October 2020 Newsletter
OCTOBER 2020 CLIENT NEWSLETTER
SOCIAL SECURITY: There is some good news to report. Social Security will post a modified CPI increase of 1.3% for all beneficiaries effective for January 2021. The bad news is that the real inflation this year will be closer to 5%, especially with housing and food costs going up. Fuel costs are down as an offset but most Senior Citizens do not usually drive to work and tend to stay home more. The increased Medicare fee will offset more than half of the average increase, to net less than $10 per month.
FEDERAL STIMULUS PAYMENTS: $1.8 billion will now be paid to 85,000 State and Federal prisoners who were not budgeted into the Cares Act. How the money is used is debatable. How the $30,000,000,000 federal deficit will be repaid is also debatable.
CALIFORNIA INCOME TAXES: The Golden Grizzly Bear State has proposed bill AB 1253 to increase the top 13.3% tax rate to 16.8% RETROACTIVELY to January 1 this year. This new rate would affect only millionaire’s taxes and would be inflation adjusted annually. The worse news is that State taxes are not deductible on the Federal returns if over $10,000. U Haul and moving services are absolutely overwhelmed from moving people out of state now.
NEW CALIFORNIA EXCISE TAXES: Cannabis excise taxes are now based on 15% of the mark-up (retail sales price) rate. This is determined every six months and paid by the distributors, same as liquor, beer, and wine. It is worth noting (client rumors) that illegal marijuana may now be cheaper.
FEDERAL TAXABLE FIND: In ancient times everything belonged to the King. He would dispense forests and estates to the loyal and political supporters with an occasional bequest to war heroes. In our country, a democracy, the Federal government will allow people to profit from their efforts as long as they pay taxes on it. Even if it is minerals from Federal or State lands and the Spanish treasure ships.
About 100 years ago a volcanic diamond-bearing site was discovered in Arkansas. The De Beers people who owned and operated the South African mines cartel found out and tried to take it over. They were repulsed because it was on State land. They lobbied that if they couldn’t have it, the output would destroy the value of diamonds everywhere and a compromise was reached whereas the location would become the Crater of Diamonds State Park and it would not be commercially mined. Visitors to the park have been allowed to dig around and keep any diamonds they find.
Recently, a 9 carat diamond was found and the stone is currently being appraised. It might be a surprise to all that the value, when determined, will be taxable under the Cesarini vs. US tax case that ruled that all TREASURE TROVES found are taxable income. Unfortunately, the finder will probably have to sell the beauty to pay the taxes. Noteworthy, is that a 16 carat diamond was found there in 1975.
CALIFORNIA PROPOSED REAL ESTATE PROPERTY TAXES: The coming election will probably toss out Proposition 15 which limited property taxes to a cost basis when purchased and a 2% annual increase until it is sold or inherited. This will affect commercial properties and will bring in another $12 billion annually to pay for the huge costs of pensions and administration. These taxes will be paid by consumers and businesses through triple net leases and increased prices. I am sure it will pass because the Temecula citizens passed an increased sales tax increase a few years ago (no SWAT team here) and a majority of Californians passed the huge fuel and transportation tax increase recently. Californians love spending and taxing.
I once had a medical doctor client who lived very high. He would spend exactly twice whatever he earned, which was very substantial. Eventually he lost his contract to provide medical services with the State for overbilling, and went downhill forever afterwards. Reminds me of California State and municipalities with no limits on spending and none on new taxes.
FEDERAL FOREIGN ACCOUNTS AND ASSETS: An FBAR report must be filed annually when the tax returns are filed. Please inform us if you or your spouse had an aggregate value of foreign accounts of at least $10,000 at any point during the tax year. It is a question on the tax returns. I once represented a client on a FBAR penalty case involving a Canadian investor who actually filed the reports and I had to deal with a SOB IRS lawyer who thought his job was to read instruction manuals, not to look up the case on his computer.
