To discuss what you can do now to ease your 1995 tax burden, the guests were Jim Vonachen, tax accountant in Denver, and writer and CPA Stuart Weiss.
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Good evening and welcome to Business Week Online. Don't wait for Congress to pass a new tax bill before you start getting ready for your own next tax bill, due Apr. 15. The Personal Business section of BW (Dec. 4) summarizes some things to do -- and we're here tonight to tell you more and take your questions.
Our guests are the author of the story, Stuart Weiss, and one of the experts he quotes: Jim Vonachen. Jim (JVonachen), a graduate of St. Josephs College in Indiana with both a JD and an MBA from Notre Dame, is a partner in the Denver office of Clifton, Gunderson & Co., where he is in charge of the tax practice. He has been with the firm since 1970.
Stuart Weiss is both a writer and a CPA now based in Portland, Ore. Previously, he was an analyst with Wall Street firm Oppenheimer & Co. and a member of the Business Week editorial staff in New York. He holds a BS from UCLA and an MBA from Stanford. His screen name is StuartWeis.
The moderator for this event is Jack Dierdorff (JackBW), consulting editor of Business Week Online and former managing editor of the magazine. And now on to our tax discussion -- and the questions you send us here on stage via the Interact button.
JackBW: Good evening to all of you on AOL. Welcome to BW Online, Jim Vonachen. And also welcome, Stuart Weiss.
JVonachen: Thank you.
StuartWeis: Thanks, Jim, for being so helpful with the story.
JackBW: I have an opening question for you, Jim.
Question: If you could do only one thing between now and Dec. 31 to ease your 1995 taxes, what would that be? And why would it be important?
JVonachen: The most important aspect is to know your personal tax situation as to how much income and expenses you will be having for 1995. This is important because tax-planning strategies will affect different people in different ways. Your situation will be different depending upon the nature and type of your income and deductions.
JackBW: So you should do some calculations of income, deductions, etc., now?
JVonachen: Absolutely.
JackBW: Stuart Weiss has a follow-up.
StuartWeis: Let's focus on your capital-gains position. What is a good way to review the capital gains I've already incurred in 1995 so I can make this projection?
JVonachen: We need to anticipate what the current capital-gains tax rate will be in order to prepare an accurate projection. With the current proposals, if they are retroactive, the rate will be equal to 1/2 of the ordinary rate. If the proposals do not pass, the rate will max out at 28%.
JackBW: How about this one, Jim?
Question: What about people without any capital gains? Is there significant action they can take before 1996?
JackBW: Or are capital gains the main event here?
JVonachen: Making charitable contributions before the end of the year is an excellent strategy. This can be done either in the form of cash or property. If you have capital-gain-type property such as stocks, your deduction is equal to the fair market value of the stock on the date of the gift. By making this type of gift, you get a deduction for, in effect, your untaxed gain on the stock.
JackBW: BobArn3130 wonders what you're anticipating from Congress, Jim.
Question: What are the essential elements of the tax bill now before Congress -- i.e., the ones you think will be passed into law?
JVonachen: Who knows?
StuartWeis: Going back to charitable contributions, I understand that now you have to document them more carefully. Can you elaborate on that?
JVonachen: Single charitable contributions in excess of $250 need to have written verification from the charity. Contributions of property in excess of specified dollar limits may need to have appraisals as well as documentation of receipt from the charity.
JackBW: Stuart is following up.
StuartWeis: The rules on charitable contributions have gotten tougher. How are they tougher this year than last?
JVonachen: Actually, the new rules took effect for 1994 returns. So basically, we are under the same situation that we were in the prior year. It is just more of an IRS audit trigger this year because people have had a full year to understand the new reporting requirements.
JackBW: Here's one on next year's taxes.
Question: Isn't now a little late to be worrying about the taxes you'll pay for 1995? What strategies should you be planning now for the 1996 tax year?
JVonachen: One strategy is to prepay your state income tax before Dec. 31 so that you can get a deduction on your 1995 tax return. However, beware of possible alternative minimum tax consequences. That is why I stated initially that the most important aspect of tax planning is knowing your current situation. Some people who have an alternative minimum tax problem could end up paying more tax by prepaying their state income tax. This is not a common situation but is a potential area to be aware of.
JackBW: LArnold1 sends us this from the AOL audience.
Question: When you buy a house, the interest on the mortgage is tax-deductible, right? And does it matter if you bought in the first half or second half of the year?
JVonachen: The only advantage of buying in the first half of year is that you would have paid more mortage interest and thus have a larger deduction.
JackBW: Try this next.
Question: What about using a computer program to do your taxes? Any you recommend? Any downside to this -- aside from income to CPAs?
JVonachen: The computer programs are good, but I've seen many input errors where the operator of the program does not understand in what category or box to enter various types of income. This is especially true when passive- loss rules apply. Most of the commercial lower-priced programs will work fine even on complex returns if the correct input is made. It is very easy to check a wrong box and come up with a drastically wrong answer and not realize where the error is -- or IF there is an error.
JackBW: I do mine on a computer and then have my accountant check it over. Now Stuart wants to follow.
StuartWeis: If you use software, do you still need an accountant?
JackBW: I do!
JVonachen: Absolutely. How else would I make a living? Seriously, you need to understand how the return should look in order to do a thorough review. You cannot depend completely on the tax program.
JackBW: SonarDAWG has a deduction question.
Question: I have a large library of computer tech books. I was considering donating about $3,000 worth to a local library. Would this be tax-deductible?
JVonachen: These would be deductible based upon the fair market value of the computer books. The difficult part of claiming the deduction is determining the proper fair market value. What you believe to be fair, the IRS may view as absurd. In addition, this size of donation, I believe, would require an independent appraisal attached to the return.
