Tax Tips Blog

Dave writes:
I’ve been reading and enjoying your tax tips blog.

I have a question about wash sale and mutual funds/etfs.

I just sold shares of Vanguard’s VPACX mutual fund (based on the MSCI Pacific Index) at a loss. To avoid wash sale rules and keep my capital loss, what am I allowed to buy within 30 days? Can I buy shares of VPL, Vanguard’s Pacific ETF which based on the same index as VPACX (and is actually a different share class of the same fund)? If not, what about the ADRA ETF, which is based on the Bank of New York’s Asia 50 ADR Index? The latter has significant overlap in holdings with VPL/VPACX, but has different allocation and some different positions.

Thanks,

David

My reply:

Hello David!  Thanks for your kind words about my blog.

You asked a very good question.

As I’m sure you’re aware if you sell a security at a loss your tax loss is disallowed if at some point during the 30 days before you sold the security or 30 days after you sold the security you purchased “substantially identical” securities.  These same rules apply to loss from sales of mutual fund shares. In fact, if you are automatically reinvesting your dividends, wash sales can become common.  Any disallowed loss due to the wash sale rule is added to the basis of the replacement shares purchased within the forbidden 61-day period.

Stocks issued by one corporation are not considered substantially identical to stocks issued by another corporation; however mutual funds aren’t as clear cut.  With mutual funds the IRS has taken the position that each transaction needs to be evaluated separately; thus they have not issued any clear guidelines as to what they will ultimately consider “substantially identical” and what they will not.  In other words, this is something that you’re going to have to make a decision on and document your reasoning in your personal tax records, just in case the IRS were to ever question it.

Some people take the view that no mutual fund is “substantially identical” to another, but I don’t agree.  It’s my belief that the wash sale rule is based on your position in the market.  Thus, in my opinion, two different mutual funds or ETFs that are based off of the same index and/or hold substantially the same securities would be considered “substantially identical” and be subject to the wash sale rules.

I hope this helps you make your decision.

Best wishes,
Gina

This post is not directly about taxes, but instead is directed toward anyone who has considered working at home. Me and several of my clients, both men and women, have chosen to work at home and now wouldn’t consider going back to an office outside the home. Especially with gas prices continuing to climb, if working at home is an option for you in your profession, you may want to look into more carefully.

In doing your research please consider reading the book, “Worth More Than Rubies. This book is about women developing business at home and being there full-time for their families, but it applies equally well to men. The book has just been accepted into Amazon.com and I am helping Kathie Thomas, the author and my friend, promote this book. Her book will be available forever, but this promotion will only last for one day.

Her promotion launch is taking place this Friday (Australian time) and anyone who purchases her book at Amazon.com on that day will be eligible for over $1,500 worth of gifts, contributed by a group of business owners, including myself who are showing their support of her book.

Here are the details: Special offer (24 hours only): From midnight 27th June 2008 AEST (10am 26th June - 9.59am 27th June US EDT)

By Invitation Only!

Introducing…..”Worth More Than Rubies” is all about women (or men!), just like you, who want to be home for their families, while still contributing to the household income. This book will inspire you and give you ideas to return home to work and the gifts below should help you on your way with various aspects of your business.

What you will learn in Worth More Than Rubies

• The Value of a Work At Home Mom
• The value of women working at home and being present for their families
• The benefits both children and spouses receive from a mother home fulltime.
• Cost savings from being at home.
• Examples of connections you can make outside of the home so you don’t feel all alone.
• A list of 64 different types of businesses that you can operate from home,… and much much more!

If you purchase a copy of “Worth More Than Rubies” which retails for $17.95USD at Amazon.com during the 24 hour period of 27th June Australian time (or from 10am 26th June US EDT) then you will also be be eligible to collect $1,500 worth of giveaways, put together especially for this promotion.

You can see a sneak preview of what’s waiting for you by clicking here. And once you have purchased a copy of the book you can enter your details, along with your Amazon receipt here to receive your free gifts as a thank you for participating in this launch.

Just click on the Amazon.com logo and you’re on your way!

Best wishes, Gina

Ebtehal writes:

I just started LLC company. I hired only one employee as part time for 3 months. How I should deduct his social secuirty and when and where should I submit it. If he make more than $102,000 from his full time job over the 9 months. Should he still pay Social security tax.