REAL ESTATE: Although real estate values have increased 6% in the past year there are problems looming. Federal mandates for landlords forbidding evicting non-renting tenants, and forbearing mortgage payments have pushed a $15 trillion dollar liability into the next year. Some people will be capable of negotiating rent or mortgage repayments into the next year when everything must be resolved. The others will move because of unemployment or inability to pay. This will induce a crash of foreclosures and a glut of houses for sale. Beware, it could affect your finances or ability to move. Best to complete refinancing now before interest rates or prices affect your deal. This is the best of times.
ANNUITIES: We still offer an insurance annuity which features a 6% sign-up bonus, averaged 6% earnings for the past ten years, guaranteed principal with no loss years ever, and no fees. We believe it will outperform most portfolios based on the current economy and the near future. If you are interested and would like to discuss your investment portfolio, please email me or call to schedule an appointment.
Best wishes for the coming Holidays. We hope to see you again next year and pray that the COVID-19 virus is whipped forever.
Phil Chute, EA, Nett, Leslie, and Sarah
September 2020 Newsletter
SEPTEMBER 2020 CLIENT NEWSLETTER
With barely a fortnight left to the election, I would like to pray only for an honest election. Everybody knows the opponents for the Presidency by now so let the true wishes of the real voters be known. If it is connived, duplexed, or rigged then we will have a Constitutional crises which could result in bloodshed before it is decided. Whatever you do, try to vote for the future of the country and flag, not short-term personal gain, and do your best to insure it is done honestly.
STIMULUS GRANTS, & LOANS
There have been government loans, grants, one-time stimulus payments extra unemployment benefits, and deferred payment mortgage plans like never before to offset the tragic effects of the pandemic and a shutdown economy. The tax effects on these plans are all different. On a deferred mortgage loan, the principal and accrued interest on missed payments are added back to the loan and will be repaid from the longer term which is not a taxable event. Grants are not taxable because they are a return of taxes gifted by the federal government. Loans for business performance and hiring are not taxable if the conditions are compiled with. One-time stimulus payments to most all taxpayers are grants and not taxable. There will be no audits except for sparse reviews of multi-million dollar loans and grants.
When analyzing client’s portfolios I have noticed that many clients are invested in High Yield mutual funds. Unknowingly or simply unadvised, the brokers should be telling them, especially senior citizens, that they have been investing in High-Risk Bond funds. They usually pay very high dividends and earnings [interest and capital gains] but the risk is always there. The risk equation is that higher risk equals the higher interest rates. There is a huge amount of foreign debt in some of them and foreign stocks or bonds in this case are not audited and vetted/certified as they are in America. Sometimes sovereign foreign bonds, such as with Russia in the 1990s, were greatly discounted. A $10,000 bond would be sold for $7,500 with the mutual fund buyer showing it at full value and receiving full interest payments. Upon maturity the bonds would be cashed in and the investors would make a huge profit. Problem was that the Russian bonds went south and became insolvent with the crash of the Empire during the 1990s. One of my clients, who was retired, lost 1/3 of her portfolio from one day to the next. I never sold high Yield funds again. They are also not recommended risk-wise for senior citizens unless they have a very large portfolio.
Also, Enron bonds were in play for some time until they took everybody out. It was like a roller coaster with everybody climbing on board for a great ride uphill until the thing spun out of control to insolvency. Beware of risks which are in direct relation to gain or loss.
Noticeably are the high interest rates paid for California Municipal Bonds. The average interest rate was 5% which would have an after tax equivalent of 8% compared to ordinary taxable interest bonds. The broker had paid a premium to buy the bonds with the extra-high coupons. Accordingly, a $10,000 bond with a higher than usual interest rate would command a sales premium depending on the life left on the bond. The broker for this portfolio had paid premiums of thousands to buy many bonds. Accordingly, the client would see he had received the 5% dividends but not notice the other line of the distribution that showed it was offset with amortized expense charges for the premium paid.
