The Decline and the Fall in the Wealth of Nations

Year End Tax Planning Updates

November 20, 2009

Reducing Property Taxes

Both residential and commercial properties have dramatically declined in value over the past twelve months. For many counties in California, there is still time to consider submitting an appeal to the local assessor's office to reduce the appraised value for the fiscal year ending June 30, 2010.

Applications need to be submitted by November 30 for most counties. For more information contact Cindy Hsieh.

Executive Gifts of Cars to Charity

We've all heard about getting the "maximum" charitable deduction when you give away your used vehicle to a local charity. This may not be a good strategy as the following facts will demonstrate.

Assume you acquired a vehicle for $100,000 and now after ten years, you've racked up a lot of mileage so the blue book value is only $10,000.

If you give your car to a charity, a flatbed truck will haul away your beloved machine to be sold at an auction. The selling price at an auction may be as low as 50% of what you'd get by selling the car yourself. Instead, you may want to employ your son or daughter to do the selling and pay them a commission, and then give the cash to the charity. This alternative would yield more for you and more for charity.

If your car is used in a business, the argument changes dramatically against a gift of the vehicle. Depreciation rules for luxury cars are limited, and may have only reduced the tax basis of the car by $2,500 (estimate) per year. Tax basis is the original cost less the total depreciation you've claimed over the years of use. After 10 years, the car's tax basis will still be in the $70,000 range.

If you sell your car for $10,000, you can report a $60,000 ordinary loss on your tax return assuming the car is used 100% in your business. The $60,000 loss will yield a tax savings of $24,000, assuming a 40% federal and state combined tax rate. You'll also have the $10,000 cash.

If instead, you give away your car to charity, the maximum charitable deduction you can claim is the fair market value of the car. Due to past abuses in this area, the current rules limit this to the actual amount the charity receives from the sale at auction. The charity may get $10,000 at an auction, but more likely, your car will only sell for $5-6,000 maximum. The tax deduction for $6,000 is only worth $2,400, using the 40% tax rate.

Moreover, the deduction for a year end gift is uncertain because the charity will not be able to inform you until the vehicle is sold in the following year which may be close to, if not, past April 15. They will provide you with form 1098-C for the year you made the gift to attach to your return. Clearly, selling your car to a third party and then making a cash donation to the charity would be more beneficial to all parties, except the IRS!

See Both IRS Publication 526, Charitable Deductions, and Publication 561, “Determining the Value of Donated Property,” for details.

Net Operating Losses

Currently, net operating losses on your federal returns can be carried back two years and carried forward for twenty years.

Recent legislation signed into law on November 7, provides for a five year carryback period for losses incurred in 2008 or 2009. Therefore, losses from 2009 can be carried back to 2004, and then carried forward into subsequent years to obtain immediate refunds. Alternatively, the taxpayer can still elect to forgo the carryback period and instead, carry the loss forward for twenty years.

Homebuyer's Tax Credit for $8,000

Another provision enacted in the November 7 bill covers first time home buyer credits of up to $8,000. The act extends the tax credit to homes purchased between November 7, 2009 through April 30, 2010.

If a home was acquired in 2009 prior to November 7, taxpayers can actually amend their 2008 return to obtain the refund immediately. The home would be treated as though it was purchased on December 31, 2008.

The $8,000 credit is phased out for high income earners for purchases before November 7, 2009:

For single filers, the credit is phased out from $8,000 to zero as income increases from $75,000 to $95,000.
For married filers, the credit is phased out from $8,000 to zero as income increases from $150,000 to $170,000.

For homes acquired after November 6, 2009, the phase out is as follows:

For single filers, the credit is phased out from $8,000 to zero as income increases from $125,000 to $145,000.
For married filers, the credit is phased out from $8,000 to zero as income increases from $225,000 to $245,000.
For all taxpayers, the credit is completely phased out for homes costing more than $800,000.