Gifting of Medical & Educational Costs

January 31st, 2011

Anyone worried about estate taxes wants to give to their beneficiaries and not have those gifts count against their life-time Estate/Gift tax exclusion of $5,000,000.  Here are some thoughts on that subject.

Each person can give $14,000 to any other person annually and not have that amount count as a taxable gift. This means a married couple can give $26,000 annually to each beneficiary.  The only complication here is that the person receiving the money must be at least 18 years old.  If they are not yet 18, call me – there are ways to make this happen with little or no trouble.

Another way to pass down money gift tax free is to pay the medical costs for your loved ones.  The rule here is that any deductible medical expense paid for a lineal descendent is an income tax deduction by the one paying the bill.  The main rule here is that the bills have to be paid directly to the medical service provider, not to your loved ones.

Also a pass down item is paying the educational costs of a lineal descendent.  While not tax deductible, like medical expenses, the gift is not a taxable gift. These educational expenses must be to a qualified educational institution and must be paid directly by you.

So what is really being achieved by giving these gifts?

You are reducing the value of your estate and saving the 35% estate taxes.

You are helping your kids without giving them the cold hard cash.  What you are doing is allowing them to stretch their hard earned money a little further by relieving them of worrying over medical and educational costs.  No small thing these days!

You are allowing your grandchildren to attend private and church based schools their parents may not be able to afford.

If you have your kids manage a checking account that you fund as needed, you have them do the work and you both get the benefits.

How is this a bad thing?

As always, contact me with your questions.

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The Words of Thomas Jefferson

February 21st, 2010

The two enemies of the people are criminals and government, so let us tie the second down with the chains of the Constitution so the second will not become the legalized version of the first.

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Health Savings Accounts

January 6th, 2010

I was just reading about a new thing called Health Savings Accounts.  What these accounts do is allow a self-employed person or someone working for a smaller employer to have less expensive health coverage.


These Health Savings Accounts (also called Archer MSA’s) have two facets.  The first thing needed is a high deductible health insurance policy.  The second need is to open a HSA (which is tax sheltered just like an IRA.)  An HSA can be funded by individuals to the tune of up to $3,050 and up to $6,150 for families. 


The HSA contributions are “pre-tax”, meaning they are deducted from one’s gross wages before computing taxes – just like an IRA.  Also like an IRA, the account earnings are not taxed.  When withdrawals are made the amounts are not taxed if used for qualified medical expenses. 


The experience of some HSA families has been savings of around $3,100 per year.  This savings is due to the higher deductible amount being assumed by the insured.  A nice bonus is that the annual savings goes a long way in covering the plan contributions needed to keep the account “topped up” to the maximum limit mentioned above.


The people who benefit the most from HSA plans are individuals and families that enjoy generally good health.  Now they can better afford coverage against catastrophic health problems without suffering under the burden of high cost, low deductible health plans.  One problem in switching to a high deductible plan is it may not be possible for those with preexisting conditions such as cancer or diabetes.


While the HSA’s have been criticized for taking healthy people out of the health insurance pool, those enjoying good health are now rewarded for their stay-healthy live styles.

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October 28th, 2009

I’m writing this business letter at home and asking myself if I can take a deduction for a home office.  Or more properly stated – Business Use of the Home deduction.  Maybe.  Here’s why.


Required Business Use:   Just because you make money at home doesn’t mean you’re in business.  Preparing taxes at home is a business, investing for personal gain is not.  Odd, since the tax work may generate only $25,000 per year and the day trading could garner over a million and still be personal in nature.  Also, terms like “exclusively and regularly as a principal place of business” and “meets or deals with customers” come into play.  So, sitting and writing a business letter at the dining room table is not a business use, but sitting with a client and preparing a tax return is.


Try this on for size.  A barber cuts customer’s hair in the garage, builds a greenhouse and grows plants for a nursery in the yard, is a licensed realtor and uses a spare bedroom as an only office and writes articles for the New York Times at the dining room table.  Yes, yes, yes and no – as to business use of the home. 