And then there were the high advisor fees cleverly hidden in the back of the statements. These range from 1.5% to 2% of the portfolio value and are charged quarterly.
Lastly, one of the portfolios was heavy in energy stocks ranging from utilities to oil and gas. These are falling out of favor with the California/New York initiatives to ban gas and oil in the future while forest fires are raising the utility rates like crazy. Just because lack of maintenance by the utility company high-tension lines helped start fires in the Northwest this past year, they shouldn’t be responsible for all of the magnitude of unmaintained public forests which burned out of control.
Overall, the portfolios I saw had earned less than 2% year-to-date and the year is closing. This year I expect to see 5% inflation and I expect many portfolios to actually lose principal due to inflation and poor earnings. Next year could be a repeat.
CHINESE INTERNATIONAL INVESTMENTS
One other item written in the financial news recently is the invasion of foreign securities in our Stock Exchanges and other agencies. Especially China with their long-term goals of world domination militarily and economically. First, our greedy International firms traded their technology transfers and trade secrets to do business in China. Woe to them to find themselves facing their products in international markets afterward with Chinese names on them.
Then comes the Chinese Belt and Road initiative to place huge segments of the world under China’s influence. They loan infrastructure loans to Asian and African countries and build airfields and highways to them. They now enslave one to two million Uighur Muslims laborers in Xinjiang concentration camps. This is the Communist Chinese equivalent of the Russian Communist Gulag.
Their Capitalistic trend is to go public with many of their quasi-public entities. I have read that up to 1/3 of Public retirement pension accounts are now invested in foreign accounts, mostly Chinese. Many of them are merely shells of government subsidized companies formed to attract American dollars for trade and expansion.
Speaking of funding our state and municipal pension accounts; the Public pensions nationally earned only 3.2% this past year ending June 30, 2020. Low interest rates invite high risk in other hedge funds and securities. Most public pension accounts are greatly underfunded from paying higher benefits than earnings. One fund in Chicago was only 23% funded and they had already sold off future sales tax receipts. We should expect to see some Chapter 9 Municipal bankruptcies before the year is over. Most cities have a municipally built and funded sports stadium which operates in the red every year. More so this year though with the Coved virus keeping fans away.
On to the good news: We have access to hundreds of insurance annuities which have a large range of very low interest rates for the most conservative investor but have averaged around 6% in the indexed options. No taxes on earnings are paid until withdrawn from the account. EquiTrust offers a 6% up front bonus so if you worry about early withdrawal fees, then that would take care of them. Long term investments are what annuities are all about and this is perfectly safe for pensions and IRAs. There is also a no loss clause in case the insurance company takes a crash on investments because of uncontrollable economic situations, the owner of the insurance annuity does not suffer any loss against his/her principal investment balance. He/she merely has no earnings for the bad year. In our proposals of actual earnings, the 2008 year was the only year without earnings. No fees are charged against your earnings or portfolio, ever. This is the safest and best investment I know of, and I have seen them all from my 40 years in tax practice and 20 years as a securities broker-principal executive.
Last but not least is the political trend to shut down normal energy sources such as fracking and transporting gas/oil by pipeline. This ties in with the Green initiatives and mandates to close the 20 electricity generating peaker plants and all nuclear power plants in California which resulted in blackouts and brownouts this past year for the first time since the Enron fiasco. They have resumed buying power from out of state, just like when Enron was involved. The State Government recently announced the mandate for only all new electric vehicle sales from 2035 [autos] to 2045 [trucks]. The substitute for gas/oil fuels will be electricity. Electric power from where? The latest proposed solution was to use the electric car [batteries] as a reverse plug-in mode to feed power BACK into the grid during peak periods. I can see it now, “Honey, don’t go shopping after dinner because the State is draining our Tesla batteries. But we can recharge them after midnight tonight from the windmills.” During the power cutoff this summer, Governor Newsome of California told us the solution was to use less electricity. Reminds me of the Express Train from Nowhere to Nowhere.
