Hans Kasper, MS-CPA, PS

Individual Tax Planning

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Reducing Income

Social security benefits

Income Shifting

Flexible Spending Accounts

Alternative Minimum Tax and Stock Options

Employee Business Expenses

Capital Gains
Sale of Principal Residence
Roth IRA
Rollovers From Taxable IRAs to Roth IRAs
401K Plans
Adoption Expenses
Child and Dependent Care Credit
Education Tax Credits
Coverdell (IRA) Education Savings Accounts
Deduction for Higher Education Expenses
Qualified Tuition Programs - Section 529 Plans
Employer's Educational Assistance Program
Tax Free Sales of Rental and Investment Real Estate

Even as a CPA, I do not believe that you should become overly concerned about taxes.  That doesn't mean that the importance of income taxes should be ignored, but to spend your whole life trying to avoid them is very depressive.

The average person should spend about one day or two half days per year reviewing their income tax situation and finding ways to minimize their tax burden.

Review of the items below may help you with this process.

Reducing Income

  1. Make retirement plan and account contributions;

  2. Use pre-tax dollars to fund flexible benefits;

  3. Convert taxable income into tax-exempt income (tax-exempt mutual funds);

  4. Make family gifts (doing so removes earnings from income);

  5. Transfer capital gains property to junior family members in a lower than 25% tax bracket to take advantage of the 10% capital gains rate;

  6. Convert personal interest expense into deductible qualified residence interest expense (refinance personal debt into mortgage debt--there are some limitations);

  7. Employ family members in your business;

  8. Use installment sales to defer income from the sale of assets;

  9. Use like-kind sales to avoid realization of income on the sale of real estate and business assets;

  10. Minimize retirement income distributions whenever possible.

Social Security Benefits

If there was ever one portion of the tax law that should be eliminated, it is this one.

First, we pay income tax on the social security taxes that are deducted out of our payroll checks.  Second, when we received the benefits, we are taxed again.  Third, the interest that we earn on the benefits paid to us are taxed.  Fourth, if we die with enough money, we have to pay estate taxes on the benefits paid to us.  Four taxes on one benefit.

Since 1986, Social Security recipients can be taxed on 85% of their benefits.  Individuals with lower income are taxed on up to 50% of their benefits or not at all.  If your 2002 income is more than $34,000 for a single person or $44,000 for a married filing joint couple, then 85% of your benefits will be taxed.

 If your 2002 income is between $25,000 and $34,000 for a single person or $32,000 and $44,000 for a married filing joint couple, then up to 50% of your benefits will be taxed.

Below these income levels, your benefits will not be taxed.

To reduce tax on SS benefits, you can: hold back on taking IRA distributions until you are required to do so and shift as much income as you can to other individuals within your family who are at lower tax brackets.

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Income Shifting

Spend now and earn later OR spend later and earn now.  Generally, income and expense shifting is the movement of income or expenses from one year to the next.  In this manner, the taxability of such income or expenses can be shifted from higher to lower tax brackets.  An example is the delaying of self employed income into the next year and contributing to charity in this year.

Income can also be shifted to lower tax brackets through gifting.  A grandparent can gift substantially appreciated stock or other capital assets to a grandchild who is in a much lower tax bracket (children under 14 are taxed in their parents' tax bracket).  The grandchild can then sell the stock and pay much less tax since they are in a lower tax bracket.  The grandchild will acquire the grandparent's cost basis in the stock which is to be used in the calculation of the gain.

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Flexible Spending Accounts

If your employer has established a flexible spending account (a.k.a. Section 125 plan--if such a plan has not been established, then have them call us to set one up), you can have your medical insurance, medical expenses, dependent care up to $6,000 per year, and disability and group term life insurance deducted from your payroll check pre-tax.  This will allow you tax save in taxes between 22% and 35% of the expense amounts.

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Alternative Minimum Tax and Stock Options

If you are going to exercise stock options and hold on to the stock, then before doing so you need to calculate your tax liability.  It is possible that you may owe either income tax or AMT even though you have not sold the stock and do not have the money to pay the taxes.

Please call us on this matter before exercising your options.

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Employee Business Expenses

If you are an employee of a business, you use your auto for business purposes, and your employer gives you a monthly allowance that you do not have to account for, then your employer is required to add this allowance to your W-2 income and tax you on it for income taxes and social security/medicare taxes.  Then, you can take a deduction for your auto expenses (usually mileage) on your Schedule A--itemized deductions--in the miscellaneous area which has a deductible of 2% of your income.  Under this situation you become a tax loser for the benefit of your employer.  Below is a calculation.


