In December of every year, I make a run to Deseret Industries to drop off my old clothes and furniture that I no longer use and want to donate. When I get there, they always give me a blank donation slip. I have to fill in the value.

Willy must do something similar because he asks the following question:

Q: Hi Tom, If I have a blank Donation slip given to me from a valid tax deductible place, how much can I take (within limits of my donations) from that one simple receipt? How much is too much, to avoid red flags?

A: The answer is that you should estimate what the items will be sold for by Deseret Industries, Goodwill, or wherever you drop them off. If the total of noncash donations for the year is under $500, you don’t have to fill out any special form and the IRS pretty much accepts the value. If more than $500, there is a simple form that your tax preparer will complete. The real answer to this question is to be realistic with the value. You might even want to step into the Goodwill store and get an idea of what they sell things for. I will tell you that they do sell designer jeans for more than other jeans. That I know because I do volunteer work at Deseret Industries and they always have us separate out the designer jeans.

Be sure to be fair in your judgment of the value of donated items. If you are, chances are good you won’t raise a red flag.

Warmest regards,

Tom

How do I get my 401(k) money out to start a business without being taxed on it? I must get this question at least twice a week, so it’s about time I answer it here on my blog. There are two possible ways to do this. The first is to borrow out whatever you are allowed by your company. Normally this is 50% of the value of the account. This is my preferred solution to this question.

Helena asks about the other possible solution.

Q: Can I set up a pension plan in a new C corporation, then roll my 401(k) into that C corporation and have the pension plan buy stock in the C corporation?

A: Potentially, yes. I say potentially because the IRS recently has been attacking this transaction. There are several companies who will set this up for you. Technically, it should work. The IRS is attacking it under their broad powers of collapsing transactions that only have a tax purpose. The new health care bill signed last week by President Obama includes a provision that may make this attack even easier for the IRS.

In that bill, the “economic substance” doctrine, which has been around for eons of time in the courts, was added to the Internal Revenue Code. The essence of this law is that if you cannot show a substantial non-tax purpose for the transaction, then the IRS can ignore the transaction. The fines they can impose are enormous – 40% of unpaid tax with no relief possible unless you can win your economic substance argument.

I am not a big fan of this transaction for many reasons. First, the obvious potential for the IRS to reverse it and assess penalties. Second, you now own your company through your pension plan, so when you eventually sell your company, all of the distributions will be taxed at ordinary income rates.

Third, the company is subject to tax on all of its earnings currently at corporate tax rates that reach as high as 35%.

So, I would suggest you either borrow out the money or pay the tax now on the distribution.

Warmest regards,

Tom

Nancy asks the following question about using IRA funds for real estate investing:

Q: I am interested in purchasing and holding small rental homes for rental income to increase cash flow in retirement. What are the advantages and disadvantages of owning these properties within a self directed IRA?

A: The only advantage to buying investment real estate in your IRA is that you defer the tax on your IRA until you retire. Now for the downsides to doing this.

1. You don’t get any of the tax benefits of real estate. This includes the benefits of depreciation and using your real estate losses to offset taxable income from other sources.
2. You substantially reduce your leverage. Banks don’t like to lend to IRA’s because you cannot guarantee the loan. Your interest rate will be higher and your loan to value will be lower.

For more one investing in real estate through your IRA, go to www.ProVisionWealth.com/products and click on School of Tax Strategy and get our course on investing in real estate through your IRA.

Warmest regards,

Tom

Vita asks a question that every stock trader should ask:

Q: What is the best entity to use for stock trading?

A: Like most questions, the initial answer is, "it depends." It really depends on how much stock trading you are going to do and what your goals are for your trading activity. Let me give you a few ideas that you can go over with your Tax Coach.

1. If you are trading casually, your gains and losses will be treated as capital gains and losses. This means that the losses can only be used to offset your gains (not other income) and your related expenses will be treated as investment expenses. In this case, a limited partnership or limited liability company (LLC) works great.

2. If you are trading professionally, you can elect to treat your gains and losses and being part of a business. Then you get to use your trading expenses to offset any income. These are the trading rules and you really need to sit down with your Tax Coach to determine whether you are a trader and whether you should make the mark to market election.

3. If you are a trader, the entity you use will depend on the rest of your situation and tax strategy. Again, your Tax Coach should be working with you to develop a comprehensive strategy.

If you don't have a Tax Coach who understands the trading rules, please feel free to call our office at 866.467.5809 or email us at cs@provisionwealth.com for a recommendation.

Warmest regards,

Tom

In our last School of Wealth Strategy call, we talked about building your wealth team. Afterwards, Michael asked the following question about building a team in a state where you don’t reside.

Q: How do I build a wealth team if I want to invest in a different state than where I live? How can I identify good team members if I don’t live there or is it better to primarily try to invest in your local area only? Can it be a good strategy to have rentals in different geographical states if they are managed well and cash flowing?

A: Building a great team is never easy. You have to find team members who you can trust and build a relationship with. This is true whether the team member is local or in another state. The single most important team member is your wealth coach. And your wealth coach can help you find team members anywhere. That is one of their primary functions.