Best wishes for a less stressful remainder of the year. Call or notify us if you should receive any IRS or California notices or communication on your taxes. We are also available for free investment portfolio reviews and estate planning.
Phil Chute, EA, Nett, Leslie, and Sarah in the publishing background
August 2020 Newsletter
AUGUST 2020 CLIENT NEWSLETTER
First the good news.
The Corona Chinese virus appears to have made a pass and slowed down to a manageable level. This highly contagious virus has affected everybody in many ways. Now, our many clients who were afraid to leave their home may begin to go on with their lives. Social activities will be restricted and masks with social distancing will be the norm at least until the year is over. This is the new norm.
Good news from Congress.
A recent bill has passed to allow deductions for up to $300 for charitable contributions without itemizing. It will be treated the same as the school teacher credits for 2020 returns.
Good news from the California Secretary of State.
For our senior citizen drivers over 70. You now have an extra year from the expiration date (if from March to December 2020) to get your CDL license renewed. The SOS mentioned Covid-19 but I think it takes an extra year to find parking and get through the line in Temecula.
The IRS is in trouble again.
The IRS recently admitted that they have trailers full of unopened mail which contain payments relating to tax returns which were timely electronically filed. The process that recorded the tax return data has already been sending past due notices for the missing payments, most of which are in these trailers. At this time the 12 million pieces of unopened mail have resulted in millions of past due notices with attendant penalties which the IRS will need to reconcile by going back to the post date on the envelopes, after opening them. Let’s hope they are post dated.
California is now a third world country.
According to the Wall Street Journal article titled “California’s Green Blackouts.” This month there have been recurring electric energy brownouts and shutdowns of air conditioners because of continuous hot weather, after decommissioning the two nuclear power plants at San Onofre and some fairly new gas powered peaker plants throughout the state. The nuclear plants could have operated safely for many years at half-power but the State Energy Commission decided they didn’t like nuclear power, while the gas plants are also supposedly environmentally unfriendly because they aren’t clean renewable energy produced by windmills or solar. Governor Newsom said he remains “committed to radically changing the way we produce and consume energy.” True statement. Especially when the Governor waived the emission standards for privately held gasoline, natural gas, and diesel electricity generators to power up to replace some of the missing energy. “The solution,” as officially stated, “is to reduce electrical usage.”
Now the bad news from California.
Prop 15 is on the ballet for the fall and will destroy the original proposition 13 which limited property taxes. If you think the taxes on your house or property are not high enough, then go for it. Although it appears to affect only commercial real estate, the door will open and guess who ends paying for real estate taxes, the public users for everything we do. There is a companion Prop 19 which appears to lower taxes. Sadly, the attached financial economic report showed the opposite effect. Like the old switcheroo of the last election for a massive tax increase which had people voting no to become a yes vote by structuring the proposition to read backwards. The Attorney General had denied his wording is biased.
Because we have a proposed budget deficit of over $60,000,000,000 [billions] for the year in California, the land of the bear, there will be many new tax proposals in the fire. The first is a 25% increase in the maximum State income tax, which is now the highest in the Nation. Others will crawl out of the darkness of Sacramento political chambers after the coming
election. When I was a stockbroker I sold California Tobacco Bond securitized future settlements as interest tax-free bonds.
This was the money allotted for 20 years due to the collective lawsuit loss of the tobacco companies to the States. Now it has been spent and we are paying interest on it as it amortizes.