Auto Benefit


Total Wages


Auto Benefit


2% of Total Wages


Tax Deductible Auto Benefit


Net Taxable Benefit


Income Tax on Benefit 28%


Fica tax on $6,000


Total tax loss


This is what you are going to do.  You are going print this out and give it to your employer.  Then, you are going to point out to them that they are also being over taxed since they are matching the Fica tax.  Then, you are going to ask them to establish a written "accountable plan" and allow you to report your business auto miles to them which will allow you to make most of the auto benefit, if not all of it, non-taxable to both of you.

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Capital Gains

Long-term capital gains (stocks and etc. held longer than 365-366 days) are different from short-term capital gains (held less than one year) in that they are taxed at a lower tax rate 10% or 20% vs. 15% or 27% or higher for short-term gains.

How to reduce capital gains at year end:  If you are near the end of the year, have capital gains that you have already realized, have stocks or real estate that have losses that you haven't realized, and you want to get rid of those stocks or real estate, then sell those stocks or real estate and use those losses to offset the gains to reduce your taxes.

What if I have a large loss or a large loss carry forward?  If you are near the end of the year, have capital losses that you have already realized, have stocks or real estate that have gains that you haven't realized, and you want to get rid of those stocks or real estate, then sell those stocks or real estate and use those gains to offset the losses to possibly pay no taxes on the gains.

If you have acquired the property by inheritance or gift, then the holding period begins when the person it was received from acquired the property.

If you have acquired the property by inheritance, then the cost basis of the property is generally fair market value on the date of death of the person you inherited it from.

If you have acquired the property by a gift, then the cost basis of the property is generally the lower of the cost basis of the property of the person who gave it to you or the fair market value on the date of the gift.

Mutual Funds

The cost basis of a mutual fund is usually determined by the mutual fund company and reported to you when you redeem shares from the mutual fund.  HOWEVER, if you have moved your mutual funds from one brokerage company to another, then the new firm will not know your prior cost basis and will not report it.

In that case, the cost basis is calculated as follows:




Avg. Cost
Invest 06/01/95 10,000. 1,000 10.00
Dividend 12/01/95 300 20 10.10
Cap.Gain Dist. 12/01/95 600 40 10.28
Redemption 08/01/96 (5,142) (500) 10.28

The cost basis is Investments + dividends reinvested + capital gain distributions reinvested (-) redemptions.  Each time a transaction occurs the average cost basis per share is recalculated.

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Sale of Principal Residence

In 1997, Congress passed a law that allows for the tax free sale of your home if you meet certain conditions.  Those conditions are:

  • You have lived in the home 2 of the last 5 years.

  • The gain on the sale is less than $500,000 if married filing joint or $250,000 if single or married filing separate.

If you have rented out your home or have had an office in the home since 1997, then you will have to pay tax on any depreciation that you have taken.

If you have lived in your home for less than 2 of the last 5 years, then you may have to pay tax on the gain unless you are moving due to a change in employment outside of your current working area.

Yes, you can buy a home, fix it up, live in it for two years and sell it tax free.  And, you can do it over and over again.  Yes, I have clients who do this.

Additional IRS rules 01/02/03

Vacant Land surrounding a residence and sold separately from the residence may qualify for the exclusion if the sale or exchange of the physical residence takes place within two years before or after the sales of the vacant land.

For property lived in less than two years, the total exclusion will apply due to a Change of Health if the taxpayer is instructed by a physician to relocate for health reasons (get it in writing.)  The total exclusion would also apply to Unforeseen Circumstances such as:

  • Natural or man-made disasters, such as war and acts of terrorism;

  • Death;

  • Cessation of employment;

  • Divorce or legal separation;

  • Multiple births from the same pregnancy;

  • Events determined by the IRS.

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Roth IRA

A Roth IRA is one of the best investment-retirement deals around.  All earnings on the withdrawals are tax free as long as you meet the tax free requirements (call us on this).

The 2002-2004 contributions can be as much are $3,000 per person under 50 years of age and $3,500 for persons over 50.  The allowable amount is phased out when income exceeds $150,000 for married couples and $95,000 for single filers.

