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CURTIS, BAILEY, EXELBY & SPOSITO, P.C.
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Recent developments that may affect your tax situation
Many of you may find it difficult to keep track of developments that affect your tax picture. The growing volume of complex, new developments can overwhelm even a knowledgeable taxpayer. The following may help to keep you up-to-date on key developments during the third quarter of 2001. The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please email or call us at Curtis, Bailey, Exelby & Sposito, P.C. for more information about any of these developments and what steps you should take to take advantage of favorable developments and to minimize the impact of those that are unfavorable. Tax relief for victims of Sept. 11 terrorist attacks. The IRS granted some forms of tax relief to victims of the Sept. 11 terrorist attacks. The deadlines for filing certain kinds of returns were extended, and penalties for failure to make some types of deposits were waived. Also, victims in places designated as disaster areas can choose to deduct their uninsured casualty losses on their 2000 returns instead of their 2001 returns. This choice (which requires filing an amended return for 2000) may generate a quick tax refund. Standard deductions, exemptions, and tax brackets will increase for 2002. The individual tax rate brackets, the standard deduction, and the exemption amount all are adjusted annually for cost-of-living increases. Based on government CPI figures, “unofficial” but highly reliable estimates of the adjustments for the year 2002 show increases in many key figures. For example, for 2002, the exemption amount (the amount you can claim for yourself, and if applicable, spouse and each of your dependents) will be $3,000 (it's $2,900 for 2001), and the basic standard deduction will be higher as well. For example, it will be $7,850 for joint filers ($7,600 in 2001), and $4,700 for singles (up from $4,550 in 2001). The tax rate brackets also have been adjusted. Combined with the one-half of one percent decrease in the top four tax brackets for 2002, these adjustments could mean a drop in your tax bill if your income for 2002 will be about the same as for 2001. For example, for 2002, a married couple filing a joint return with $46,700 of taxable income will pay $6,405 in federal income tax. That's $787.50 less than the $7,192.50 they will pay for 2001 on the same amount of taxable income ($187.50 less if you factor in the couple's receipt of a $600 rebate/credit for the 2000 tax year). Research credit denied for software development costs. A credit is available to companies that increase spending on research, but the IRS and some courts have taken a tough view of how innovative software must be for the development cost to be eligible for the credit. A recent court decision supplies a case in point. Affirming a district court's conclusion, the Seventh Circuit has held that a corporation could not claim the research credit for the cost of developing an information system that integrated order processing, billing, cash processing and maintenance. The appellate court held that the software developer's abandonment of the source code was evidence that development of the system wasn't innovative enough for the software to qualify for the credit. Federal per-diem rates revised effective October 1. Reimbursements of an employee's business travel costs (lodging, meal and incidental expenses) at a per-diem rate are payroll-and income-tax free if made under an “accountable plan” and the daily rate doesn't exceed the federal per-diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. These per-diem rates, which vary by travel destination, are changed annually, generally effective for the last quarter of each year and the first three quarters of the next year. The per-diem rates for the October 1, 2001 through September 30, 2002 period have been issued. For the last three months of 2001, the taxpayers may consistently use either the new per-diem rates or those that were in effect for the first nine months of 2001. The simplified per-diem rates, which assign one per-diem to high-cost areas within the continental U.S., and another to non-high-cost areas, also have been revised (and the list of high-cost areas has been modified somewhat). Effective October 1, 2001, the new high-cost-area rate is $204, and the rate for non-high-cost areas is $125. These rates were $201 and $124 respectively for the October 1, 2000 through September 30 2001 period. For the last three months of 2001, taxpayers may consistently use either the new per-diem rates and high-cost localities, or those that were in effect for the first nine months of 2001. Full deductions OK'd for cost of supplying jet for vacation travel. A business executive whose time is extremely valuable may decide to travel via the company jet instead of enduring the frustration and delays of commercial travel. The Eighth Circuit Court of Appeals has upheld a Tax Court decision that a corporation could deduct in full its expenses associated with providing an airplane for executive employees' vacation flights. The company's deductions were not limited to the amount taxed to the employees as compensation due to the flights. Falling interest rates have a big impact on tax and estate planning. Lower interest rates affect the income, estate and gift tax value of many types of transfers. In many cases, the drop in rates produces favorable results. One example is the private annuity. In the typical private annuity transaction, a parent transfers property to his child in return for that child's unsecured promise to pay the parent a fixed, periodic income for life. If the fair market value of the property transferred equals the present value of the annuity under an IRS valuation table, there is no gift tax due. Entering into a private annuity when interest rates are lower results in a lower annual payment amount that the younger family member will have to make to the older family member to prevent a gift from arising on the transfer. Note, however, that lower rates may result in higher tax costs in some types of sophisticated transactions. Final IRS regulations allow automatic filing extensions for estate tax returns. The estate tax return normally is due 9 months after the date of the decedent's death, but many estates request filing extensions. The IRS has acknowledged this fact by issuing final regulations that allow the executor of a decedent's estate to get an automatic 6-month extension of time to file the estate tax return beyond the regular due date.
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