Some tax info you might not be aware of: Because fees are not taxes requiring voter approval, there has been steady fee increases appearing in California over the past years. The nature of the fees are usually a twist in the law such as sales taxing a person on the full price of an item purchased in Costco, before applying the sale discount. Note that it is not priced net but shown at full price for tax purposes and the discount is shown separately. Then there are the other little sneaky taxes such as the 1% tax on lumber and wood products in addition to the sales taxes when you leave Home Depot. And when you buy a new car there is the tire fee-tax for “disposal” of all tires including the donut spare and a separate fee-tax on the lead balancing weight used because lead is bad for you. And there is the additional fee-tax when the garage takes the worn tire off the car, which is another disposal tax, in addition to the tax on the new replacement tire. But don’t forget the sales tax on shipping [postage] and handling of taxable items bought on line. Meanwhile, the new one dollar tax the State added to my business license fee has now increased to three dollars this year. And so it goes on and on.
More bad news from California
On July 30th, the California Senate voted 33-3 to create a commission to study the impact of Confederate States slavery before the Civil War affecting Californians and to award reparations for descendants. Since there is a Democratic Supermajority and Governor, whatever they decide may become law without a public vote.
Now the National bad news.
The shutdowns of businesses, all schools, low economic activity, and accompanying disruption of everyday life in America has wrought a terrible toll on the economy. Our national debt has gone from $21 trillion to over $30 and the numbers are still rolling. All the big states want the Feds to borrow money to bail their losses out by digging into the pockets of the small states that better manage their economies. This is to avoid borrowing more money to cure their own problems. This is simply redistribution of wealth on a national scale. No matter who wins the next election, there is a monster national debt, worse than at the end of WW II, to be paid with interest when due. To increase it any further after the recession would be a crime because it forces the debt on future generations. Tax increase proposals from both political parties is a certainty.
Yes, we still have insurance annuities. Our favorite has a 6% sign-up bonus and historically has averaged 6% as an indexed investment. Guaranteed earnings are less. No losses or fees ever. Proposals on request.
We still offer a free financial review of all your pensions, investments and taxes, free of charge.
About Stocks, Bonds, & Taxes
Because most of our clients purchased our new book, attached is our first official review by a national reviewer. There have been two additional 5-star reviews but they didn’t comment in detail.
Thanks for the privilege of working with you this past year. As always, contact us immediately if you have any questions about your returns, receive a California correspondence form or a SC2000 inquiry letter from the IRS.
Best wishes to all.
Phil Chute, EA and Staff
July 2020 Newsletter
This newsletter is to inform you of current events that can affect you economically.
The new stimulus bill is being refined in the Senate and it appears 90% likely that it will include the following provisions:
First, it will include another round of direct $1,200 payments to many Americans with AGI under $75,000
if single and twice that if married, plus $500 for each dependent regardless of their age.
Second: An extended stimulus unemployment benefit will be enacted at a lower rate of $200 per week
instead of $600.
Third: The ban on evictions from Federal backed mortgaged properties will be extended.
Fourth: More testing funds will be available for senior facilities, schools, and child care centers.
Fifth: The proposed bill will restrict lawsuits in coronavirus related cases.
Sixth: There will be additional aid to schools and universities.
The bill will be finalized and publicly announced in the final form Monday next week.
We have offered free financial planning for our clients included in our tax fees. I have been, or am currently, licensed in securities as a Registered Principal, taxes as an Enrolled Agent, and fire, casualty, life & disability insurance agent.
This past week we reviewed the finances of a client and found, although he had good investments, that
his ex-spouse was still the beneficiary of his huge pension. The client was notified and is very grateful. Another client had property above the tree line of the San Gabriel Mountains where it is nice and cool.
The recent fires in Northern California in the past year resulted in a huge increase of mountain residential property casualty rates. The client left his policy information with me. I noticed that he had a good rider to cover the increased costs of replacement construction from damages but the property values were wrong. His property, with a FMV of $350,000, was insured for almost twice the amount. The client saved half of his renewal premium by realistically adjusting the amount of the property of his policy, resulting in no real loss of coverage.
A widowed client was worried about the roller coaster effect of the stock market on her pension. She agreed to buy an insurance annuity through us which will protect her investment.
