Looking For A New Job?
You Can Deduct The Cost Of That Job Search

With the unemployment rate still high, there is help from the IRS for some who have lost their jobs or are threatened by job loss.

You can deduct the cost of looking for a new job even if your job search is not successful. And you don’t have to be unemployed to deduct job-hunting costs; you can do so while looking for a better job even though you are still employed in your current one.

Deductible: The cost of advertisements, career counseling, resumes, calls, local transportation, travel, lodging, meals (in some cases) and entertainment (50% deductible), and other expenses related to the job search.

Requirement: The new job you are seeking must be in your current line of work. You can’t deduct the cost of looking for a first job, or a first job in a new career.

Include job-hunting expenses among your miscellaneous deductions, the total of which are deductible to the extent they exceed 2% of adjusted gross income, if you itemize deductions.

Make Sure Your Tax Preparer Has All The Info

A recent case illustrates the importance of obtaining accounting tax advice and then being sure the tax preparer knows of it.

In this case, there was a divorce. One asset was a high value piece of property with a low basis. The property settlement distributed the property half to each party.

There was also the sum of $500,000 to be paid to the wife. When a sale was imminent (and within the statutory period to transfer property incident to a divorce), the husband transferred his interest in the property to the wife and she agreed to the carryover basis.

A different accountant prepared their returns and was not told of the agreement. Thus, he allocated the gain to each of them.

The husband later saw the error and filed an amended return.

The resulting conflict ended up in Tax Court and the wife was held liable for the taxes, penalties, and interest.

Protecting Retirement Accounts

Protect retirement accounts from Medicaid claims if you lack long-term care insurance.

Most Americans still don't have such insurance. The uninsured who can't afford long-term care can obtain it through Medicaid but Medicaid will take their "available assets," which may include IRA's, 401(k)'s, and other retirement accounts, to recover the cost.

Key: State rules have a big effect on planning. Example: In some states, once an IRA's required annual distributions begin at age 70½, the IRA balance is no longer an available asset, and only a portion of each distribution can be diverted to Medicaid.

So converting a regular IRA to a Roth IRA which has no required distributions can be a costly mistake.

Consult with a local Medicaid expert to protect assets under your state's law.

Consider This!

"All the Congress, all the accounts and tax lawyers, all judges and a convention of wizards cannot tell for sure what the income tax laws say."

Walter B. Wriston, former chairman and CEO of Citicorp

'S' Corps
Must Treat Working Shareholders As Employees

The owners of an S corporation report all of its income on their personal tax returns.

Mistake: The sole owner of an S corporation saw no need to pay himself a salary since he was receiving its income and paying tax on it anyway. And by not taking a salary, he and the corporation avoided paying payroll taxes.

Argument: The IRS objected that the owner was doing work for the corporation to earn its income, so he was an employee who must receive a wage subject to employment taxes. The owner answered that he wasn't an employee because he didn't take instructions and wasn't answerable to anyone.

Tax Court: Since the owner worked for his business, he was a "statutory employee," even if he didn't answer to anyone else. So, his income from the business was taxable wages.

Planning: S corporation owners who work for their businesses must receive "reasonable" wages.

There is no exact definition of "reasonable" except that the wage be credible in comparison to market rates paid to others for the same or similar work.

Despite Tax, Capital Gains Remain Quite Attractive

Capital gains are still more attractive than dividends to long-term investors, even though they are taxed at the same rate.

Why? Capital gains are tax deferred until a sale.

Dividends are reduced by tax of up to 15% (or more including state taxes) before they can be reinvested.

But a stock that provides the same rate of return through appreciation will do so on a pretax basis-and compound in value at a faster rate to a higher total.

If you buy stocks or funds for the long term through a taxable account, remember that a tax advantage is still enjoyed by appreciating stocks and funds that have a bias toward generating capital gains rather than dividend.

Consider This!

"The first nine pages of the Internal Revenue Code define income; the remaining 1,100 pages spin the web of exceptions and preferences."
- Warren G. Magnuson, former chairman of the Senate Committee on Appropriations

Long-Term Care Insurance
Can Protect You And Your Loved Ones

A recent study published in the New England Journal of Medicine gave several important statistics:

1. If you are 65 or older, there is a 43% chance that you will spend over 90 days in a nursing care facility.
2. The national average cost of nursing home care is $55,000 per year. Here in Arizona, the amount runs about $42,000 to $45,000 per year.
3. Only about 7% of Americans have done any planning for long term care needs.

With this information each person who reads this article needs to ask themselves the following questions… Who will pay for the necessary care?

Medicare, under current law, has a limit of 100 days in a nursing home after a hospital stay. Medicaid (Access in Arizona) has many faults for middle class people such as income limitations, asset limitations, lack of choice of facility, and possible reimbursement. This leaves you!

If your income is high enough, you should not have a problem. It is called self-insurance. The operative factor is the adequacy of your income to pay the nursing care costs as well as the costs of the person not needing the care.

If you do not have that type of income, you should investigate Long Term Care Insurance. Policies vary from company to company so before selecting a plan you should review the type of benefits offered, cost of the coverage, and duration of coverage. This is not the answer for everyone, it should be considered if you have significant assets that you wish to protect and you want to stay independent of the care of others.

WARNING: Getting Tax Advice From The IRS Can Be Risky

During the March and April 2003 tax filing season, auditors from the Treasury posing as taxpayers went to IRS Taxpayer Assistance Centers to ask questions about the tax law.

Result: IRS personnel answered only 72% of the questions correctly, answered 25% incorrectly, and suggested that the taxpayers do their own research or referred them to someone else in the rest of the cases.

Warning: The fact that you relied upon bad advice received from the IRS will not relieve you of any resulting tax liability.

Tax Briefs

Restricted stock options are often used as an incentive to hire a person. When the option is received it is normally priced at market value. When the restrictions are voided, it is taxed as ordinary income to the extent of fair market value over cost.

In some cases it could be advisable to pay the tax earlier than required. Then the appreciation will be taxed as capital gain. This election, under Section 83 (b), must be made within 30 days of receipt. The election should be made after considering the potential of forfeiture of the stock as no loss deduction is allowed under those circumstances.

Investments are the first area in which tax planning can result in tax savings.

Dividends: The top rate on dividends has been reduced to 15% but not on all dividends. Common stocks must be held more than 60 days for ordinary dividends and over one year for capital gains. Exclusions include most dividends paid on preferred stocks and by Real Estate investments trusts. Interest and short-term capital gains earned from mutual funds will also be excluded.

All distributions from IRAs, 401(k) plans and other deferred compensation plans will be taxed at normal rates and are not subject to the maximum tax cap rate.