request of Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, the United States Government Accountability Office (GAO) performed a review of an IRS research project and has outlined opportunities for the IRS to identify potential opportunities to reduce the tax gap.

The document focused on the $285 billion tax gap that stems from underreporting. The GAO cited the IRS's use of the net misreporting percentage (NMP) -- the amount improperly reported expressed as a percentage of the amount that should have been reported.

The document identifies more than a dozen areas to improve compliance in reporting of tax obligations. These include types of tax deductions and exemptions where taxpayer mistakes or deliberate fraud caused a significant loss in tax revenue. These include situations where taxpayers reported the wrong amounts by more than 5 percent or by more than $450 each, or where the total amount of misreporting among all taxpayers in that area topped $3 billion.

Areas for further study identified by the GAO include:

• Income and losses from partnerships and S corporations (NMP of 18 percent),

• Rental real estate (NMP of 51 percent),

• Farming (NMP of 72 percent),

• Sole proprietorships (NMP of 57 percent),

• Capital gains for assets other than securities (NMP of 12 percent),

• The earned income tax credit and additional child tax credit ($14.3 billion misreported),

• Deductions for charitable contributions ($17.4 billion misreported),

• Deductions for medical expenses ($7.6 billion), and

• Deductions for job expenses and other deductions ($24.3 billion).

The GAO looked at the National Research Project that the IRS launched to see how many taxpayers underpaid or overpaid federal taxes in 2001 and reviewed IRS files to see where the most taxpayers willfully or mistakenly misreported their tax obligations. The GAO found that the Service's overall estimate of the tax gap, and opportunities to improve compliance with tax laws, would be helped by better technology and information storage. Paper storage of some files, as opposed to electronic storage, makes tax data from the National Research Project harder to assess. The GAO found in two other studies that the IRS was unable to locate 153 paper files.

The limitations on deductions for home mortgage acquisition and equity debt interest for regular tax purposes and the non-deductibility of equity debt for AMT purposes were not addressed by the GAO report. In light of the home debt refinancing boom and the sheer complexity of computing the deductible amounts, one has to wonder why they consistently avoid the radar. Is it an oversight or a political hot potato?

Senate Finance Committee Chair, Baucus said that the document showed that the IRS has an opportunity to improve compliance with tax laws. "Better customer service can help taxpayers avoid the mistakes found most frequently, so honest Americans can pay their taxes properly and on time, "he said in a statement. "More effective enforcement can stop those who actively seek to defraud their fellow Americans by willfully misreporting the deductions and exemptions they're due."

At an April 18 committee hearing, Baucus informed Treasury Secretary Henry M. Paulson that the Finance panel will expect the IRS to improve Americans' voluntary compliance with tax laws to 90 percent by 2017.

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Hardship Withdrawals Liberalized

Generally, it is never a good idea to take distributions from a 410(k)-type plan except for their intended use. These plans were authorized by Congress to provide tax-deferred savings that are intended to provide support for the plan participant when disabled or during post-age 59-½ retirement. Although all distributions are taxable, those taken before reaching the age of 59-½ are subject to an additional 10% “early distribution” penalty on the taxpayer’s federal return and may also be penalized on the state return. Thus, the combination of federal tax, state tax (if applicable) and the early withdrawal penalty can make it very expensive to tap these funds prior to retirement, and taxpayers should first look for other alternatives.

Hardship Withdrawals - However, if the particular plan permits, taxpayers are allowed to take a “hardship” distribution from the plan. Generally a “hardship” distribution is described as cash withdrawal to satisfy an immediate and heavy financial need of the employee (plan participant) and is necessary to satisfy the financial need. Tax regulations specify the following as distributions on account of an immediate and heavy financial need:

(1) Expenses for medical care that would ordinarily be deductible which includes expenses for the care of a spouse, dependent or primary beneficiary under the plan;

(2) Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);

(3) Payment of tuition, related educational fees, and room and board expenses, for up to the next 12 months of post-secondary education for the employee, or the employee's spouse, children, dependents, or primary beneficiary under the plan;

(4) Payments necessary to prevent the eviction of the employee from the employee's principal residence, or foreclosure on the mortgage on that residence;

(5) Payments for burial or funeral expenses for the employee's deceased parent, spouse, children, dependents or primary beneficiary under the plan; or

(6) Expenses for the repair of damage to the employee's principal residence that would qualify for the casualty deduction.