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Rollovers From Taxable IRAs to Roth IRAs

On occasion, it happens that you can hit a very low or negative taxable income year.  When that happens and you have a taxable IRA, it would be advisable to covert some money from the taxable IRA to a Roth IRA.  This allows you to covert a taxable account into a non-taxable account and pay a low tax or no tax on the conversion.  Once this opportunity is lost, it is lost forever.

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401K Plans

If your employer has a 401k retirement saving plan and your employer matches your contribution to the plan, then you should enroll in it if you can afford to do so.

All contributions to the plan are deducted from your payroll check pre-tax--income tax, but not Fica or Medicare tax.  You will need to know:

  • how the plan operates and the limits on the amounts you may contribute to the plan;

  • how your employer's contribution is computed;

  • whether you may direct the investment of your account;

  • whether you can borrow from the account and how loans are handled should you leave the company;

  • how and when you can begin withdrawing from the fund;

  • the tax and penalty implications of withdrawing money from the fund and if you qualify for a hardship allowance; and

  • how to rollover the money to an IRA or to a new employer's plan.

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Adoption Expenses

Individuals may claim a tax credit (that is a dollar-for-dollar refund of tax liability) of up to $10,000 for qualified adoption expenses (e.g., legal fees and court costs).

As a special rule, if you adopt a special needs child as defined by the state you live in, you may claim a $10,000 credit even if you have spent no money for the adoption.

The credit begins to phase out once income exceeds certain levels.

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Child and Dependent Care Credit

First, read the flexible spending accounts section above.

This credit is for children (under the age of 13) or dependent care (such as an elderly parent or sibling who can not care for themselves).  The credit is based on a percentage of your income and is very nominal.  Except for low income persons, you will always be better off by using an employer's flex plan.  If your employer does not have one, then have them call us to set one up.

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Education Tax Credits

The HOPE credit is for the first two years of college or like-kind education and is up to $1,500 per year.  The life-time learning credit is for 20% of expenses up to $1,000 per year.  Both credits phase out when income exceeds certain ever-changing levels.  For the parent to claim the credits, the child must be their dependent.  There are many cases where it is better for the child to claim themselves and the credit when the parents can not receive the credit due to the level of their income; however, (01/02/03) if a parent does not claim the student, who is otherwise eligible to be a dependent, as a dependent so the student may claim the education tax credit on the student's income tax return, then the student's personal exemption amount is zero.

Qualifying expenses: excludes health center fees, excludes books purchased from the book store, includes books charged as an enrollment fee, includes independent study fees, includes enrollment fees, and excludes room and board.

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Coverdell (IRA) Education Savings Accounts

Anyone may set up an education savings account for a designated beneficiary who is under the age of 18.  There is no tax deduction for the contribution to the account.  This money can be used for elementary, secondary, and college education (books, tuition, fees, supplies, equipment and room and board).  The contribution levels  phase out when income of the grantor (the person putting the money in the account) exceeds certain ever-changing levels.

The idea here is that money is put into the account and earns interest tax free and, when removed for education purposes, the income is not taxed.

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Deduction for Higher Education Expenses

Starting in 2002 to 2005, there is a deduction for qualified higher education expenses.  You can not take the credits above and this deduction at the same time.  The maximum deduction for 2002-2003 is $3,000 (2004-5 is $4,000) and is phased out when your income exceeds certain ever-changing levels.

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Qualified Tuition Programs - Section 529 Plans

These are great plans that vary greatly from one investment company to another.  I really like this type of plan because it allows the grantor to maintain control of the money.  If your child chooses not to go to college, then you can shift the beneficiary to another child, another person, or take the money back out again (with penalties and tax).  If the money is used for education, then there is no tax and the earnings accrue tax free.

You can put in $11,000 per year per person (two children = $22,000).  This is great idea for well-to-do grandparents.

When investing in such an account, please ask about load fees and annual expenses.

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Employer's Educational Assistance Program

Any employer may set up an educational assistance program.  This plan allows the employer to gift tax free and the employee to receive tax free up to $5,250 per year in educational expenses.  If you own a business, your child, who works for you, is not your dependent, and is 21 years of age or older, may qualify for such assistance.  Think about this for a minute and you can see the benefit.

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Tax Free Sales of Rental and Investment Real Estate

Rental and investment real estate can be sold tax free if the proper rules and procedures are known and followed.  This type of transaction is called a Section 1031 transfer or a like-kind exchange.  Commercial, residential rental, vacation homes, and investment (raw land) properties qualify for this type of transaction.  Your primary, personal residence does not.

