Broker Check

March 31, 1999

Merry Olde England Begins the Modern Tax System

          Tax issues are at the heart of English history.   Lady Godiva rode naked  in the streets to protest (successfully) her own husband’s oppressive taxes.  William the  Conqueror compiled the Doomsday  Book, a  survey of  all the property in England in order to prepare a tax system.

          The first modern tax system  was the “aid”  the King requested from  the Barons.  “Aids” could reach the wealth of the whole nation, so charters such as the Magna Carta arose to restrict the King’s tax power. New taxes could be collected only by consent and at first no one could consent for another.

          But the House of Commons began to approve these taxes collectively, and bargaining for taxes between the  King  and the nobles  started   parliamentary government. Such bargaining became the essence of politics. Taxation was granted only for a year, so that bargaining began  anew  each  year.  “The separation  of powers” meant that the King could spend, not tax, while Parliament could tax, not spend.   This was considered an  essential  safeguard  of  freedom.   Today,  the principle means something entirely different.

          The Magna Carta provided for internal free trade, from which the right  of free travel derives and because Kings were so aggressive, military taxes could be raised only for strict “defense”.

Auto Mileage Drops on April 1

          No, it’s not an April Fool’s joke, for the first time Treasury is reducing the standard mileage allowance for business driving. The rate falls to 31¢ per mile as of April 1. Until then, it’s 32 1/2 ¢ per mile.

IRS Rates Increase

          Starting April 1, the IRS will pay individuals 8% and corporations  7% on refunds. If a corporate refund exceeds  $10,000, the rate on the excess falls to 5 1/2%. On balances due to the government, the IRS will charge 8%.

IRS Changes Netting Procedure

          The IRS has some relief for taxpayers on interest netting, offsetting  interest owed on back taxes with interest that IRS  owes  them  on an  overpayment  for another tax year. The Service will allow netting in limited situations for interest that accrued prior to   October 1, 1998. Rules are in Revenue Procedure 99-19.  The IRS will have details  later this year on the netting procedures for interest accruing on or after October 1, 1998.

Taxpayer May Claim Home Sale Exclusion For Residence Owned By Revocable Trust He Created

          A private letter ruling concluded that the  owner  of  a  revocable trust that holds title to a home is treated as the property’s owner for purposes of the home sale exclusion. As a result, the taxpayer is able to claim the up to $250,000 home sale exclusion (up to $500,000 for qualifying married taxpayers filing jointly) if the taxpayer owned the home (individually or through  the trust)  and used  it  as a principal residence for at least two of the five years preceding the sale.  However, the full  exclusion  is available only if the  taxpayer  did not use the exclusion on a previous home sale within the two year period ending on the sale date.

Bull Market’s a Bear on Taxes

          Investors are discovering the mean side of a bull market. Even with the new, lower capital  gains tax  rates, many  will  have to share a large chunk  of their investment profits with the U.S. Treasury. And figuring how much to pay is more complicated than ever.

          If you held stocks or mutual funds for at least a year before selling, you pay a 20% tax on your profits. If you’re in the 15% bracket, you pay 10%.  But, if you sell in less than a year,  profits are taxed at your higher ordinary  income  tax rate! This tax consequence may surprise those caught up in the Internet stock craze.  A common misconception is because they’re dealing in stocks, they automatically get the new low capital  gains rates.   Not so,  what  they  do  not understand is that short term gains are treated as ordinary income.

          The  Colonial Group, a   Boston fund  company estimates   mutual  fund investors will pay about  $40 billion in capital gains taxes, up 18% from last year, despite lower capital gains rates.   The reason is because of heavy trading by some mutual funds. Mutual funds are required to distribute their stock profits, otherwise they will be taxed on them as well as their shareholders.  Worse,  some  investors will pay taxes on funds whose share prices declined from last spring’s highs.

          There  is  also  a recordkeeping nightmare:   keeping  track o f  an   active portfolio.  To figure capital gains and losses, you must match every stock you sold in 1998 with a purchase and determine the correct tax for each and every trade. If you fail to keep track,you might have to pay the brokerage firm to reconstruct your trades.   If  you are dealing in  mutual funds you must keep track of each dividend you received  and whether  you reinvested it by purchasing more shares or not. Each  action  or inaction you did as a mutual fund investor affects the cost basis of your investment.

          If you have any questions about these or any other  tax or financial  issues, please call me.