JackBW: Medrep1042 asks about another kind of deduction.
Question: What is required in order to claim an office at home, and is it really a red flag to the IRS?
JVonachen: It is the biggest red flag you can put on your tax return other than your dog as a dependent.
JackBW: Next, from XXCHEF.
Question: I buy and sell several properties a year. My ex-accountant said I had to pay tax on all of the gain even if the gain was taken over time (10 to 30 years) in the form of a mortgage -- something about "dealer status." Is this right? What constitutes a "dealer"?
JVonachen: A dealer is one who constantly buys and sells property for a living. Many people will not be considered dealers but investors. This is often a difficult line to draw. However, if you are selling properties from a single tract of land, special rules apply. Generally, if you sell more than five parcels, you will be considered a dealer -- if all of the parcels are from a single tract.
If you are just buying and selling investment properties, it is more of a facts-and-circumstances test. If you have other types of outside income, it is a harder case for the IRS to categorize you as a dealer. If this investment income is your only income, it is very easy for the IRS to take the position you are a dealer. There are no hard-and-fast rules in this area.
JackBW: CRiggsiii had a casualty loss, it appears.
Question: Would $2,000 I spent to replace a laptop that was stolen be a legitimate deduction?
JVonachen: The deduction is legitimate, but casualty losses can only be deducted if they exceed 10% of your gross income. So if your income was less than $20,000, you would get a partial deduction if you are able to itemize and file a long form.
JackBW: Stuart Weiss has another question on home offices.
StuartWeis: Jim, I know home offices are a red flag, but what is a legitimate home office these days?
JVonachen: The major point of contention is not how helpful or appropriate a home office is to helping your business. The IRS has taken a focal-point attack as to how much time is spent in the home office as opposed to other areas where you spend your business time. We need to be able to dedicate a room or portion of the home exclusively toward business. Even one personal use of the room will disallow an entire year's business deductions. Thus, in almost all cases, the IRS, if they push you to the wall, can eliminate even legitimate business deductions very easily. The need or the burden of proof is on the individual claiming the deduction.
JackBW: A moment of light relief from BobArn3130 -- send postcards to Leavenworth.
Question: So can I claim my dog or not?
JVonachen: What breed?
JackBW: Can you shed any light on this one, Jim?
Question: Whatever happened to the idea of tax-code simplification?
JVonachen: Every time the tax code is simplified, a new annuity is created for tax accountants. The purpose of the tax law is not only to raise revenue -- there are other social concerns and goals. Once you have the interaction between the social concerns and the revenue concerns, complexity exists. Until the Congress is willing to simplify the goals of the tax laws, the tax code will always be complex and demanding.
JackBW: Here's an interesting one from DaleG10166.
Question: I took a one-year appointment as a visiting lecturer at a California university. How much of my living expenses can I safely deduct?
JVonachen: Because the appointment is for one year, no expenses will be allowed. If the assignment was temporary, for less than one year, then you would be able to claim room, board, and transportation costs of maintaining a separate worksite.
JackBW: Now, back to Stuart for another question.
StuartWeis: You get to write off dependents, $2,500 I believe. So, what is a dependent for tax purposes? For example, what are the rules on elderly parents or other nontraditional dependents?
JVonachen: The parent's income must be less than $2,500, and you and/or other relatives must provide more than 50% of the support for the parent. If several relatives provide the support but no one provides over 50%, a multiple-support agreement should be filed with the tax return so that at least one person is allowed the dependent deduction. This arrangement can fluctuate from year to year depending upon the agreement of the children.
JackBW: Our friend XXCHEF is back with another question, about his business.
Question: We expect to show a loss this year in our business. In general, would it be best for us to maximize our loss by, for example, paying January debts this December? We expect to be able to use the loss to offset profits next year.
JVonachen: If you have a net operating loss where the business losses exceed your income, you may be able to file a refund claim and carry back your 1995 loss into 1992, 1993, and 1994. One downside of this: If the business loss is flowing from an individual 1040, you will lose all or a portion of your itemized deductions. Thus, it may be better not to prepay expenses and to claim them in 1996. But this is not an easy decision because you need to know the size of your potential refund to compare that to the benefit of a deduction in a future year. In addition, the tax bracket for 1996 should be considered. If you are in a 39.6% bracket in 1996, do you really want to carry back the loss to a year when you were in the 15% bracket?
JackBW: DaleG10166 clarifies the situation in the question about the job in California.
Comment: Back to my one-year appointment -- I should have said nine months. Does that help me?
JVonachen: Yes, as long as the job is expected to last less than one year and, in fact, does last less than one year. Then the expenses should be deductible.
JackBW: Stuart has a final question -- for which we'll need a fairly fast answer.
StuartWeis: I want to sell stock that's really done badly, but I think it is going to do better next year. How long do I have to wait until I repurchase it? I want to take the loss this year, but buy it next year.
JackBW: You must have missed the 5000 market!
StuartWeis: Sure did on that stock, Jack!
JVonachen: To avoid the wash-sale rules, you would need to wait 31 days after you sell before you buy the identical security back.
JackBW: Thanks, Jim and Stuart. That's a wrap for tonight.
JVonachen: Thanks.
StuartWeis: Thanks for including me in the discussion.
OnlineHost: Thanks to Jim Vonachen of Clifton, Gunderson & Co., Stuart Weiss, and all the BW Online team for this conference on yearend tax tips. And thanks to all of you on AOL, with apologies to any of you whose questions we didn't have time for.
If you'd like to continue the discussion, we invite you to move to the BW Online Chat Room. Or you can post comments and questions on the BW Online Message Boards. Transcripts of this and all other BW Online conferences are available soon after the event (under Talk, Special Events, or Search BW).
Copyright 1995 by The McGraw-Hill Companies, Inc. All rights reserved.