Thanks,

Ebtehal

My reply:

Hello Ebtehal, thanks for visiting.

Payroll is more complex than most new businesses realize.  I really do not recommend that any new business do their own payroll.  I wrote a post a couple of years ago about this, which you can read here:  http://glgcpa.com/blog/2006/10/09/payroll-headache/

The first thing you should do is obtain a copy of Circular E (publication 15) from the IRS website, which you can find here:  http://www.irs.gov/pub/irs-pdf/p15.pdf

If you don’t have a Federal Employer ID number you’ll have to get one of those too.  You can do that online here:  http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

Then locate the website for your state department of labor and read their rules.  Often times you need to inform them when you hire someone.  In addition you will have to set up accounts for withholding, if applicable, and unemployment compensation.

When you hired this employee they should have completed Form W-4 and I-9.  The information contained on these forms and Circular E will tell you how to withholding, how much to withhold and when you need to deposit the Federal amounts to the respective Federal authorities.  You’ll have to get the state information from your state department of labor.

It doesn’t matter if your employee is making more than $102,000 or $202,000 from some other job your employee might have - you are still required to withhold at the specified rates.  Then at the end of the year, the employee can apply for a credit of any over withholding on their individual tax return.

My best advice - get someone to help you and fast.

Best wishes,
Gina

A writes:

Dear Gina  :

I shall be grateful if you could please enlighten me on the following issue.

The background : A startup had engaged an independent contractor on an assignment which ran for a few months.  The compensation was a mix of cash and shares as stock grants (valued at a mutually agreed amount, substantially higher than the par value).  The contractor has still not taken the shares.

The query : When does the company issue a 1099-MISC to the contractor … only when the shares are issued?

Thanks,
A.

My reply:

Hello and thank you for visiting.  You’re really asking two questions, the first is easy and the second cannot be answered with the information you provided.

Form 1099 must be issued to all independent contractors for the services they rendered, if that amount is over $600 for the year by January 31 of the following year.

As for the “stock grants” this sounds like a stock option, but without reading the contract I wouldn’t know for sure if they are grants or options and if so what kind.  Providing stock as compensation is an extremely complex part of the tax code, especially if it is being given to an independent contractor.  It is also an area of frequent audit.  Thus, the best thing for you to do is to speak to the person who is in charge of payroll for the startup.

Best wishes,
Gina

Lydia writes:

Steve writes: I am starting a business in California.  Since I will only be doing business in CA, why do I need a Federal TIN, versus a CA Tax ID #.  Is there a law or a tax code covered by a law that requires a TIN for state only businesses?

Thank you for your assistance.

Steve

My reply:
Steve,

Hello! Since California is part of the U.S. any business in CA is also governed by Federal law. Federal law requires that you pay Federal taxes, when necessary. In order for you to file information returns (when no tax is due) and tax returns (when tax is due) you will need a Taxpayer Identification Number (TIN).

The type of Taxpayer Identification Number (TIN) depends on your business entity and whether or not you have employees. In general it works as follows:

* Sole Proprietorship (or LLC taxed as a sole proprietorship) with no employees - you can use your Social Security Number (SSN) as your TIN
* Sole Proprietorship (or LLC taxed as a sole proprietorship) with employees - you will need an Employer Identification Number (EIN) as your TIN
* Any other business entity - you will need an EIN

If you need an EIN you can apply for one online here: http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

Best wishes,
Gina

Mark writes: I have a side business with no employees. My understanding of the solo 401k is that you can contribute 15k initially and then 25% of your income. My side business nets 12k-15k. Would I be able to, after paying self employment taxes, contribute the remaining amount in into the solo 401k. Also, I contribute to a 401k through my other job as well. Would I be able to max it out as well?

Thanks for your help,
Mark

My reply: Hi, Mark thanks for visiting! Employee elective deferrals to a solo 401(K) plan are limited to $15,500 for 2008. This means that all of your employee elective deferral contributions for your 401k from all of your employers including your solo 401k from your sideline C business are limited to $15, 500.

However, there are two contribution parts with a solo 401(k). First, you can contribute up to 100% of the first $15,500 of your 2008 compensation or self-employment income ($20,500 if you’ll be 50 or older at year-end). Second, you can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income.

