| Newsletter |
| May 2005
Supreme Court gives IRAs protection in bankruptcies The U.S. Supreme Court issued a unanimous decision in April that will protect individual retirement accounts (IRAs) from creditors in bankruptcy proceedings. Until this decision, company pensions and 401(k) plans were protected under federal law, but IRAs were not.
The Supreme Court reversed a lower court’s decision which had held that IRAs were not protected because individuals could withdraw money from their IRAs at any time. The Supreme Court ruled that the 10% early withdrawal penalty serves as a substantial deterrent that keeps taxpayers from accessing IRA funds before age 59½. Therefore, IRAs are in the same category as other retirement plans and should be protected from creditors when bankruptcy is filed.
How to help your child buy a home
Make a gift. If you want to make a gift to your child, you can give up to $11,000 per year, per person completely tax-free. You don’t need to file a gift tax return, and your child won’t have to report the gift on his return. (Gifts are generally not taxable for income tax purposes.)
If you are married and your spouse joins in the gift, you can effectively pass up to $44,000 each year to your married child and his or her spouse. (Consult with us before making gifts exceeding $11,000 per person.)
Co-sign a loan. If you’re not in a position to make an outright gift to your child, consider helping with a loan. If your child’s income is too low to qualify for a home loan, you can co-sign the mortgage. There may be gift tax consequences to co-signing, and you will be responsible to the mortgage company if your child can’t make the payments. To maintain your credit rating, ask the mortgage company to send you a copy of any late-payment notices.
Lend the money. Another option is to lend money directly to your child. If the loan is to carry interest, it should be recorded as a lien on the property to preserve the interest deductions for your child. Be careful about low- or no-interest loans. The IRS will treat the parents as having received interest income if the loan is over $100,000, or if the loan is between $10,000 and $100,000 and the borrower has investment income exceeding $1,000 per year. If your loan is under $10,000, the IRS shouldn’t tax you on uncollected interest.
Consider co-ownership. Yet another option is to co-own the property with your child. Typically, the parent makes the down payment and the child pays the mortgage payment, utilities, taxes, and other ongoing expenses. The home is jointly owned, and the family agrees on a split (often 50/50) of the appreciation in value when the home is sold.
If the child makes all the mortgage and tax payments, there should not be current tax consequences to the parent. When the home is sold, the child may qualify for the home-sale exclusion for gain on his ownership portion, and the parent would be taxed on the gain on his share of ownership.
If you would like to discuss this topic in greater detail, give us a call.
Big change for Series EE savings bonds Effective May 1, 2005, interest rates on new Series EE savings bonds will be fixed instead of being adjusted every six months. The change will not affect bonds purchased prior to May 1.
Previously, rates paid on Series EE bonds were adjusted each May 1 and November 1, based on rates then paid on five-year Treasury notes. Now the interest rate paid on new purchases of Series EE bonds will be fixed and will be based on the 10-year Treasury note.
The rate change for Series EE savings bonds will not apply to Series I bonds. These bonds have a two-part interest rate, one part fixed and one part adjusted every six months based on inflation. IRS raises its interest rates The IRS will charge 6% interest on individual and corporate tax underpayments for the second quarter of 2005 (April 1 through June 30). Large corporate underpayments will be assessed interest at 8%. On tax overpayments, the IRS will pay individuals 6% and corporations 5%. The interest paid on corporate overpayments exceeding $10,000 will be 3.5%. All of the rates are one percentage point higher than rates for the first quarter of 2005.
IRS releases vehicle depreciation limits The IRS has issued the depreciation limits for business cars first placed in service during 2005. For passenger cars, the limits are $2,960 for 2005, $4,700 for 2006, $2,850 for 2007, and $1,675 for each year thereafter. The limits for light trucks and vans are $3,260 for 2005, $5,200 for 2006, $3,150 for 2007, and $1,875 for each year thereafter.
Different limits apply to electric vehicles, and some nonpersonal-use vehicles are exempt from these depreciation limits.
Note that first-year depreciation limits for vehicles placed into service in 2005 are considerably lower than the limits for 2004. The reason: 50% bonus depreciation for new business equipment purchases is no longer allowed. New rules also apply to heavy sport utility vehicles (SUVs) used in business. SUVs built on a truck chassis and weighing more than 6,000 pounds are exempt from the depreciation limits given above. They are, however, subject to a maximum first-year expensing limit of $25,000.
If you need additional information about depreciation as it applies to your 2005 business equipment purchases, give our office a call.
This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, please contact us.
Home | Accounting Services | Bookeeping Services | Payroll Services | Tax Services | Planning | Consulting Services | Tax Return Preparation J. Aviles CPA , P.A. 11804 N. 56th Street Temple Terrace, FL 33617 © Copyright 2005 J. Aviles CPA , P.A. |