Another client showed us his considerable inherited investment portfolio which was 100% invested in California tax-free bonds. The wealthy relative had bought them to avoid taxes while she lived in California. The problem was that the client had moved to another state and now all the interest income would be taxable. His broker never advised him. An additional problem is that the bonds are paying high-risk interest dividends because they were rated lower than in the past. This was before California announced a current deficit of over $60 PLUS Billion for this fiscal year (before the new shut-down).
Now the bad news which most financial professionals have been expecting. The following information was gleaned from the Wall Street Journal and my personal client interactions and expectations.
After a market shock earlier in the year when the DJIA dropped over 2,000 points in a single day, the market has responded magically. Tesla Motors and gold both hit $1,900 per share and troy ounce setting new records. Equities are up 25% in five months, setting a new record. Silver rose unexpectedly to $23 per troy ounce. NASDAQ and S&P Indexes are up 40% from February. New records break again. Wonderful performances, as the DJIA rallied about a thousand points monthly since the first quarter corporate earnings were announced earlier.
The perfect storm is coming. Economists now estimate the GNP has contracted by 32%, about one third, in the second quarter this year. The virus lockdown continues with the worst contraction on record. While 60% of all closed restaurants will never recover, the financial markets and real estate sales have been defying gravity. Interest rates have been held at artificial lows by the Federal Reserve Bank. Thursday,this week, the Federal Economic Agencies will release their official data.
One other issue on the way in the next two months will be the results of corporate second-quarter earnings. They will reflect the continued exposure to the economic nightmare we have all experienced. The results should be much worse than the news that dropped the Dow from $27,000 to $20,000 earlier this year. We will learn if the recent market contradiction of exuberance versus reality will sustain.
We offer insurance annuities which are guaranteed to never lose principal, offer a 6% sign-up bonus, and honest earnings.
Best wishes and good health to all. Call for financial planning appointments or to buy my new book,Stocks, Bonds, & Taxes, which is all about financial information and estate planning.
Phil Chute, EA & Staff
Second Quarter Newsletter 2020
This has been a tumultuous year with the Coronavirus and widespread social disruptions of lives, work, and business. Many of us have been affected in various ways and we hope that as Americans, we will endure and look back in prosperous years ahead to review these times. Our hearts go out to those folks who have contacted the virus or been otherwise affected by it. Like the 1918 virus which helped stop the carnage of WWI, it is worldwide and caught the entire world unprepared.
Meanwhile, back at the big home-office, we improved our breathing environment early in the year to protect our family, employees, and clients. We installed an IQ Perfect MERV-16 filter with ultraviolet treatment for the main air conditioner/heater unit. This huge box of filters and electronics constantly wipes the air clean of all particles and viruses. It also helps people with allergies to anything airborne. Our tax season has been very mild with more returns sent by post or email. I am sure that the July 15th extension of the filing deadline gave everybody twice the time to prepare and complete the complex task of our annual filing obligations.
My new book, Stocks, Bonds, and Taxes, a huge prolonged affair, has been finalized with a second edition; a college textbook. We continually edited and reformatted the previous edition and now have an improved third printing of the original book which matches the textbook except for the 330 problems and answers in that text. We sent 200 review copies to different California colleges that offer business courses for the fall semester.
You must have read about the Rapid train from nowhere to nowhere [Bakersfield to Fresno] that has become a dinosaur living in Sacramento. A real high-speed train is in the works between Las Vegas and Apple Valley with extensions proposed to Rancho Cucamonga. This is privately funded and construction will begin next year.
We have insurance annuities for our conservative clients. Some offer a sign-up bonus up front to 6%, lower penalty terms for early termination, guaranteed earnings, exposure to the equity market through the insurance company investments with a no-loss guarantee, no advisory fees, and finally, very secure high reserve ratings required for California approval.
As always, we are here year-around for questions, interviews over tax situations, investment choices, and estate planning. If you should receive any tax communications by mail please fax or email a copy (both sides) to us and we will respond to you immediately.