Because of these two parts you could make employee elective contributions of $15,500 to your 401k at your regular job (assuming your compensation is high enough) and then contribute based on the profits of your sideline business.

But I think you should look into the SEP for your sideline business because you can accomplish the same thing with less paperwork.

Best wishes,

Gina

Katy writes: I was reading IRS Pub 535 (Business Expenses), and in chapter 7 it says, “Self-Employed Health Insurance Deduction”…The insurance plan must be established under your business.”

What does “established under your business” mean?

My reply: Hi Katy, thanks for writing.

This means that your business must have established a plan to pay your health insurance premiums.  Your business does not have to establish the insurance policy itself.  You can purchase a policy from any source.

If you happen to have more than one business, you must decide which business will establish this plan, as the premiums deduction is limited to the net profit of the business that has established the plan.  You can read a little bit more about this in the instructions for Schedule A of your 1040 packet, or if your an S-Corporation, the instructions for Form 1120S.

In addition, you may also be interested in my book, Confidential Compensation, which is in the process of being published.  This book explains a tax strategy of how paying your employees with medical expenses can actually save both you and your employees money.  An electronic version is available now from mobipocket and the print edition should be available within a month or so from several online retailers such as Amazon and Barnes and Noble.  If you’re interested, you can learn more about it, from the mobipocket sales page.

Best wishes,

Gina

Tom writes:

My dad is age 57, and will be retiring in 3 months. He will be eligible to take a lump sum distribution from his company’s pension plan. If he does a direct rollover of the pension plan moneys into an IRA, will he be able to make withdraws from the IRA without the 10% penalty, i.e., separating from service after age 55? Or does he have to take withdraws from the IRA subject to Section 72(t) rules to avoid the 10% penalty?

My reply:

Hello Tom!  Congratulations to your father!

As you know if he were to take the lump sum distribution from a qualified retirement plan upon retirement, since he is 57 that distribution would avoid the 10% penalty.

In general, if he were to rollover his pension, instead of taking a distribution, then he would have to abide by the rules of the rollover.  If after he has established an IRA from his pension he wanted to take a distribution, in order to avoid the 10% early withdrawal penalty he would have to find another exception.  Some of those exceptions include:

• Distributions made as part of a series of substantially equal periodic payments for life (as you referred to)
• Distributions made to unemployed individuals for health insurance premiums
• Distributions due to total and permanent disability

Since I have not seen your father’s past tax returns or retirement plan options, the advice given above may not be accurate or complete for his specific situation; thus, I advise your father to consult with a qualified tax professional before making a final decision.

Best wishes,
Gina

Stuart writes:
I have a question about the alternative motor vehicle credit. The Ford dealer told me I can take the tax credit for my 2008 Hybrid Escape each year I have it. I’m hearing from others the credit is just for they year purchased. Which one of these is correct?

My reply:

Stuart,

Thanks so much for writing.  As of right now, the original purchaser of a new 2008 Ford Hybrid are allowed an alternative motor vehicle credit.  If you were to purchase a 2WD version you would be ELIGIBLE to take a credit up to $3,000 on your 2008 tax return.  If you were to purchase a 4WD version you would be ELIGIBLE to take a credit up to $2,200 on your 2008 tax return.

Just because you’re eligible to take the credit does not mean you’ll be able to use it.  This credit is not allowed to reduce your regular income tax liability below zero.  If you are eligible to take multiple tax credit, this tax credit is taken last after all other credits have been taken.  If your alternative vehicle credit exceeds your maximum dollar limit, the excess is NOT refundable, nor can you carry it forward to future years.  In addition, if you sell your car before the end of it’s useful life (as determined by the IRS), the amount of the credit that you were able to claim may have to be recaptured.

So the short answer is, the salesman was wrong.  The credit on this car is actually very good, but it’s a one year shot, which may come back to haunt you if you don’t like the car enough to hold onto it.

Best wishes,
Gina

P.S.  I wrote an article about this a couple of years ago, I used $3/gallon for gas and I’m paying almost $4/gallon now, so time is changing things, but the theory still holds.  You can read it here, if you like:
http://glgcpa.com/blog/2006/07/21/should-i-buy-a-hybrid/