Employees working from home must be doing so for the convenience of the employer.  Sounds easy to qualify, but it is not.  Another office provided elsewhere by the employer usually disqualifies the home use.  For an employee to qualify, usually their employer has to be located in another state or in a city located more than a commuting distance away.


Now that you qualify, what is deductible?  Expenses that are “directly related to business use” and those that have a “business portion of indirect use” are deductible.  The first group includes the costs of building a greenhouse, the second, things like property taxes and utility bills.  Direct expenses are typically 100% deductible, indirect expenses are allocated on a percentage basis.  However, business use of home deductions can never produce a business loss – only zero income.


Telephones:  The basic local charge, including taxes, on the first telephone line is never deductible.  If you have only one telephone, only the specific business long-distance calls are deductible.  Stay tuned for a posting regarding cell phones, computers and other “listed” property – special business use rules apply.


Depreciation:  Take your original cost plus capital improvements or fair market value, whichever is less.  Determine the date of the first business use and then let me do the rest. 


Allocation Methods for Determining Business Use:  Generally, any reasonable method is fine.  I typically add up the number of large rooms and find a percentage.  (2 bedrooms, 1 living room, kitchen – the bedroom used for business equals 25%)


Sale of the Home:  The depreciation deduction can come back to bite you.  Now that a portion of your personal residence is business property, that portion is taxed as business property when sold.  If the home has appreciated in value this can be a bad thing.  This is my biggest reason for discouraging taking a deduction of business use of a home.  Also consider this, if your business is audited you have opened up much your personal life style and expenses to examination as well.


Automobile Expenses:  Here’s good news, since you work at home you no longer commute to work.  And as we all know commuting miles are not deductible.


When the Home is Rented:  All the above rules apply except instead of the messy depreciation you just deduct a percentage of your rent.


So where do you go from here?  If you really want to take a home office deduction, keep really good records and even take pictures.  After that, talk to me and see what I think.  If you’re still of a mind to take the deduction we’ll talk about the many details that were not covered here.

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Tax Benefits For Educational Expenses

October 9th, 2009

Since many of us have children ready, in or just out of college, I wanted to discuss the income tax deductions available for educational expenses. 

The following is meant to be generally informative.  This area of taxation law is both confusing and complicated.  Please call or come in to see me with your questions.  Or, if you really want to go straight to the source, down load Publication 970 at

Child & Dependent Care Credit: 

A nonrefundable credit is allowed for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to be gainfully employed. 

How this relates to education expenses is that pre-school expenses incurred when both parents work qualify for this credit.  Additionally, after school and summer programs may also qualify for children under age 13. 

Also of note here, if your dependent or spouse is disabled and can not care for themselves, care costs may also be counted toward this credit. 

Scholarships and Fellowships: 

A scholarship or fellowship is tax free only if you are a candidate for a degree at an eligible institution and the money is used for qualified education expenses

  • Candidate for a degree – attend a primary or secondary school or are pursuing a degree at a college or university, or are attend an accredited educational institution that is authorized to provide a program that is acceptable for full credit toward a bachelor’s or higher degree, or a program of training to prepare students for gainful employment in a recognized occupation.
  • Eligible institution – is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students.
  • Qualified education expenses - are expenses for tuition and fees and course related expenses such as fees, books, supplies and equipment.  These expenses must be required of all students in your course of instruction. 

Other Types of Educational Assistance: 

  • Fulbright Grants – are generally treated as scholarships
  • Pell Grants & Other Title IV Need-Based Grants - are generally treated as scholarships
  • Payment to Service Academy Cadets - are fully taxable
  • Veteran’s Benefits - received for education, training or subsistence are tax free
  • Qualified Tuition Reduction - if provided by an eligible educational institution to one of its employees can be tax free. 

There are two tax credits available in regards to educational expenses – the Hope Credit and the Lifetime Learning Credit. 

Hope Credit: 

Using the Hope Credit you may be able to claim credits up to $1,800 per eligible student for qualified education expenses.  (Note the “may be able” phrase – there are income and other limitations and other qualifications that must be met for this credit.) 

