September Newsletter

As summer draws to a close school bells are ringing once again. This month’s newsletter covers an array of topics from the important concept of understanding Fair Market Value, to a recap of the recently passed legislation regarding federal student loan programs. Also included is a general interest article regarding a new social media phenomena, called Tumblr, used by millions each month.

As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

Understanding Tax Terms: Fair Market Value

A dozen tax planning triggersIn the thousands of pages of U.S. Tax Code, there is a collection of terms used by the IRS that is unique to federal income taxes. One of the more important to understand is the phrase: Fair Market Value or FMV.

“Fair market value (FMV) is the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.”

Source: IRS Publication 561

This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes.

When is it Used?

FMV is used whenever an item that is bought, sold, exchanged, or donated has tax consequences. The most common examples are:

Circle Buying or selling your home or other real estate
Circle Buying or selling personal property
Circle Buying or selling business property
Circle Establishing values of other business assets like inventory
Circle Valuing donations of personal goods and property like automobiles
Circle Valuing bartered services
Circle Valuing transfer of business ownership
Circle Valuing the assets in an estate of a deceased taxpayer

Sound simple? As you can imagine FMV can be open to wide interpretation and disagreements with the IRS that have led to some very high-profile tax cases. For instance, the IRS believes the FMV of the estate of pop icon Michael Jackson is over $900 million while the representatives of the estate think its FMV is $7 million. This difference could lead to additional taxes and penalties of over $700 million!

What you need to know

While you don’t probably own anything close to the value of Michael Jackson’s estate, properly documenting FMV can help you defend against any potential IRS challenges. Here are some suggestions to help you defend your FMV determinations.

Check Properly document donations. Charitable donations of non-cash items are a big area that FMV is challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt (confirmation) of your donations.
Check Donate capital items like automobiles to the correct places. You may use the FMV of a donated automobile but only if the charity you donate the item to will use it themselves, or will provide it to someone who will use it. Websites like Kelley Blue Book ( can help establish the value of your vehicle when you donate it. Otherwise, the FMV of the donated vehicle will be limited to the amount the charity receives when they re-sell it.
Check Get an appraisal. If you sell a small business, collection, art, or capital asset make sure you have an independent appraisal of the property prior to selling it. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS.
Check Keep copies of similar item transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you bartered or sold, it can readily support your FMV claim.
Check Take photos. The condition of an item is often a key determinate in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount.
Check Keep good records. Keep copies of invoices for major purchases. Retain bills for any improvements. Make sure your sale of property includes a dated bill of sale that clearly states transfer of ownership and amount paid for the item.

With proper planning, establishing the fair market value of an item sold or donated can be done in a reasonably defendable way.

Tax Implications of Long-Term Care Insurance

Protecting Your Kids from Identity TheftWe’re all living longer. Health insurance premiums keep going up over the rate of inflation. Nursing home and assisted living costs are draining the assets of the elderly. What can you do? The answer for many is long-term care (LTC) insurance.

What is it?

In short LTC insurance pays for personal care services if you can no longer care for yourself due to some prolonged illness, disability or cognitive problem. These policies help cover the cost of maintaining a quality of life when your long-term prospects require the help.

There are many versions of LTC insurance and what is covered. There are also many points of view on what is the correct type of coverage and whether LTC policies are cost effective. The purpose here is not to judge whether LTC insurance is right for you, but to let you know that there are federal tax benefits with LTC insurance that should be considered in your evaluation of an LTC policy.

What you need to know

Check Income received from LTC insurance payouts is usually not taxable.
Check Premiums paid for LTC insurance can be tax deductible
Check Be careful of the gotchas. Among other things, to be a qualified LTC policy the policy must have guaranteed renewal and have no cash surrender value. You must also be “chronically ill” per the IRS definition to have benefits be non-taxable.
Check The amount of the premium deduction can be limited. Remember, medical expenses are itemized deductions that may only be taken when they exceed 10% of your adjusted gross income (7.5% if 65 or older). In addition, the deduction is limited by your age. Here are the annual premium limits for 2013:

Long-term Care Premium Deduction
Age Premium limit
Age 40 and under $360
Age 41 – 50 $680
Age 51 – 60 $1,360
Age 61 – 70 $3,640
Over age 70 $4,550

Tumblr: What is it?

A dozen tax planning triggers

Follow the world’s creators

Tumblr lets you share everything”

Source: Tumblr website

When Yahoo announced the $1.1 billion acquisition of Tumblr a couple of months ago, most over 40 years old said, “What is Tumblr?”, while those under 25 may have let out a loud groan. So what is Tumblr, and why should you care?

Tumblr is a free simplified blogging tool that is used to share photos, show short videos, and create posts that are readily viewed by friends through everything from computers to smart phones. It is also one of the most popular places on the internet. There are over 130 million Tumblr blogs, over 50 billion posts, and more than 13 billion views during a typical month.

The Tumbler experience begins with a flexible dashboard that the user modifies to post their own photos and videos as well as re-blog materials from other users. Tumblr use tends to fall into three general areas: reporting a person’s daily activities, re-posts of things found that friends and others might find interesting, and a life-style or theme collection.

Why so popular?

Tumblr takes the problem of traditional blogs and makes it more useable. It is a way to collect interesting things and share it with friends and others in the Tumblr community. There are popular Tumblr sites that collect humorous charts, pictures of cats, or images of earth from outer space. In addition, artists and photographers are seeing it as an easy way to display their creative works and share them.

Why should you care?

Check Businesses. The Tumblr creators started the service as an easier way to blog. Many small businesses are finding ways to use Tumblr to stay connected with their clients and customers through this easier to manage blogging tool.
Check Advertisers. The Tumblr popularity means there is a new way to advertise and reach very specific target audiences. Yahoo is sure to explore ways to capitalize on this opportunity.
Check Parents. This free simplified blogging service is where kids are going. As places like Facebook receive attention from unwanted friends and multi-generational access to one’s personal Facebook community, tools like Tumblr remain more intimate. The good news is there is a content control flag that will block inappropriate material from young users. But it is also an easy way for you to connect with others with common interests.
Check Kids. Like it or not, Tumblr is now one of their social media tools of choice. If your child is browsing the net, they may well be viewing Tumblr sites that interest them. They especially like the re-blogging feature that lets them share their discoveries with friends.

Here are some examples of how Tumblr is being used:

Student Loan Programs Get a Fix

Creative Summer JobsAs students head off to college, one bill recently signed in Washington D.C. makes federal student loan interest rates a bit more predictable.

With over $1 trillion in student loan debt, the cost of student borrowing is quickly becoming a major economic issue in the United States. The rates for many popular government sponsored loan programs doubled on July 1st from 3.4% to 6.8%. Since some 18 million loans could be affected by this change, Congress determined it was necessary to address the scheduled change.

Under the recently passed legislation, the rates for these loans will now be set against a market rate formula with a cap on the highest possible rate. The hope is that by making the rate a formula, it removes politics from the process and allows families and students to better plan their costs. Specifically, interest rates will be set annually with the rate linked to the 10-year Treasury note rate. The rates will be as follows:

Fall 2013 rates Maximum Rate Cap
undergraduate 3.9% 8.25%
graduate 5.4% 9.50%
parents 6.4% 10.50%

With the passage of this law, approximately 11 million loans will see an average interest savings of $1,500 according to the White House.

While the legislation provides some certainty in student loan rates, there are already rumblings that future legislation is forthcoming. So stay tuned.

As always, should you have any questions or concerns regarding your situation please feel free to call.

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