We hope you liked the 2020 Calendar we put together for your use.
Wishing you the best of the remaining months of the year. Let us all stay safe and healthy.
Phillip Bruce Chute, EA, Nenita, Leslie
Second Quarter 2017 Newsletter
Early this year we had a DOE [California Department of Employment] payroll audit. This was a complete surprise and meaningless exercise taking three weeks to complete. We have been in business 40 years and never had either a client audit or our own business for this event. This resulted in bitter communications and demands from them until it was resolved for very little money for a 1099 employee who had not been on wages three years before when she worked independently out of her home [but was now working as a salaried employee on their audit]. They were looking for Illegals under the tables, tried to get payroll taxes on alimony payments, made a handyman an employee, then added huge penalties, on their absurd assumptions. Only the threat of appeals, causing a re-audit, resolved the audit. It was a total waste of time and resources for both the State and us. They wouldn’t tell us who sicced this meaningless audit on us.
The lesson above is that if you receive an audit notice from any Federal or State agency, immediately notify us, for your defense. In all audits the auditors make the worst assumptions and hope you will pay the overstated bill to get rid of the bad experience, especially with the State of California. All audits can be beaten down with a proper attitude and defense [and an appeal].
Now, for some mixed good news: The State of California passed a resolution, with a 2/3 majority vote, to increase DMV fees and fuel taxes for the repair of roads and the unfunded ‘Train To Nowhere’ rapid transit project. If my memory hasn’t failed, I remember the public voting to add sales taxes to motor fuels for this same purpose of fixing freeways and roads many years ago. It appears that the money has disappeared in the General Fund. A repeal is now being organized for the next election and we will have an opportunity to reject it. On the other hand, the residents of Temecula approved a local sales tax increase in the last election….
We have petitioned a case in the US Tax Court for a client. This appeal of a no-show business audit result is in the works. The case is being reviewed in Riverside. The last time I was there the case was settled when I bumped into the auditor while waiting for the elevator. This one is not that easy, but we will see how it goes. Two lessons are apparent at this point, keep good business records and don’t ever ignore audit appointments.
We just completed a 706 return which took months of compilation of data and research. Estate tax returns are not that common because the $5,400,000 gross estate exclusion is larger than most estates. These returns were filled to use the DSUE [deceased spouse unused exemption] to the advantage of the surviving spouse. This allows us to avoid future taxation of the unused exemption. Another reason for the prolonged preparation is because all estate tax returns and related gift tax returns are audited when received by the IRS. We have always had favorable audit letters and are waiting for the audit results.
The new Republican government is on track to change the US Tax Code. There will be significant changes and hopefully it will really be simplified and taxes not increased. The last major Tax Code revision was in 1984 when Alternate Minimum Tax was conceived. It should have been labeled correctly as Alternate Maximum Tax because it overrides and increases all other income taxes. I expect something to pass, but please remember that the horse created by a committee in Washington became a camel.
We are doing a lot of estate planning. Tax season has passed with much time now available to review your investments, savings, and trusts. We can help you with your living [revocable, grantor] trusts and estate 1041 trust returns. In all matters, because of my extensive experience in securities and present insurance licenses, it’s time for a free review of your estate. Please keep in mind that the stock market, like real estate, is at an all-time high and diversification is great to preserve capital and equity gains.
A practical estate planning note: For no charge, your bank or savings and loan will provide a ‘Payable on Death form’ for spousal signatures. This form allows a surviving spouse to access all bank and savings accounts for cash needs for funeral and other expenses without probate delays. Please keep this in mind if you have separate accounts anywhere. It is not required for pensions or IRAs.
Lastly, if you ever receive a letter from any government agency concerning taxes please call and send us a copy ASAP. We will also review your broker statements or pension documents without charge to discuss these matters with you.
We hope you continue to have a good year and we will see you again in the next tax season.