It can be a good strategy to have properties in different states. For example, when I saw the Arizona market heating up a few years ago, I decided to start investing outside of Arizona. I chose Utah because it wasn’t overheating. What a great decision that turned out to be. Arizona has gone down in value and in rents and my Utah properties continue to do well.

I don’t suggest investing in just any state, however. Choose a state you are familiar with and even locations you understand. Make sure you do your due diligence on the market. Remember that becoming an expert at your investing is crucial to your success. It’s very difficult to be an expert in lots of different markets. I chose Utah because I grew up there and knew the market well. Work with your Wealth Coach on choosing your markets as well as your team.

If you would like more information on building a wealth team or finding a great wealth coach, contact us at 866.467.5809 or cs@provisionwealth.com

Warmest regards,

Tom

Pete asks the following question about paying expenses for a family member.

Q: Last year I paid my brothers real estate taxes to help him out. Can I deduct that expense from my income taxes? It is unlikely that he will ever pay me back.

A: I have to admit, when I saw this question I started chuckling. I like to see your realization that you are unlikely to be repaid. The short answer is that you can never deduct expenses you pay for someone else except in limited circumstances when they are for a dependent (like your children). The IRS is likely to call your payment of your brother’s taxes a gift (which it likely is).

There is one way you might be able to deduct this. If you treat it as a loan and you have a loan document that includes interest that both you and your brother sign and then later on your brother cannot pay it despite your serious collection efforts, you might be able to deduct it as a bad debt. The challenge is that you will have to make real collection efforts, including turning the debt over to a collection agency (which won’t make your brother too happy) and going to small claims court to collect the money.

It sounds to me like this is really a gift and maybe you should just call it for what it is. If you would like any help with documenting your loan, please feel free to call our office at 866.467.5809 and schedule an appointment with one of our CPA’s.

Warmest regards,

Tom

Here is a question that was asked recently by Vita about Social Security benefits:

Q: For those 65 and older and eligible for social security, are they still able to earn something (and if so, what is the annual limit)? How does having an IRA or an employer pension plan affect their eligibility for social security? Thank you!

A: Let's start but recognizing how absurd it is that the government punishes people for working. That's right. If you work "too much" you don't get all (or in some cases, any) of your social security payments. Still, the rules are not nearly as bad as they used to be. In fact, if you wait until your "full retirement age" then you can earn all you want and not lose any of your benefits. For those who were born between 1943 and 1955, full retirement age is 66.

If you take social security payments before you reach full retirement age, then your benefits are reduce by $1 for every $3 you earn in excess of $37,860 until you reach full retirement age. If you lose benefits because of your earnings, then your benefits will increase when you reach full retirement age to start paying you back for your lost benefits.

Only earned income counts. So, investment income, passive income and retirement income from pensions and annuities don't count and you can earn all you want of these types of income. So having an IRA or pension plan doesn't have any effect on your Social Security benefits.

For more about these and other social security questions, go to http://www.ssa.gov.

Warmest regards,

Tom

One of the great tax benefits available to investors is the depreciation deduction. What makes it so great is that you don't have to spend any cash to get the deduction. You simply get a deduction for a portion of the cost of the property each year, regardless of whether you bought the property for cash or used someone else's money to buy the property.

One of our School of Tax Strategy students, Elaine, wants to know about the depreciation on mobile homes. Specifically, she asks:

Q: I have a mobile home on property and I own. I have it rented. Is the mobile home depreciated the same as a regular home over 27.5 years?

A: I went out and did some research on this and struggled to come up with the answer. Fortunately, I have a great team member, our managing partner, Rob Deines. Rob not only came up with the answer; he came up with more. Here you go.

The general rule is that mobile homes are treated as regular homes and depreciated over 27.5 years. If the home is truly mobile, however, such as an RV, there is an argument to depreciate it over as few as 5 years.

Thanks to Rob for finding this. And thanks to Elaine for asking the question.

Warmest regards,

Tom

Robert Kiyosaki and I along with the rest of the Rich Dad Advisors enjoyed a terrific seminar yesterday in Dallas, Texas. We had over 1,200 attendees in person and 3,800 in 90 countries via on-line streaming. I met many wonderful people who are intent on improving their financial situation and taking back control of their wealth.

One of them, Mark, asked me the following question that I promised I would answer here on my blog:

Q: If I trade credit spreads with a Roth IRA, and I am not yet 591/2 and the account is less than 5 years old and I withdraw from the account, I pay a 10% penalty. Is there any other tax or fee? If not, wouldn't that be less than any other taxes?

A: Yes, it would be less than any other taxes if that were the case. For that reason, the IRS and Congress have made it clear that if you withdraw from your Roth IRA within 5 years of when you first form a Roth IRA, you will pay both regular tax and a 10% penalty when you make the withdrawal. This is even true if you are over 591/2 years old. So, don't do a Roth if you need the money within the next 5 years.

Thanks for all of the great questions at the KRLD event in Dallas. I hope to see many of you at the Gold vs. US Dollar event in Scottsdale this next weekend. It will be a life-changing event that will give you more power and control over your future than anything else you could be doing this weekend. So what are you waiting for? Sign up at http://www.provisionwealth.com.

Warmest regards,

Tom