The general rules are:

  • A new piece of real estate must be purchased that is more expensive than the one being sold;

  • When the old property is sold, an intermediary, called a facilitator or trustee, must take hold of the cash proceeds of the sale until the new property is purchased (you can not take hold of the funds or you will be taxed on them even if a new property is purchased);

  • The new property being purchased must be identified (written notification to the facilitator) within 45 days from the date of closing of the sale of the old property (up to three properties may be identified);

  • One or all three of the new properties being purchased must be closed on within 180 days from the date of closing of the sale of the old property;

  • If any of these dates are missed by even one day or not all of the funds are utilized, then some or all of the proceeds from the sale of the old property will become taxable to the extent of the gain on the sale of the property.

  • Click here to learn how to do a 1031 on rental property that you want to convert to your own personal residence.

  • Click here to learn how to do a 1031 on a personal residence on which you want to exclude the 250,000 / 500,000 gain that was also rental property.

My firm acts as a facilitator for Section 1031 exchanges.  Please contact me prior to listing your rental or investment real estate for sale so that all of the proper paperwork may be completed to avoid taxation of such a sale.


How To Structure Like-Kind Exchanges Through A Qualified Intermediary

With the recent upheaval around proposed regs dealing with the treatment of exchange funds held by qualified intermediaries (QI) in deferred like-kind exchanges, the complex nature of these transactions is in the spotlight. QIs have served an important business/investment purpose since the Starker decision (Starker v. U.S., 602 F2d 1341, 79-2 USTC 9541) first approved of their participation.

Using QIs to structure like-kind transactions

The reliance on QIs for taxpayers seeking to engage in like-kind exchanges came about as a result of the Tax Court decision in Starker which allowed the taxpayer to identify and acquire replacement property from a third party; that is, not the party acquiring the taxpayer's relinquished property.

In Starker, the taxpayer sold property to a buyer and used an agreement whereby the buyer would hold the funds to purchase replacement property for the taxpayer in order for the taxpayer to get the tax deferral benefits of a like-kind exchange.

The IRS originally said the transaction in Starker did not pass muster for a like-kind exchange claiming that like-kind exchanges were intended solely for direct property "swaps". The Tax Court and the Ninth Circuit Court of Appeals disagreed. It took until 1991, however, for Treasury to issue regs to determine how the proceeds or funds received in a like-kind exchange that is not a straight up "swap" would be handled.

Treasury created a "safe harbor" for like-kind exchanges structured through QIs. Since then, taxpayers have been using QIs to structure their like-kind exchange transactions.

QI safe harbor

Under the QI exchange safe harbor, the taxpayer must identify replacement property within 45 days from the date the relinquished property is transferred and has a total of 180 days from the same date to acquire all replacement property. In that period, the taxpayer may not hold or have access to the proceeds from the relinquished property.

Through the QI safe harbor, taxpayers will not be deemed to be actually or constructively in receipt of the proceeds from the relinquished property because exchanges structured through a QI will be treated as if the QI were not the agent of the taxpayer. Money or other property received by the QI before the QI receives replacement property will not be treated as money or other property received by the taxpayer. The taxpayer's transfer of relinquished property and subsequent receipt of replacement property will be treated as an exchange and the determination of whether the taxpayer is in actual or constructive receipt of money or other property is made as if the QI is not the agent of the taxpayer.

Requirements for QIs

For taxpayers to be in the QI safe harbor, the following requirements must be met:

l The QI must not be the taxpayer or a disqualified person;

l The QI must enter into a written agreement with the taxpayer under which the taxpayer's right to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the QI is expressly limited; and

l The QI must acquire relinquished property from the taxpayer, transfer the relinquished property, acquire the replacement property, and transfer the replacement property to the taxpayer as required by the agreement.

Selecting the right QI

Like any other agent, taxpayers must be sure to look into a QI's background, education, experience, and reputation. In addition to that basic research, taxpayers must be aware that certain QIs are disqualified by the regs.

Disqualified persons include a taxpayer's employees, attorneys, accountants, investment bankers or brokers, and real estate agents or brokers are disqualified if they have worked for the taxpayer within two years prior to the exchange.

Not disqualified are bank-owned exchange companies where the taxpayer has received banking services from the parent bank and financial institutions, title insurance companies, and escrow companies that have provided routine financial, title, escrow, or trust services for the taxpayer.


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This page was last updated on 05/13/2010


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