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.