  • Eligible student - an eligible student has to have not used the Hope Credit in the last two years, is either a freshman or sophomore, is at least a half-time student and does not have a felony drug conviction.
  • Qualified education expenses - are tuition and certain related expenses paid for yourself, your spouse or a dependent. 

Also regarding the Hope Credit – there is a whole bunch of small print, exceptions and provisos, so come to me with specific cases and questions. 

Lifetime Learning Credit: 

Lifetime learning credit qualifications are almost the same as those for the Hope Credit.  Generally, a student eligible for this credit is not limited to freshmen and sophomores.  This lack of limitation means that an eligible student with qualified education expense can always take the Lifetime Learning Credit of up to $2,000. 

Student Loan Interest Deduction: 

There is a special deduction allowed for paying interest on a student loan.  This deduction hit a maximum of $2,500 in 2008. 

  • Student loan interest - includes interest and loan fees and origination fees.
  • Qualified education expenses - are tuition and fees, room and board, books, supplies and equipment and other necessary expenses – such as transportation.
  • Qualified loans – are from loan sources other than related personal or qualified employer plans. 

Note the inclusion of loan fees and origination costs above.  This is new and you may want to call your loan company and ask if your loan includes these costs.  And, if these costs are big enough to warrant doing so, you may amend prior year’s tax returns and get a refund. 

Cancellation of a Student Loan: 

Normally cancellation of a debt is taxable to the amount of forgiven debt.  However, cancellation of a student loan may not be income.  To qualify for this exclusion the following two requirements must be present. 

The loan must contain a provision that it may be cancelled if you work for a certain period of time in certain professions and for any of a broad class of employers.  And, the loan must be from a qualified lender to assist the borrower in attending an eligible educational institution.

  • Qualified lenders - include the federal, state or local government; certain tax-exempt public benefit corporations; an eligible educational institution (with certain provisions) or a Section 501(c)(3) organization
  • Eligible Educational Institutions – are educational institutions that maintain a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance. 

Tuition and Fees Deduction: 

The Tuition and Fees Deduction can reduce the amount of your income subject to tax by up to $4,000.  This deduction may be beneficial to you if you cannot take either the Hope or lifetime learning credit because your income is too high. 

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

 You pay qualified education expenses of higher education

  • You pay the education expenses for an eligible student, and
  • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return 

Who can not take this deduction – those filing as married, filing separately; another person can take you as a dependent; your adjusted gross income is over $65,000 for singles or $130,000 for married filing jointly; you are a nonresident alien or you took the Hope or lifetime learning credit.  (Note: The income levels are the starting amounts for a faze out of the deduction.) 

Coverdall Education Savings Account (ESA): 

You may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary.  Total annual contributions can not exceed $2,000 and the beneficiary must be under 18 years of age. 

Note that the contributions are not deductible, however the account income is tax free. 

Note also that the benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. 

Qualified Tuition Program (QTP) aka Section 529 Plans: 

State may establish and maintain programs that allow you to contribute to an account for paying a student’s qualified education expenses.  These Section 529 plans are often used by grandparents as a way to distribute fairly large amounts of their estates to their grandchildren.  Talk to your financial advisor as too which state’s plan best suits your needs.  

Note that you may contribute to a QTP plan and to a Coverdell ESA in the same year for the same beneficiary. 

Education Savings Bond Program ( EE Bonds ): 

One of the longest standing education expense benefits are the U.S. “EE” Savings Bonds.  These bonds are purchased at half their face value and the interest accumulated tax free.  If the bond proceeds are used for qualified education expenses and certain income limits are met, the accumulated income is not taxed.  These bonds are safe and secure and may be purchased in small denominations.  Ask the relatives to skip the usual birthday and Christmas presents, and instead give an “EE” bond instead.  Sure it’s boring, however, just how may Barbies do your kids need anyway? 