Caution: Even though hardship withdrawals are allowed, they are still taxable distributions, and unless they meet certain exceptions are also subject to the early withdrawal penalty.

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Gift Taxes

Generally, during any tax year, you can give any one person cash or gifts valued up to the annual inflation adjusted amount without causing any tax ramifications. This is a popular method used by individuals to transfer wealth to family members and avoid the inheritance tax on the amount transferred when they pass away.

For 2007, the annually inflation adjusted gift amount is $12,000. Thus, you can transfer up to $12,000 to any number of individuals within the calendar year without tax ramifications.

For example, you are married and wish to make a gift to a married child. Both you and your spouse can each gift up to $12,000 to both the child and the child’s spouse, allowing a transfer of $48,000 without tax ramifications. However, if you exceed the $12,000 per person limit, you must report the gifts to the Internal Revenue Service and reduce your lifetime estate tax exemption by the amount of the excess gifts. Once the lifetime gift tax exemption has been used up, future gifts would be taxable.

The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value. Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

• Tuition or medical expenses that you pay directly to an educational or medical institution for someone's benefit
• Gifts to your spouse
• Gifts to a political organization for its use
• Gifts to charities

If you have or intend to make gifts during 2007, or would like to work a gift-giving strategy to reduce your estate, please give this office a call.


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BRIEFS

Keep the IRS Informed of Your Current Address

Don’t think that just because you don’t receive a notice that the liability for timely service reverts back to the IRS. A recent tax court illustrates the problem.

A U.S. district court recently ruled that the IRS could impose a levy on a taxpayer's wages even though the taxpayer did not receive notice of his right to a pre-levy collection due process hearing until after the deadline for making such a request.

The IRS sent a certified letter to the taxpayer, return receipt requested, at his last known address that asserted his liability for the taxes and notified him of his rights to a hearing. The letter was returned to IRS as “undeliverable.” The taxpayer had moved to a new address, but did not notify the IRS of the change.

The court held that the levy was enforceable. It said that the IRS's obligation to provide notice of hearing rights to the taxpayer was clear. IRS need only serve Bullard at his last known address. Bullard did not actually have to receive the notice. The onus was on Bullard to notify IRS of any change in his address. The court noted that the tax law employs the disjunctive term “or,” indicating that only one method of service is required. The statute in no way requires that if service via one means fails, another means must be pursued.

Even though the IRS will pick up your address change when you file your annual tax return, it may not be timely enough, especially if your return is on extension or you are behind in your filings. It is always better to notify the IRS and state, if applicable, just as you would for your family, financial and business affiliations. You may not want to receive correspondence from the IRS, but it is easier to deal with the first notice. The complications can only increase as the number of notices go unanswered.

The IRS provides a change of address Form #8822 for this purpose. If you are relocating, please call this office for a copy of the form.

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Private Activity Bond and AMT

Generally, interest on state and local bonds (i.e., obligations of a state, the District of Columbia, a U.S. possession, certain Indian tribal governments or any political subdivision of the foregoing) is exempt from federal income tax.

However, even though interest on municipal bonds is generally excluded from income for purposes of the regular federal income tax, interest on certain “private activity bonds” is included in income for purposes of the alternative minimum tax. Therefore, it might be appropriate not to include investments in “private activity bonds” in your portfolio if you are subject to the alternative minimum tax.

Your broker can tell you whether a particular bond you are considering is a “private activity bond” subject to this rule or if your portfolio already includes any such bonds.

The alternative minimum tax is a separate tax method that applies if the tax determined under that method exceeds your tax computed by the regular income tax method. Whether you will be taxed by the AMT method depends on a large variety of circumstances.

In general, the effect of the alternative minimum tax would be to prevent you from achieving too low an effective tax rate by means of tax-favored techniques, such as investing in municipal bonds.
If we can assist in determining how the alternative minimum tax would apply to your situation, and how it would affect the after-tax yield if you were to invest in municipal bonds, please give this office a call.

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