Phil Chute, EA
Phillip B Chute EA Financial Inc
First Quarter 2017 Newsletter
After the tax filing season [Fifth Season of the year] ends we catch our breath and clean house. This year, however, a week after the deadline, our main computer imploded and we were down for several weeks with new equipment and software nightmares. We came to the realization that no matter how good the equipment is, whether it is Hewlett Packard or Dell servers, three years appears to be the life [or death] of the equipment and backup devices are never configured correctly. Accordingly, keep the short life in mind for your personal or business equipment.
Tax fraud is the latest demon on the horizon for most of us. The scamsters come from various sources; mostly the telephone and internet, I cannot recite how many times I have received phony calls from “”The IRS”” and somebody in Nigeria wants me to invest to get a million-dollar hung up inheritance or other device. I even had calls from people wanting to free my niece or to save a client from jail overseas. Lately there are new “”job opportunities”” on the computer offering huge salaries and benefits for home office applications requiring no experience”. If you receive calls or messages of suspicious nature delete it or hang up. If in doubt, call me, and we will review the nature of the inquiry for you. Above all, never offer information or money in any way unless you know the party is legitimate. Unless you are in collection status with the IRS for past taxes, never pay any attention to telephoned IRS demands for payment scams that are so intimidating. The IRS always corresponds by mail many times before collections are instituted.
We have been seeing many new clients these past years because of our successful web sites. We appreciate all good new clients but have rejected clients who relied on fraudulent returns in past years. By careful screening and proofing all returns the best we can, we have had only one audit [I had told the client his large deductions were suspect and he assured me he had backup receipts for everything claimed] over the past four years, which is only one of 1,200 returns. We had two audits in the prior two years but both were no-change audits because the client had perfect records. The IRS is certainly doing less audits than in prior periods, but this is a very low percentage and far below the norm. I would like to thank our clients for listening to us over the years to lower the possibility of future confrontations.
We did have three IRS audits last year, complements of other tax preparers who could not attend by lack of licensing. Most of the returns currently being prepared are either by people doing their own returns or people who are not capable or cannot legally represent their clients before the IRS. We had five requests for audit representation and turned one down because the client wouldn’t attend his own audit with us, and the other declined to find a cheap representative. This year, as with past years, we detailed proofed all returns before completion. This expensive step resulted in almost flawless work which results in fewer client letters and problems from the tax authorities.
Many of our clients have Subchapter S Corporations which dispense profits as officer’s salaries and dividends. Sub S Corps split the profits between officer’s salaries and a K-1 form to the owners/principals. An important point, which is missed by many clients, is that the split separates active income from passive income. Active income is from material participation in the operations and control of the business representing salaries paid to active ownership. The residual profits, amounts paid out tax-wise on partnership K-1 forms, is passive income which is nominally from invested capital. This income is not subject to Social Security Self-Employment taxes. It is important to have both elements in the business to be correct and audit proof. There have been only fraud-related audits of corporations in recent years but any day now, the IRS or the new administration, could zero in on these businesses to conform. While we are on corporate matters, an officer or owner cannot be on 1099 miscellaneous income in lieu of wages because they are truly an employee. Even board of directors people are on wages. Please contact us about this matter if you are subject to the above rules and we will handle your payroll requirements. I have testified in court about whether a client “managed his business as a corporate professional, and not a private person” and it can break a corporation to be on the wrong side of the fence when push gets to shove.
Although I retired as a stock broker, I still maintain insurance licenses and provide tax planning and investment planning for IRA’s, pensions and other insurance needs [insurance annuities still pay more than bank interest rates and are highly regulated by California insurance authorities for adequate reserves and ethical business practices]. Please call if you have any questions about your investments or need an IRA.
Continuous best wishes for this year. Don’t forget to give us a call if there are any problems or questions about your taxes or investments.
Phil Chute, EA
Phillip B Chute EA Financial Inc