Employer-Provided Educational Assistance: 

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year from your Form W-2 income.  Note that the educational expenses must be incurred for the benefit of the employee, not their dependents.  Ask your employer is these benefits are available.  If your employer does not have a qualified plan, ask them to establish one.  Not only are the employer contributions not taxed to you, your employer does not pay employment taxes or workman’s compensation insurance on the contribution amounts.  These benefits are will worth the cost and effort for setting up the plan. 

Business Deduction for Work-Related Education: 

Work related education expenses can be deducted if you itemize your deductions, if an employee or file Schedules C or F, if self-employed and have qualified work-related education expenses. 

Qualified Work-Related Education expenses must meet at least one of the following tests: 

  • The education is required by your employer or the law to keep your present salary, status or job.
  • The education maintains or improves skills needed in your present work 

However, even if the education meets one of the above tests, if is not qualifying if: 

  • The education expenses is needed to meet the minimum educational requirements of your job
  • The education expense qualifies you for a new trade or business
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Income Tax Advice


September 18th, 2009

The Long & the Short of It – In any one calendar year you are allowed to give business gifts of $25 per person.  Note also that gifts to, say a client’s wife, are imputed to that client.  Also, if you and your wife are in business together, the $25 limit is shared by both you on a per client basis.


In the “not gifts” category are those free pens with the company name and logo.  (That is as long as the pens don’t cost you more than $4.00.) 


Also note that any item that can be considered either a gift or entertainment, is generally considered as entertainment and subject to the 50% rule. 


If you give a customer tickets to an event it can be treated as either entertainment or a gift.  If you take a customer to an event, it is considered entertainment and subject to the 50% rule.


When is a gift not a gift?  Answer, when it’s Advertising and Promotion.  Example – trade show give away items.

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September 14th, 2009

You may deduct business-related entertainment expenses (if both ordinary and necessary) for entertaining clients, customers or employees.  There are two tests:


Directly Related Test    1.) The main purpose was the active conduct of business.   2.) You actually discussed business .   3.)  You had more than a general expectation of benefiting business-wise.


Associated Test   1.)  The entertainment was associated with the active conduct of your trade or business.  2.)  And, directly before or after a substantial business discussion.


As has been the case for the last several years, only 50% of your entertainment expense is deductible.  Also of note is the rule that the expense can not be lavish or extravagant.


Additionally, a “clear business setting” rule must be met.  Examples of non- “clear business settings” are nightclubs, theaters, sporting events, cocktail parties and meetings that include persons who are not business related people – such as spouses, other golfers, etc.


Lavish or Extravagant Expenses.  (Quoted from IRS Pub. 463)  You can not deduct expenses for entertainment that are lavish or extravagant.  An expense is not considered lavish or extravagant if it is reasonable considering the facts and circumstances.  Expenses will not be disallowed just because they are more than a fixed dollar amount or take place at deluxe restaurants, hotels, nightclubs or resorts.


Entertainment Expenses That Are Not Deductible.  Club dues and membership fees paid to Business, Pleasure, Recreational or Other Social Clubs.  This group includes the likes of Country, Golf, Athletic, Airline, Hotel and Other Clubs.  The bottom line – dues and membership fees are almost never deductible.


Seems easy enough.  If only.

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August 31st, 2009

Thinking of fixing up the old digs?  Doing so may save you some taxes.  Here’s the deal.


This thing called ARRA (The American Recovery and Reinvestment Act) Section 25C tells me that if you install new qualifying insulation or exterior windows and doors, metal roofs (including skylights) and various and sundry way efficient heating and cooling systems you can garner yourself up to a $1,500 federal credit.  (Inquire about possible state credits based upon where your home is located.)  Well the dollars aren’t huge, however remember, you will be saving on the monthly utility bills.  And oh-by-the-way, you will sleep the sleep of the righteous and true.


Also exciting is ARRA Section 25D. (I live for this!)  Here you are going to get credit for state-of-the-art residential green energy systems such as solar- and wind-generated power systems.  Note too that these credits apply to rental and vacation homes as well.  Some of the systems that qualify are geothermal heat pumps, solar panels, solar water heaters, small wind energy systems and fuel cells.  My buddy who lives up in the Sierras tells me that solar water heaters (he uses them to heat his floors as well) work just fine through most winters.


If you’re thinking of building a new home or doing a major remodel, ask your architect about LEED (Energy and Environmental Design) standards and what credits and advantages can be had for “going green.”


Let’s talk electric meters.  That thing with all the funny dials that no one knows how to read has been up-dated.  Go digital!  If monitoring how much electricity you’re using impresses you as a good thing, digital is the way to go.  By evening out your electricity usage, your utility bills will go down.  This because the power companies often charge according to the maximum demand made during each billing period.  Lower the maximum and you lower the bill.


It’s all good (and green too).

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August 27th, 2009

When I’m sitting in an income tax audit and produce an old, crumpled up Goodwill receipt with only “4 bags of household goods” as detail, I know what’s coming.  They ask for more evidence and substantiation for the deduction – seems reasonable to me.  More often than not, there is none.


Most of us give our old clothes, furniture, etc to the Goodwill, Salvation Army or similar organization.  Most all of us deduct the value of these goods on our tax returns.  While the IRS is fine with the idea, the details can become problematic. 


Want to nail down your deduction?  Here’s what you need to know and do.


First and most important – the organization has to be a qualified, non-profit organization, i.e., the Goodwill or Orange County Child Abuse Prevention Center. 

Next, follow the rules outlined below.


The goods donated must be in “good used condition or better”.

Get a receipt or other written acknowledgment showing the date, name and address of the organization, condition of the goods and value you are assigning to those items.

A detailed itemization is strongly suggested.

Take pictures!

If a receipt is impractical and the value is less than $250, write out your own receipt detailing the donation and circumstances.


Written acknowledgment from the charity showing the date, name and address of the organization, condition of the goods and value you are assigning to those items.

Make a record of when and how you acquired each item, the amount paid, the donated value and how you arrived at that value.  (Not as hard as it sounds – estimated date; “purchase”; $5000; $500; Thrift Store selling price.)

Take pictures!


Written acknowledgment from the charity showing the date, name and address of the organization, condition of the goods and value you are assigning to those items.

List the items by type of item being donated:

Art valued at $20,000 or less  *  Art valued at more than $20,000  *  Collectibles * Qualified Conservation Contribution  *  Other Real Property  *  Intellectual Property  *  Equipment  *  Securities  *  Other.

Detailed description of the property.

If tangible property – detailed description of the condition of the property.

Appraised Fair Market Value at date of gift.

Date acquired

How acquired


For Bargain Sales – the amount received.

Amount claimed.

Average trading price – if applicable.

IRS Form 8283 signed by you and the appraiser.

A signed acknowledgement from the charity on Form 8283.


There are more rules for various other categories.  If you’re planning on giving anything large or unusual, call me so you can be sure to cement down the deduction.


Sure it can be complicated, however, when you do donate and don’t take the time to do it right, you’re also giving a gift to Uncle Sam in the form of higher tax bills.   My suggestion – take the time and take the deduction.

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Income Tax Advice

Finding Certainty in An Uncertain World

February 25th, 2009

Times are tough and just getting tougher.  My question to you is does it really matter?

Question:  Do you only brush your teeth when you have a date?  No, of course you brush well and often.

Question:  Do you only worry about your finances when times are difficult?  No?  Yes?  How about a solid maybe?

Worrying about how your life is going should be just like brushing your teeth. Some facet of your finances and being prepared for life’s uncertainties should be apart of every day. Yes, many things can not be planned for. However, many things can be anticipated and your reaction can be planned.

Case in Point:   Identity Theft.   Could it happen to you? Sure. Is it likely? Sure. No. Maybe. Regardless of the likelihood, should you look into it? Yes, of course.

So take a minute and look over this web site:

The Privacy Trust Group are good people trying to help you keep trouble from knocking at your door.

That seems like a good thing to me.

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